Is Congress Trying to Eliminate Mortgage Brokers ?

April 1st. April 1st is April Fool's Day. It's also one of my dearest friend's birthday.

But this year, it's significant in another way as well. April 1st, 2011 is the day Mortgage Brokers will have to decide how they will be compensated - 100% by the borrower, or 100% from the Lender. One or the other. Brokers will not be able to "straddle the fence" and receive compensation both ways anymore, as has been the case for quite some time now.

Brokers are going to lose the ability to tailor the loan to suit the borrower. If compensation is to be lender paid, the broker must pick one flat premium to charge on all loans, no matter the situation. No broker credit allowed. And because the lender premium will have to pay for all of the broker compensation and lender fees, that means a higher rate must be charged by the broker to cover the costs. This means higher interest rates have to be quoted to borrower. Who benefits the most from this ? The large banks do, that's who.

Now that the only borrower who can get a loan is a borrower with a good score, all lenders, banks and brokers are competing with interest rates, not loan programs like a few years ago. And if everyone is competing on the pricing of interest rates, it would appear as if brokers are really about to lose...

Sounds like a really bad situation for borrowers and brokers. It's difficult enough getting a transaction to work as things stand today. This new legislation is bound to make things worse, it seems.

But will it really ?

My first impression was yes, it's bad. Real bad. But after thinking about it a bit, reading some lender guidelines on the subject, and watching video from my friends at TBWS.com I am not so sure.

Of the course the "big banks" would love to crush their smaller, more elusive competition (smaller regional banks and mortgage brokers), and with the help of Congress, it appears the new financial reform legislation is geared towards serving that purpose. Brokers and smaller lenders have long shared a "scratch my back and I'll scratch yours"relationship in the past, and the new law will probably strengthen the mutual benefit affair between the two...

The one-way or another broker compensation legislation is definitely in place to cut out the niche brokers and small banks, and to give an even larger slice of the mortgage loan pie to large lending institutions.

But, I do not think it is actually going to be that bad. Sure, brokers and banks will have to make adjustments to comply, but they will. The everyday, hard working industry professionals will figure out the legislation, the competition, and the way to get things done - despite the constantly changing obstacles that are ever present.

Hasn't it always been that way ?

Pre-Qual, Pre-Approval, Conditional Approval - What's the Difference ?

As long as I have been in the mortgage business (about 8 years now), there has always been confusion by borrowers (and some loan officers) about the difference between a loan Pre-Qualification and loan Pre-Approval.

Not Even Close...
A Pre-Qual, or Pre-qualification can almost be considered a task as simple as someone looking at a credit report and saying "yes, they have a credit report with decent scores, therefore, they are pre-qualified for a mortgage loan !". It isn't that simple, but it is very, very close. A pre-qual has no real standing, and is virtually worthless. There are so many nuances with a REAL approval for a mortgage loan that a pre-qual simply misses. If a broker or lender tells you they will "pre-qual you for a mortgage", first ask them what they mean by "pre-qual". If they then describe to you they will basically only review your credit report, tell them, "never mind". A pre-qual is simply a wast of everyone's time...

Better, But Still Not There Yet...
A Pre-Approval is a little better. Why ? Well, a pre-approval contains more information about the borrower. Generally, a pre-approval involves URAR 1003 loan application. A lender, or broker will actually ask the borrower questions based on the 1003. Then, they just fill in the blanks. It is very similar (it is the same document the loan officer will use for loan submission to underwriting, but usually does not have verified information) to the actual loan application.

Once the broker has the information, they will then submit the information to either Fannie Mae's DO/DU (Desktop Originator/Desktop Underwriting) or to Freddie Mac's LP (Loan Prospector) Loan Approval engines. A broker or lender can use DO/DU or LP to pre-approve a FHA, VA, or Conventional loan for a borrower. It is very powerful, and it is a simple, quick way to see if the borrower fits into the scope and parameters of the loan program they are seeking. DO/DU and LP are also used as guidelines by underwriters as to what the borrower will need to provide to the underwriter in order to receive final loan approval. We will talk more about that in a minute. But you still are not there yet...


You Are Getting Close...
A Conditional Approval is actually that - Your loan is approved based on the conditions that have been set by the underwriting. The 1003 has been completed by the loan officer with the information contained on the application verified with the borrower's documentation. The loan officer has looked at paystubs, W2's, bank statements and verified work history, rental history, and various other items and tasks required for the loan to be approved. A conditional approval is much better than a pre-qual and a pre-approval, but it definitely the riskiest area to be in, and the scariest. You are fully immersed in the loan process now. The chips are stacked - you have drawn a line in the sand...This is your position and you will stand behind it, 100%. You are all in...

