Archive for the 'Qualifying' Category
An Assortment of Mortgage Loan Updates
Well, it’s time to get back on my pony here. The site hack I experienced recently combined with this crazy market took the wind out of my sails. But like the fires that have brought nuclear winter to Sacramento–maybe I should say nuclear summer since it’s a 111 degrees today–conflagration in the mortgage industry show no signs of coming under control. So here are a few updates:
INDYMAC BANK IMPLODES
Renown for their dismal customer service attitude toward the mortgage broker community, Indymac Bank bellied up this week. Confessing that federal banking auditors had found the bank to be “no longer well capitalized”, Chairman and CEO Michael Perry announced that the company would take a powder, lay off 3800 or so employees (including some very decent folks locally), and completely exit the forward mortgage business until they can “improve their capital ratios.” That’s corporate double speak for “we’re outta here.”
While promising “to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks,” the company has left borrowers stranded and attempted to extort additional fees in exchange for not canceling existing rates locks. I had one refinance ready for docs that isn’t going to fund, and my associates have buyers packed in to the Bekins van who must now quickly find an Extended Stay while they secure alternative financing. At this point, we are having trouble working through the remaining staff to resolve issues. If you have an Indymac loan, find a replacement, now.
PMI IN RETREAT
Kiss 10% down investor loans goodbye. The same is true for owner occupied, cash out refinances. The mortgage insurance (MI) companies are in full retreat. In recent weeks there have been announcements that as of July 14, MI will no longer be available for any investment properties or cash-out owner refinances in declining markets.
That basically leaves only owner occupied purchases and rate & term owner refinances eligible for 80%+ LTV financing. And MI for 5% down payments are evaporating as well, leaving borrowers scrounging around for at least 10% down on conventional loans. If this announcement is a canary in the coal mine, it is quite conceivable that we will soon find ourselves in a 20% down payment world again. Wouldn’t that be lovely. If everyone suddenly needed 20% down, do you think that would freeze the recovery in its tracks?
Thank God for FHA and 97% financing, not to mention the Nehemiah down payment assistance program, which brings me to my next update…
NEHEMIAH FACES RENEWED CHALLENGE
Although I think it unlikely that we’ll see any tightening of FHA requirements in this election year, Nehemiah is facing new challenges from HUD. If it is decided that Nehemiah does artificially inflate property values and distort the market, say goodbye to this program. Sacramento’s sub $350k market has been re energized by investors and first-time buyers, the latter category leaning heavily on substantial seller concessions to overcome their lack of funds for down payment and closing costs. For now, Nehemiah is still around. Best to save up some money. FHA won’t go away, but buyers may have to have their own 3% down payment before long.
That’s it for now. Call me if you need help with financing on the west coast.
read comments (0)There have been many consequences of the subprime mortgage meltdown. But one which has received very little attention so far is the repricing of risk by investors who buy mortgages. That is about to change. What’s important to understand about this fuzzy term is that mortgage rates will now rise even for consumers with decent credit scores. Meet risk-based pricing.
In the 2007 mortgage meltdown, investors realized that the low interest rates previously offered didn’t adequately cover the risk of default. Past projections floated on a rising tide of appreciation that kept every one off the reef. Now that the tide has rolled out and shipwrecked many lenders, those left afloat are raising rates to compensate for the soaring level of defaults.
Are You an “A Paper” Borrower?
Long before subprime came along, there were two general categories of mortgages; “A Paper”, and everything else. Those of us involved in “A Paper” lending rarely visited the dark underworld of B, C, & D paper. But the advent of subprime brought light to that world and introduced us to risk-based pricing as the industry opened wider the gates of home ownership. So think of the current repricing of risk as a further striation of the A paper segment. This will mean that higher risk borrowers will now pay higher rates.
Pricing Adjustments
The long and short of this is that A Paper borrowers will no longer be treated equally. For instance, if Fannie Mae’s Desktop Underwriter (DU) approves your loan and your Fico score is below 620, expect to pay a rate 1/2 point higher than your friend whose score is 720, unless you’re putting 30% down. If you want an interest-only loan, a hybrid ARM, an owner occupied duplex, or a manufactured home, expect further adjustments to your rate, depending upon your loan-to-value (LTV) ratio.
Just a quick suggestion for Agents and Buyers in this jumpy market:
Don’t remove the loan contingency until the loan has funded.
