We are experiencing an information overload regarding the
real estate market place. As the housing element continues to struggle we are
faced with a constantly changing lending environment including ever tightening
qualifying guidelines. Some of the information provided consumers is inaccurate
or exaggerated. Scroll down the page as there are various articles with lots of
You Should be Buying Your Home Soon!
At the risk of sounding like just so much real estate hype,
there are some good reasons to consider purchasing a home soon. While un-even
across the state, 2012 did show signs of a real estate recovery that many
expect to continue into 2013 and beyond.
Home prices: increased, albeit only slightly and not
everywhere. Predictions are that home values will continue to grow slowly.
Improving: this drives the
market and as people seem to be a bit more confident about the future it is
expected that we could see a little inflation occur.
Low Interest Rates: home mortgage interest rates have
been at their lowest level in half a century. Many feel that the only way for
rates to go is up . . . no one knows when but inflation headwinds occur watch out!
Supply and Demand: concern over possible continuing
home value reductions had many put off buying decisions but that pent-up demand
is about to exert itself. At the same time, home inventory has shrunk. We could
see price increases in homes?
Unemployment Dropping: skepticism
over how the numbers are calculated and the types of jobs being created
doesn’t detract from the fact that more people are working and feeling a
bit more optimistic about the future.
Foreclosures Declining: while there are some
lingering bank owned property yet to be sold, banks have been encouraged to
work through their inventory and try to keep families in their homes if
Humboldt Home Loans
John Fesler Jody
The following attempts to bring you up to date with accurate
information of the recent lending practices that most affect real estate
borrowers. Let’s begin with a quick review of how we got to where we are
. . GREAT
REFINANCE PROGRAM – ROUND 2)
With the hoopla with which this program is being unveiled,
we might think that it will finally be a program that works for the millions of
underwater home owners. While all of the details are not due until November 15th,
some anticipated aspects of the program have been released.
While some of these details could change, here are the
likely high-lights of the program:
Allow eligible underwater homeowners to refinance
without regard to Loan-to-Value guidelines. (Why not allow any consumer to refinance regardless of home value as
long as the borrower has made current higher payments . . see comment below)
Allow the waiver, in some instances, of having to have
Waive mortgage insurance requirements.
Allow borrowers with reduced credit scores to participate.
Reduce and/or eliminate some risk base price
adjustments (add-on fees) that thwarted many from obtaining the lowest rates in
the first HARP program.
Only borrowers who are current on their mortgage
payments for the past six months will be eligible. This implies that if
a borrower had missed payments in the past but was current during the past six
months eligibility would apply. (What is
the likelihood of borrowers who missed a payment or more over six months ago
will have been making payments for the past six months?)
Encourage shorter term loans wherein borrowers would
accept 15 and 20 year terms rather than refinance into another 30 year loan. (While this would reduce the risk for the
lender, borrowers may not experience much monthly payment relief and it may not
be an option that consumers adopt.)
BANKS AGAIN TO BE BIG BENEFICIARIES
As in the past, this program will rely upon the major banks
volunteer participation. In order to gain this cooperation, here is what the
banks will receive.
and Freddie will waive their rights to demand refunds from lenders for
flawed underwriting practices. In other words, the banks will now be held
unaccountable for knowingly having made poor underwriting decisions.
banks will receive “substantial” (the word used by government
entities) relief from buy-back demands except in the case where actual
fraud is found to exist. In other words, the ability to find banks
accountable for any past malfeasance has been “substantially”
The banks insist that
they must be relieved of the above restrictions or the risk of participating is
too great. This writer’s concern is that the banks will be granted the
relief, the voluntary participation of the banks does not occur and refinances
will still fall far short of expectations. In the meantime, the banks will have
escaped again any accountability for past misdeeds.)
LOOK AT WHAT HARP 2.0 DOESN’T DO!
The program fails to address several critical issues:
Many underwater homeowners have subordinate loans (HELOCs or other secondary financing) and unless these
lenders are made to agree to subordinating to a new
HARP 2.0 loan, the program will be of limited value to many would-be borrowers.
There are no provisions for assisting consumers (e.g.
with forbearances) who find their income reduced and/or who are currently
unemployed and unable to find a job.
While the initial indications are the risk based price
adjustments (add-on fees for high Loan-to-Value or low credit scores) are to be
eliminated, the devil will be in the details and determine just who will be
Only loans held by Fannie Mae and Freddie Mac are
eligible for modification.