There are so many things that can go wrong now, and you are totally exposed, unlike when you are in the pre-qual/pre-approval stages. You can pay for an inspection and the foundation is bad. You can pay for a appraisal and the value is not there. Or if it is at first, the lender will ask for a field review and drop the appraised value $60,000 (welcome to today's real estate market !), which will absolutely kill your deal. Or their is a cloud on the title of the property. There are so many things that can go wrong here.

I do not mean to scare anyone. Most real estate transactions go through okay. Very few have things that happen that stop the transaction cold in it's tracks. But I will tell you this - There Will Always Be Something to Deal With in a Real Estate Transaction, I can promise you...


This is What You Want...
Final Approval. Nirvana. You have made it. This is what it is all about. You have met all of the conditions required to close your mortgage loan transaction, and everything has checked out and fits the parameters set by the DO/LP Approval and underwriting. The underwriter now has no choice - they issue Final Approval, and your loan is Clear to Close. The underwriter then forwards your loan to the lender's closing dept., and then you schedule your closing. The bumpy ride is over, and you have won...

I have been through this process a hundred times, and everyone of them is a unique experience, never to be forgotten...

So, the tip of the day is this - Ask for a "Pre-Approval", always. It will start you off on the right track, and if you do not measure up right now, at least you will know what you may need to do in order to get your final approval in the future...

Who Does the Closing Attorney Represent in a Transaction ?

Who does the Closing Attorney represent in a real estate transaction?

Well...It depends...

In a cash transaction in the state of Georgia (outright purchase of the property), the attorney generally represents the party that contacted them first to oversee the transaction. But this can be seen as a gray area as well, it's according to how the parties act in the transaction as to whose interest the attorney represents. Therefore, it is very important to establish who the attorney will represent in the transaction at the very beginning, so there is no confusion. There is a box of the GAR Purchase & Sale Agreement form (Page 2, Paragraph 7) that allows either the buyer or seller to be represented.

Borrower's almost always assume (mistakenly) that the closing attorney represents them during the real estate closing. It is totally understandable to think this, since the buyer generally is footing the bill for the title services.

Sometimes the seller thinks the attorney represents their interest in the transaction, since they offered to pay closing costs to the buyer. And it is true, generally the seller can stipulate who the closing attorney shall be simply because they are paying the cost for the attorney.

But if a lender is involved in the transaction (in the State of Georgia), the attorney represents the lender, and acts on the behalf of the lender throughout the whole transaction. It doesn't matter if it is a purchase or refinance transaction (see the GAR Purchase & Sale Agreement, Page 2, Paragraph 7)

Every so often, (rarely) you run into a closing attorney who is NOT on the lender's approved attorney list. If they are not approved (or blacklisted), you cannot close your loan with that attorney. You have to find an approved attorney. And the seller has to choose an approved closing attorney (or allow the buyer to select the attorney), or choose another buyer.

That's how you know who's interest the closing attorney represents...

What Alternatives Do You Have ? Alternative Credit and How to Make it Work for You...

More and more these days, it seems I am running into buyers and borrowers that just have, for some reason or another, decided to stop using creditor that report to the credit bureaus.

For some clients, this is a REAL BAD THING, because their credit scores were bad before, and since there has been no recent activity, the bad scores are frozen in time, as well.

These potential borrower have one thing to do and one thing only - GET THAT SCORE UP IMMEDIATELY. There are several ways to do this, but there is one way I recommend to most people in this situation: Find a prepaid credit card company (two or three actually, if you really want to get your credit in good condition quickly), and pay the fee. Charge on the card, and make sure you carry a balance of 1/3 of credit limit at all times. If there is a possibility of a debt-to-income ratio issue, simply pay off the balance 45 to 60 days prior to signing a mortgage loan application. And it should work. I have had several clients to follow this formula, and it seems to turn out in a positive way. However, the borrower must be patient. It can take up to a year of seasoning to maximize the effects of the new credit and diminish the old bad credit on the credit report.

For others, it's a good thing. Their credit scores appear to "freeze" in time, holding up that same numbers as the last time there was any activity by the borrower. These borrower have the scores to qualify for a mortgage loan immediately, but do not meet the tradeline qualification quantities or seasoning required by the lender.

That's when Alternative Credit Data comes into play. Lenders understand (yes, they ACTUALLY understand this, at least some of them do) that not everyone uses credit to live. A lot of people use alternative means - barter, money orders, checks (remember checks ?) and cash to actually pay to live. So there is a system set in place where a borrower can use alternative credit to get around normal credit requirements.