I recognize that some agents have always taken this approach. Others—I am of this school of thought—believe that once in Contract it’s best for both sides to determine quickly whether or not there is a deal. Sellers don’t want to waste time with a buyer who picks apart the transaction, and buyer’s agents want their clients to quickly satisfy themselves as to the condition of the property and the financing terms. Does anyone want these decisions to drag out only to blow up at the end. Of course not.
But this market has presented a new challenge: lenders who leave borrowers twisting in the wind, lenders who suddenly meet “unprecedented disruptions” and cannot, or will not, fund a previously approved loan. This is happening with alarming frequency..
If you are a listing agent, counsel your sellers to be flexibile and patient. Request more detail about the lender involved, the borrower’s qualifications, Fico scores, or the type of financing involved. But if you can’t be a little adaptable in this market, your buyer may decide to leave the party before it gets started.
So, I’ll say it again:
Don’t remove the loan contingency until the loan has funded.
Minnesota Overreacts to Mortgage Abuse
In one of the biggest overreactions to mortgage lending problems, the State of Minnesota has passed legislation outlawing stated income mortgages. On April 20, the state legislature passed House File 1004 and Senate File 988 aimed at limiting abusive home lending practices. But did they go too far?
Oops, I Think the Baby Was in That Bucket
Requiring that borrowers must now document income and assets for all loans on primary residences and 2nd homes, the law prohibits the use of any Stated Income, No Ratio, No Doc, & No Income/No Asset loan. In other words, the only way a borrower can get a loan after August 1st is to show pay stubs, W-2�s, tax returns, and bank statements.
This would make it impossible for many self-employed people, not to mention those with income from unseasoned second jobs, notes or child support/alimony lasting less than three years, to secure a home loan. See my previous post on 4 Reasons to Keep the Wage Earner State Income Loan for a better understanding of this issue. Dumb idea? Yes, I think so.
And That Ain�t All
Minnesota�s bill also bans all negative amortization loans as well as prepayment penalties on loans of less than $75,000. It establishes an agency relationship for mortgage brokers with civil and criminal penalties to go along with it. Now, we can discuss the merits of suitability standards and penalties, but before you decide whether this legislation actually protects consumers or just covers legislators� asses, read this:
Family Opportunity Mortgage program
Through the years, I have helped many parents purchase homes or condo’s for college bound children. Because of the high demand for housing around college campuses, this has often proven to be a great investment.
Last year, my son lived in an 8 bedroom house near San Diego State University where he attended school and played soccer. Rent was $700 per bedroom! Do the math. That’s $5600 per month in rent! How’s that for positive cash flow while you wait for values to rise. I’ve seen appreciation cover the entire cost of the education.
Until now, however, parents have had to accept higher interest rates. That’s because very few kids have the job history or established credit needed to be an occupant borrower. Even when parents co-borrow, we’ve had to contend with stand-along (debt) ratios.
Is This the End of Credit Score Piggybacking?
You may be familiar with the credit improvement trick of piggy-backing on someone else’s good credit to improve low Fico scores. Usually this is done to build scores for a son or daughter with no credit or to rebuild credit for someone who has had problems.
I feel dumb for being even a little surprised that there are on-line businesses encouraging and facilitating the use of this tactic—and worse—between complete strangers to game credit scores and defraud lenders. See the Mortgage Fraud Blog’s post for a good analysis of the problem.
Here’s another article I saw today, apparently one of many that appeared last weekend on this topic. The bottom line is that this tool is about to be shut down because of abuse. Don’t blame the mortgage industry for this one. It’s like drugs. The fundamental problem is demand.
This is the final post in a series designed to help agents prevent fallout that can occur when you work with an unknown lender. Part I was aimed at down payment. Part II was all about income. Part III focused on credit, and Part IV on pre-approval. Today we’ll find out who our client is working with.
Normally, you look to your lender for confirmation that it’s okay to start spending time and effort on this buyer. But when the client arrives pre-qualified by someone you don’t know, don’t assume the best. Take these steps to protect your transaction.
Question #5: Who is the lender?
Ah, the final question. You should know who is messing around in your sandbox. Is the client working with a friend or family member, perhaps someone part-time or new to the business? As business slows, recently minted loan officers have scurried back to their day jobs while still trying to grab a loan here and there. Part-time lenders cannot possibly stay current on the important changes that are rapidly occurring in the industry. You don’t want to be in a transaction with that person.