Unless condominium requirements (e.g. 70% of the units
are currently owner occupied; adequate reserves being maintained and that no
litigation involving the condominium association exists) are modified, condos will be
ineligible. This will affect states like Florida
with large condo projects.
Critics comment that this program falls into the category of
“doing something is hopefully better than doing nothing”.
Unfortunately, focusing attention on programs like HARP 2.0, which appears may
offer less than expected relief to hard hit homeowners, reduces resources and
attention that should be targeting how to fix the real problems with housing.
These same critics ask why not just modify/refinance anyone who is current on
their mortgage payments without regard to their current credit, income or
employment status? Consumers logically ask, "if I
am making my current mortgage payment is it not likely that I will make my new
mortgage payment if the amount is lowered by several hundred dollars?"
Consumers can not understand why "since the bank already has my
loan, why won't they let me refinance where there is no additional risk and
actually less of a risk if my payment is lowered?" Perhaps the problem is
that these are common sense questions in a world that seems to have lost all
Approximately 800,000 modifications occurred under the
original HARP program (projections were up to 4 million borrowers would
benefit) and the new projections are that up to 3 million could benefit from
HARP 2.0. Many analysts predict,
however, that far fewer than a million borrowers will benefit from the revised
program suggesting that this retread of the old program seems also doomed to
mostly disappoint consumers rather than provide assistance.
So, we shouldn’t get our hopes too high. This is
beginning to look like another mostly inept attempt to solve a perceived
problem instead of addressing the major housing difficulties. Instead, it
merely magnifies the government’s total lack of creativity, courage or even
understanding of our housing dilemma. Plus, the unintended consequences of the
program granting banks additional immunity against past excesses could be
HARP 2.0 (additional comment)
While this program now allegedly is designed to address
underwater borrowers, there is concern that the trade off providing banks
immunity from practically all scrutiny regarding all past indiscretions will
lead to future excesses.
A main feature of the revised program eliminates LTV
ceilings, allowing banks to refinance borrowers to currently undefined limits.
Prediction: Banks will
limit the LTV to 125% - 130% rather than retain an open ended loan amount. Few
borrowers will actually be approved for loans.
Prediction: HARP 2.0
will not only eliminate the ability to hold banks accountable for past behavior
but will provide a way for banks to address the Walk-away” borrower. This
is the borrower who though capable of making monthly mortgage
payments, are abandoning their homes that are so far underwater that
there seems no feasible way to ever recoup the lost equity. The anxiety is that
banks will via HARP 2.0 have a tool wherein they “offer” a
refinance and if refused will have the authority to pursue a deficiency
judgment action against the
borrower. While this may be an unintended consequence of this revised program
it has some potential draconian borrower impacts. (see
Fannie Mae’s resistance to principal reductions below)
Critics point out that many borrowers who could benefit from
refinancing at today’s low rates are prohibited from doing so because of
PMI limits and add-on fees. The logical question is why borrowers who are
current on monthly payments should not be allowed to refinance, at least up to
95% LTV without penalty. The logic suggests that a borrower paying a higher
monthly payment is very likely to pay the lower refinanced monthly payment. It
has been noted that even applying a qualification requirement wherein the
borrower would “qualify” for the lower payment refinance would
benefit millions of homeowners currently prohibited from acquiring a lower
interest rate. The question
Fannie Mae’s staunch rejection of allowing any
reduction of principal in dealing with underwater mortgages contributes to HARP
2.0 becoming merely an ineffectual bandaid for a
serious housing problem. The comments above regarding deep underwater borrowers
identifies that these borrowers will acquire relief from HARP 2.0 but are more
likely to be abused in future months. Without reduction and or elimination of
excess mortgage debt, borrowers are unable see a future time when they would be
able to liquidate without having to use a short sale approach. In essence, they
are condemned to being renters who will ultimately face a major credit rating
hit (via having to participate in a short sale) should they decide to sell.
Final prediction: HARP
2.0 will be highly promoted as another help to borrowers but which will provide
minimal help to few borrowers but which is more likely to abuse deep underwater
IF ONLY THIS WAS A CONSPIRACY THEORY
RATHER THAN THE TRUTH!
We know that the big banks continue to devote millions of
dollars to lobbying Congress. Less remembered is the scandal some years ago wherein
Fannie Mae and Freddie Mac executives were found to have accepted large
“contributions” (we’d never call them bribes) for favored
lending positions for those same big banks. The “books were cooked” to hide
the nefarious activity but eventually discovery resulted in job losses and
empty promises to never do such a thing again.