First and foremost, a borrower that will use alternative credit must know in advance they will do so, that way they can make sure their cell phone, electrical and gas bills are in their (the borrowers) name. The alternative credit account(s) must be in the borrowers name. Otherwise, alternative credit will not work.

There are different levels, or tiers, given to alternative tradelines:



Each tier has a descending level of importance, with the Tier I alternative tradelines carrying the most weight, and the the Tier III tradelines carrying the least. For instance, proof of 12 months Rental Housing payments are so strong, they often double as Verification of Rent and as 1 of the necessary 3 tradelines needed to meet the the alternative tradeline requirements.

There is one caveat to all of this is - with any source of alternative credit provided, you cannot be late. You are putting the last nail in your coffin if you provide documentation with a history of lates. Take my advice - Don't do it.

You will get the benefit of the service being provided to you, and have the ability to tap into this source when you are ready to take the plunge and buy a new home, without the hassle of maintaining the much heralded credit score rating...

Stay The Course - Housing Market Continues to Need Government Intervention...

The Housing Market is not ready to float on it's own right now. As for the past two or three years, it still needs a life preserver in order to survive.

Without Fannie, Freddie or Ginnie, the housing market would come to a complete stop. The private market is not ready to take the reins from the GSE's. If Fannie and Freddie were released from government care, the housing market would become as slow as molasses runs during winter.

Prior to the new Congress being elected, there was political talk that suggested Fannie & Freddie should not be ran by the government, and should be returned as private companies. Now that the new members have been elected, and power has shifted in the House, it appears there are second thoughts about dissolving the relationship between the government and the GSE's. At least for the near future.

And that's a good thing...

According to the article written by The Atlantic online website (Daniel Indiviglio), the new majority in the House are reconsidering their mantra of government cutting ties with Fannie and Freddie.

And with good timing, because the housing market still has a way to go before it stops bleeding. Fannie and Freddie are currently propping up the market, providing much needed life support to a severely wounded sector of the U.S. economy.

If the government cuts ties with Fannie and Freddie anytime soon, the housing market will lose the much needed support, and will be DOA...

Let's hope Congress continues to realize this, and dedicates itself to stay the course to legislate a economic road to recovery - not a road to disaster...

Isn't This Living ? 89 Square Feet Per Person...

For the past few years, all homebuyers in the area I live in have been interested in one thing and one thing only - Square Footage.

"I want the biggest house my money can buy", was their motto. Somehow, we equate Square Footage with prestige. If you have a big house, everyone will think You have Made IT - You have arrived.

What a myth !! Now, I must admit I live in a 1-1/2 story traditional frame home, with about 1,900 square feet. It's roomy enough, especially for two people. As I get older, I am beginning to not like the floor plan. Maybe I need to knock down some walls or something. Haven't figured it out yet...

Sorry for the interruption - To get back to my reason for writing this blog: I think the accesses of the 80's and 90's ingrained in our brains that we needed to have more - better cars - hence the rise of BMW, better clothes - the rise of designer jeans (I guess, I don't know much about clothing. I like t-shirts, shorts and jogging shoes. That's it), and all of the other excessive purchases that really proved that we had arrived.

No wonder when the interest rates dropped beginning in 2003, and the lenders invented the "liar loans", everyone decided - "I need a bigger house too. This will accentuate my portfolio of wretched excessiveness".

Remember growing up in the home with you parents and your brother and sister in a 1,200 square foot home. It had a living room, dining room, kitchen, 3 bedrooms and a basement. And that's it.

Ahhh...But we are better than that. We have arrived - We need a room for our exercise equipment, and another one for the television. And so went the housing boom.

Well, it's bust time now. A lot of people have lost their t.v. and exercise rooms to foreclosure. Some are looking to downsize, but cannot sell their behemoth McMansions.

We all are re-thinking what it means to own a home. And how big does it need to be ?

And THEN, there's this guy. Meet Jay Shafer. Jay has this whole Square Footage thing figured out. I recently had a three person family purchase a home with over 5,000 Square Feet. Absolutely Ridiculous. By Jay's measurements, they would be good with about 267 Square Feet. Which is the size of their den. The downstairs den.

With all of that extra space, they have to have a excessive use of cooling in summer and heating in winter. No wonder we use up to 25% of the worlds energy resources. BIG HOUSES with no one living in them (or not enough people, I guess I should say).

Jay - My hat is off to you and those like you. Maybe we all need to get our own version of "Tumbleweed". I actually would be interested in a tiny home, but I am almost finished buying the home I currently live in. Yes - I have been here that long. Oh well - Maybe it could be a Second home ?

Here is Jay's video. Enjoy...

In Defense of Mortgage Brokers and Yield Spread Premium...

