Archives for August 2009

Good Faith Estimate Part 3: Escrow Account Information

This next section of HUD's new Good Faith Estimate covers the escrow account, also known as the reserve account. (Click the graphics for a larger picture).


According to HUD's New RESPA FAQs, the block you see above does not include the taxes or insurance (the escrow/reserves portion of the payment). 

"…the first block is for the monthly amount that will be owed for principal, interest and mortgage insurance only.  Additional information on charges relating to the escrow account is in Block 9 on page 2 of the GFE."

This section primarily addresses whether or not there is an escrow reserve account.  Borrowers may elect to waive their reserve account when they have conventional finanancing and at least 20% equity in their home.  Most lenders charge a fee of 0.25% of the loan amount should a borrower elect to pay their own taxes and insurance.   Having an escrow reserve account when a home owner has enough home equity is generally not "required" as stated on the new GFE, however the home owner will receive either a slightly better rate or lower cost opting to have taxes and insurance included in their payment.

Hop on over to "Your Charges for All Other Settlement Services on page 2, Boxes 9 – 11 of the GFE to see how much will be collected to initiate your escrow reserves (boxes 9 and 11) account and prepaid interest (box 10).


Our current good faith estimate (below) shows the escrow reserve account with a detailed account of how many months of taxes and insurance are due verses the dumbed down lumped version of the new GFE.


The current (soon to be retired) GFE includes taxes and insurance in the mortgage payment–even if the borrower has elected to waive the reserve account (pay taxes and insurance on their own) since borrowers are qualified based on the entire mortgage payment due (principal, interest, taxes and insurance).

Is this easier to understand so far? I don't think so…but I would love to hear from you.

Book Review: And Then The Roof Caved In by David Faber

I've found that one of the perks of being a mortgage blogger is that on occasion, Roofcavedin people will send me copies of their book requesting a review.  I recently finished reading CNBC Reporter, David Faber's book which addresses how we have arrived at this financial situation we are in. 

If you watched his documentary "House of Cards"; you will find lot of the content from the book follows David's reporting from the documentary.   I enjoy Faber's reporting on CNBC in the mornings and when you read his book, it's as if he's talking to you.   It's an easy read that covers every angle of how we got here.  And maybe it's because I'm employed in the mortgage industry, I found this book hard to put down. 

If you want to understand more about the perfect storm that lead to this economic crisis; I highly recommend "And Then The Roof Caved In: How Wall Street's Greed and Stupidity Brought Capitalism to Its Knees" by David Faber. 

More Upcoming Changes to Underwriting

I originally wrote this post at Rain City Guide back in June of this year.  Fannie Maes tougher guidelines will go into effect in just a few days on September 1, 2009.  You can read the original post and comments by clicking here. 

Fannie Mae issued Announcement 09-19 amending some very basic underwriting guidelines that will not only impact conventional financing; it will apply to FHA insured loans that are underwriting using Fannie Mae’s DU.   You can read the entire announcement by clicking  here.

Here are some of the changes:

  • Credit documents will be valid for 90 days instead of the current 120 for existing construction.   The age of the document is measured from the date of the document to the date the Note is signed.
  • IRS Forms 4506 or 4506-T is required at application and at closing.  This is due to fraud (misrepresentation of income).
  • Age of appraisal is reduced from 6 months to 4 months.
  • Trailing Secondary Wage Earner Income is eliminated.   Now with a relocation, only the income of the spouse with actual employment may be considered.  Previously, it was possible to use the relocating spouse’s income from their employment prior to the relo without having an actual job.
  • Verbal Verification of Employment required within 10 days of signing the Note for employment income and within 30 days for self-employed income.  (Our company has always performed a verbal VOE prior to funding).
  • Stocks, bonds and mutual funds now valued at 70% instead of 100% to be used as reserves.   Due to market volatility, Fannie Mae is devaluing your portfolio.   This means that if you provide your mortgage originator with a stock, bond or mutual fund statement showing an ending balance of $10,000; the figure used for qualifying and on the application will be $7,000 (70% of the value).   Stock options and non-vested restricted stocks are no longer eligible to use as reserves.
  • Retirement accounts valued at 60% instead of 70% to be used as reserves.  