Fast forward to about 18 months ago when New York Attorney
General Cuomo (preparing to run for Governor of the state) threatened Fannie
Mae and Freddie Mac with a forensics audit is they did not accept his Home
Valuation Code of Conduct (HVCC) proposal for appraisal management. The GSE’s complied immediately and the proposal was adopted without review as to its “unintended
consequences” or potential negative impacts upon the real estate lending
environment. I’m not suggesting that the GSE (Government Sponsored
Enterprise) executives had anything to hide in such a proposed audit but their
acquiescence was very quick.
It is likely a coincidence that the big banks (again) were
in the thick of these decisions as the vast majority of the Appraisal
Management Companies (AMC’s) are owned and operated by these same large
In order to understand the confusion surrounding
today’s qualifying guidelines, we need to examine the cozy relationship
that continues to exist between the big banks and the GSE’s.
The 4-5 major banks are the “investors” who purchase the servicing
rights from the GSE’s. Understand that when a
loan is funded by a source lender (other than a major bank),
the loan is underwritten to Fannie Mae and/or Freddie Mac guidelines. But,
because the loan cannot be closed unless it can be sold to an investor (yes,
those same big banks) we experience additional qualifying guidelines imposed by
the bank investors called “overlays”. These overlays are sometimes
confounding if not downright absurd. Worse, they often apply only to those
entities other than the large investor banks themselves. All
with the blessing of Fannie Mae and Freddie3 Mac.
In other words, the major banks have undertaken (with no
attempt to conceal their mission) the task of trying to eliminate all
competition, including mortgage brokers and small local banks in the home loan
business. Ironically, in spite of the fact that some of the most absurd
qualifying requirements do not accompany the mortgages made by the major banks,
borrowers are almost universally charged more in both interest rate and fees.
Can you imagine what will happen to rates and fees if the banks are successful
in eliminating all competition?
Now, with this understanding of how loans are made and then
sold for servicing rights in what is called the “secondary market”,
we can visit the pricing of loans. I’ve already indicated that a borrower
will almost assuredly pay more in rate and fees at a major bank. Many banks and
mortgage brokers have become very clever at concealing the hidden costs. Yield
Spread Premium (YSP) is that fee paid by the market for the delivery of a loan
with a higher than market interest rate. During the sub-prime boom borrowers
were routinely provided higher rate loans for which mortgage originators were
paid behind the scenes bonuses without disclosure to the borrower. The adoption
of the new Good Faith Estimate (GFE) was an attempt to address this past abuse.
Unfortunately, the new form is so convoluted and complicated that borrowers
remain virtually unaware of how YSP functions. The large banks and some
mortgage brokers have developed methods of obscuring the YSP income and the
abuse continues. Thus, the next likely proposal from the legislators (who have
little knowledge themselves regarding how this works or what to do) will be to
“cap” the income that can be received from mortgage brokers. Note
that there is no proposed cap on what loan originators in large banks can earn!
(I wonder how the banks seem able to escape every legislative attempt to
regulate the lending environment? Maybe all those
dollars spent on legislator’s campaigns pay off?)
Here is how pricing affects you as a borrower. As indicated,
it is still easy for mortgage originators to conceal their real earnings via
the use of YSP. Many local originators routinely earn 1.5 to 2 points in
origination fees on every loan.
It is very unlikely that you, as a borrower, will be able to
discern the fee being charged. You have to trust that the mortgage originator
is playing fair. You can ask:
Exactly what will you earn?
Will you be earning any Yield Spread Premium (YSP) or
Service Release Premium (SRP)?
If either YSP or SRP accompany the interest rate, will
it be credited to me (the borrower)?
Talk about scaring a mortgage originator when you actually
seem to understand how this works?
Based Loan Acquisition
There is a popular ad that
suggests “use us and you will have several lenders competing for your loan
business”. The pitch suggests that you will have these several lenders
will “negotiate” and you will get that “best deal” by
such competition. What is the downside? First, lenders will contact only those
whom they perceive as well qualified borrowers. They are not interested in
wasting time trying to help more marginal buyers prepare to qualify for a loan.
Secondly, and perhaps even more critical, your personal information is being
shared via the web with many would be lenders, in hopes that several will
contact you. The lenders receiving your information may or may not treat it
confidentially. Can you see the potential problem with private information
being treated casually?