Today, I am cruising around the web just reading various articles, poking my nose in here and there, just snooping around as usual.

All of a sudden, I come across a blog written by a person who once was treated poorly by a mortgage broker. He felt that he was taken advantage of, so he decides to start a blog "exposing" the dark secrets of mortgage brokers, and discussing why they are evil.

Go ahead - take a look at the site. Read the blog, it's sort of interesting. In a twisted way, I guess.

Now, to be fair, I have a somewhat biased opinion about mortgage brokers - I have been a mortgage consultant with a mortgage brokerage for the past 7 years. I think brokers offer a legitimate service to borrowers, and a much needed alternative to going to a bank. A broker can save a borrower both time and money, because instead of paying multiple application fees to each bank, he can just pay the application fee once, and let the broker shop around for him. Immediate savings. OR, if the borrower works with someone such as myself - there is no application fee. No credit report fee. No upfront fees, whatsoever. Enough about me - this blog entry is not about me, anyway.

Needless to say - It ticked me off. It's another dishonest cover up that confuses the public.

So let's do some REAL mortgage loan exposure. The mortgage broker can provide the same interest rate or better than the average borrower can find at the neighborhood bank. How ? Because the bank offers incentives to mortgage brokers and correspondent lenders to provide them with a steady stream of new borrowers, because a banks job is to lend money. This incentive is the Yield Spread Premium, or the amount the bank is willing to pay the party who provides them with a new, qualified buyer.

Usually the mortgage broker can offer a better interest for the borrower rate from the same lending institution, than the borrower can receive from walking into a bank and applying for the same loan. How do I know ? I do this all of the time.

This is the wholesale versus retail aspect of mortgage interest rates. Why the difference ? The higher bank interest rate is derived from overhead - they have to pay the light bill, rent, the loan officer's salary, etc...The borrower's interest rate in intrinsically connected to this.

The largest banks have stopped doing business with mortgage brokers altogether. They began phasing out their mortgage broker relationships in 2007. I think they new something was in the water. I think the large banks are behind an unnamed, unidentified scheme to get rid of the mortgage broker. That way, they can charge whatever they want in interest rates, and there is no competition.

Funny thing is this - our friend the mortgage broker hater has mortgage interest rate ads from big banks and lenders DIRECTLY CONNECTED TO HIS SITE. Complete the "Real Mortgage Rates" info and select click on "submit". You will see what I am saying. I am an actual mortgage broker, and I do not advertise any rates on my site, other than the average weekly Freddie Mac rates, that are publicly available on the Freddie Mac Website (I believe the borrower should have a good starting point on the rate they are being offered). What is this guys motivation ? Who's side is he REALLY on ?

Every mortgage broker must reveal the Yield Spread Premium to the borrower. It is stated up front on the Good Faith Estimate, and is shown on the Settlement Statement at closing. Banks are not required to show how much they make on charging a borrower a certain interest rate. They are allowed to "hide" the true amount of money they make on charging the interest rate the borrower has been offered.

Here's another truth - banks sell their loans to the secondary market (Fannie, Freddie & Ginnie) and receive a Service Release Premium, or payment from the GSE's when the bank sells the loan. This is on top of any income they may have received for charging the borrower a certain interest rate.

Needless say, I continued to prod around and found an excellent article about this subject, "Why Oh Why YSP? Why Mortgage Brokers Can Price Better". It verifies everything I am expressing here...It is recommended reading for those who want to have a good understanding of how yield spread actually works.

There is a lot of truth out there in the blogosphere, but there is also a good bit of fallacy. People are being bombarded with all kinds of information, and it is hard to discern what is truth, what is fiction and that gray area in between.

I am sorry the blogger was given a raw deal by a mortgage broker. There are bad apples everywhere. But one bad apple should not destroy the reputation of an entire industry, especially when it provides a legitimate, viable service to the public.

I am going to tell things as I see them, and point out any information that seems not quite right. And this blogger is not telling the whole story...

Strategic Default

Unfortunately, the public and homeowners are being bombarded with all kinds of conflicting information, as well as disinformation.

Along with the 60 Minutes segment on Strategic Default, Roger Lowenstein, a New York Times Magazine contributor, wrote an article for the magazine that was published on January 10, 2010 titled "Walk Away From Your Mortgage!".

I do not know how many subscribers the NY Times magazine has, but you can bet millions of people have read this article.

Until there is consensus throughout our society on what should be done and how to handle the current housing/foreclosure/financial crisis - mass confusion will continue at every level. Foreclosures have moved from a homeowner/bank problem to a social problem...

You can view the 60 Minutes segment on Strategic Default right here:


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