Fannie Mae’s effective dates are to follow…if the loan is manually underwritten, this applies to applications dated on or after September 1, 2009.   However, expect to see lenders and banks to adopt these guidelines early.

Quick Video on November’s Real Estate Closings in King County

In the Seattle area, many home buyers may be trying to purchase their first home before the tax credit expires.  I highly recommend not waiting until the end of November to do so.  Here's why…

Click here for a larger image of this video

For King, Snohomish and Pierce County Recorder's office closures, click here.

Good Faith Estimate Part 2: Summary of Your Loan

The next session of the new Good Faith Estimate that I'm reviewing is the "Summary of your loan". 


If you're working with a mortgage originator in Washington State who's regulated by DFI, then a lot of this information is included on the Loan Application Disclosure Form.  

The first three lines are pretty straight forward; covering your initial loan amount, the term and initial interest rate if you have a conforming mortgage.  I'm not sure how FHA, VA and USDA loans will be disclosed where there are upfront mortgage insurance or funding fees that are often financed (added to the "base" loan amount).

What blows me away is the next line which addressed the mortgage payment. 

Your initial monthly amou nt owed for prinicpal, interest, and any mortgage insurance is: $_____ per month.

Currently, Good Faith Estimate itemizes the monthly mortgage payment and includes property taxes and home owners insurance (PITI).


I have reviewed the new three page GFE over and over again and cannot find a total estimated monthly payment. Consumers will have to add in their estimated property taxes and home owners insurance to determine what their actual monthly mortgage payment will be.

The line "Can your interest rate rise?" addresses having an adjustable rate mortgage.  You should also have additional disclosures that will explain how your ARM adjusts if you are selecting this type of mortgage.  (Washington State's Loan Application Disclosure Form covers this).

The following two lines regarding loan balances increasing have to do with negative amortized mortgages such as option ARMs and reverse mortgages.

The last two lines are clearly disclosing whether or not the mortgage has a prepayment penalty or a balloon payment.

Per HUD's New RESPA Rule FAQs, the initial loan amount and initial interest rate are based on the figures that are applicable on the date of closing.  

NOTE:  If you have a mortgage where the balance or payment may change–it is YOUR responsibility to understand the terms and all the possiblities may be presented to you with your mortgage payment.   If the terms are too complicated, please consider selecting a 30 year fixed rate mortgage (or a similar mortgage). 

Post from this series:

Review of HUD’s New Good Faith Estimate: Part 1

UPDATE August 31HUD just issued their 2nd revision to the RESPA FAQs…let's hope the third time is a charm. 

As I mentioned in a previous post, I'm going to be doing a series to review the Good Faith Estimate that will be mandetory on new residential transactions effective January 1, 2010.

The top of the new form is not earth-shattering.  It includes contact information for the mortgage originator and the borrowers' name, property address and the date the GFE was prepared.  An improvement would be to have the estimate also include the actual time it was prepared as well since we are averaging 3-4 new rate sheets per day.

HUD created this new GFE so that consumers could shop by rate and fees, ignoring the qualifications of the mortgage originator.  On the top of the form, they encourage you get three quotes.


We'll delve deeper into the "shopping cart" in a future post.  Can you imagine if HUD also encouraged borrowers to compare the expertise and track-record of the mortgage originator?

The section "Important dates" is on the top half of the new Good Faith Estimate.


Item 1 is suppose to let consumers know how long their rate quote on said estimate is good for.   There is no way to guarantee how long a rate is good with a quote unless the borrower is locking at that instant–infact, rate changes can and do happen while you're trying to lock in a rate.   Mortgage originators do not have crystal balls to know when or if the next rate change is coming. 

Item 2 is suppose to give the consumer a date for how long the closing costs are good for.  Again, this is assuming the mortgage originator has some magically control over third party services, such as the appraisal, title and escrow.  We have no way of knowing for certain if rate increases or reductions are planned by the various companies that are involved with putting together a real estate transaction.  The estimate can only be reflective of what fees are at the moment in time that GFE is prepared. 