One more potential problem for the
borrower is that each lender contacted is likely to obtain a credit report. A
credit report is one of the first things a lender wants to peruse when
determining the capability of a prospective borrower. Credit inquiries can
lower a score which can be especially damaging to a borrower who is on the cusp
of a credit score level. Just a couple of points could put a borrower into a
level that impacts the ability to acquire more attractive financing terms.
based loan acquisition
As we continue this review of lending practices and the
accompanying changes taking place, we want to introduce you to the newest
licensing requirements and how mortgage brokering differs from bank lending.
MORTGAGE BROKER VS BANK LOAN ORIGINATOR
The Secure and Fair Enforcement for Mortgage
Licensing Act of 2008 (“SAFE Act”), was passed on July 30,
2008. This new federal law mandated that all home mortgage originators
had to pass both a national and a state specific test. When first introduced,
the legislation required ALL mortgage originators to pass the exams. The final
legislation, however, exempted “mortgage loan originators who work for an
insured depository or its owned or controlled subsidiary that is regulated by a
federal banking agency, or for an institution
regulated by the Farm Credit Administration”. In other words, if one
works for a BANK the exams need not be passed. (Wonder how that exemption occurred in the final legislation? Could it
be the amount of money that flows to legislators from the Finance Industry?)
Designed to enhance consumer
protection and reduce fraud ALL loan originators (other than bank employed)
must pass the exams and also enroll on the Nationwide Mortgage Licensing System
and Registry (NMLS). While bank originators do not have to pass exams, they are
required to register and acquire a NMLS number. This latter requirement will
presumably deter a loan originator convicted of fraud in one area from simply
going to another area or state and resuming a mortgage originator career.
But, let’s be clear. We
don’t think passing two tests will keep some persons from committing
fraud. At the same time, testing does “separate” those who did pass
and those who didn’t even have to take the exams.
As mortgage brokers (with Humboldt
Home Loans, we passed exams (both scored over 85% and 95% on the national and
state tests respectively), underwent a criminal background check and registered
for our NMLS designation. Our commitment to the education regarding all of the new
rules and regulations was our investment of nearly $1000 each in pursuit of our
So, do we think there is a
difference between mortgage brokers and bank originators? You bet! We work hard to earn your business. We
are available, provide you with the best loan education in the community, keep you alerted during every step of the transaction, keep
our promises and we perform on time. Why would you not use us to assist you in
acquiring your home mortgage?
LOANS ARE STILL AVAILABLE TO HOMEOWNERS
Home loans are still available. Yes, borrowers do need to
fully qualify for today’s loans. The stated income or no doc type loans
are gone. But, rather than lament that fact, we recognize that borrowers
acquiring loans today actually can afford to make the payments and are unlikely
to face the prospect of foreclosure that plagues so many borrowers who acquired
those so called bad loans.
Most loans are fixed rate but hybrid adjustable rate loans
are available for some unique circumstances. Fixed rate financing is in most
instances limited to 90% Loan-to-Value (requiring a minimum 10% down payment)
but 95% loans are available under some circumstances to extremely
well-qualified buyers. FHA loans,
with only 3.5% down payment continue but there have been changes to the
mortgage insurance premiums that accompany FHA financing. Well qualified
prospective home buyers should carefully compare the FHA loan with the 95%
conventional loan or the Guaranteed Rural Housing (GRH) loan option. While the FHA program is excellent, it
does have some government requirements attached that can make the conventional
or GRH loan a much better option. We recommend acquiring good counseling before
making a final selection of loan option. If indeed, one is putting more than 5%
down payment the conventional product will in almost every situation be a
better alternative than a government sponsored loan option.
Finally, it is important to not be discouraged with all of
the negative news and to know that good loans are available and borrowers can
qualify to purchase homes. See the
loan counselors at Humboldt Home Loans for guidance in selecting the best loan
option for your specific need. You can talk to Jody Harper (707-269-2304) or John
Fesler (707-269-2318) to discuss your loan options.
Finally, if you are purchasing a new home, you will be
interested in the newest wrinkle in acquiring fees.
Home Resale Fees
are purchasing a new home, be cautious of this newest gimmick wherein you and all
other future owners of the home are obligated to pay a fee every time the home
transfers ownership. Sometimes called “transfer fees” or
“capital recovery fees” they require a 1% (or more) fee be paid
every time a transfer of ownership occurs. Imagine that you purchase your home
for $250,000 and five years later sell for $325,000 and are surprised to learn
that you owe $3,250 in a transfer fee? No one deserves such a fee and you need
to ask when purchasing whether any such fee exists within your transaction.
There is so much paper work involved when signing loan documents that this
could be easily missed. Another reason to work only with mortgage personnel
that you trust!