Item 3 is just intended to disclose the lock period.  The most common lock periods are 30, 45 and 60 days.  Without a closing date on a purchase, you do not know the lock period.   Some borrowers may decide to float (not lock) and home buyers without a signed around contract do not know what the agreed to closing date is.

Item 4 provides the consumer with a drop dead lock date.  I don't have an issue with this.  Consumers should know how long they can float should they decide to gamble the markets with mortgage rate.

Per HUD's New RESPA Rule FAQs, which they've all revised just 7 days after it was first issued, Good Faith Estimates expire after 10 business days:

If a borrower does not express an intent to continue with an application within ten business days after the GFE is provided (or such longer time period specified by the loan originator), the loan originator is no longer bound by the GFE.

I'm assuming this does not apply towards interest rates where the rates may be the same or we could have experienced 30 rate sheets within the said 10 business days.  I'm also concerned about this language as the loan originator cannot guarantee that certain loan programs and underwriting guidelines will be available within any time period.   Unless the borrowers information (credit, income, assets) and the mortgage world has not budged in ten days, I'm not seeing how a mortgage originator can be bound to the GFE.

I do stand by my good faith estimates, however until an application is made, all supporting information is provided and the rate is locked, there cannot be any guarantee.  There are too many moving parts and uncertainty.   Mortgage originators will need to state clearly to the consumer the rate is based on x, y and z and as long as all of these hold true, your estimate is "binding" for 10 business days assuming the rates are the same at that moment, underwriting guidelines have not changed and the program is still available (as I'm writing this post, I'm receiving notice from one of the lenders I work with that they are no longer offering the 40 year amortized mortgage).  Do you see an issue here?

Watch for my next post in this series where we continue reviewing the first page of HUD's new Good Faith Estimate.

Not so much Good in the new Good Faith Estimate

Effective January 1, 2010, HUD is requiring mortgage originators use a new Good Faith Estimate which was designed to reduce the confusion for consumers and HUD claims that the "new Good Faith Estimate will help borrowers save nearly $700".

The new GFE is drastically different than the current form and in my opinion, it's not all for the better.   To begin with, the new form is three pages long instead of the current single page form…this seems to be the wrong direction for reducing paperwork for American borrowers. 

The intent of the new form is to "help consumers shop for the lowest cost mortgage and avoid costly and potentially harmful loan offers".   If you are a long time reader of The Mortgage Porter, you know that I strongly feel that you should select the person who is going to help you with your mortgage, possibly the largest debt in your lifetime that is attached to your most valuable asset, by rate and cost could be one of the most expensive mistakes you ever make.   Other factors are overlooked when you're chasing the bottom dollar or a rate that you're not in position to lock when rates are changing 3-4 times per day on average in this turbulent market. 

What's more important than rate and fees?  How about making sure you're working with an experienced and qualified mortgage originator who can navigate your transaction to closing for starters.  It is more important than ever to select a mortgage originator who stays current on underwriting guidelines and who will roll up her sleeves to work for you.  If you're working with an originator who cares about her clients returning to her, has referral business (does not have to rely on cold marketing or junk mail to find clients) and who is ethical; then a fair competitve rate and fees will follow.  

Don't get me wrong, you should compare…but compare more than rates and fees.  Not shopping the mortgage originators qualifications and focusing only on the dollar may wind up producing a "potentially harmful loan offer" that is not suited for your financial scenario. 

I will be reviewing the new Good Faith Estimate in a series of posts here at The Mortgage Porter.   Stay tuned.

Reader Question about FHA Mortgage Insurance

I received this email this past week while I was on vacation.  Right now I am licensed for loans only in Washington State and I don’t always have enough time left in the day to answer the questions or request for advice that I receive from readers who are located outside of my current “lending boundaries”…although I do try.  Sometimes a question or email makes a good post because it may help others who read this mortgage blog. 

Hi Rhonda, I read your blog all the time and I’m in need of advice from someone who knows their stuff — unfortunately im not in WA anymore so I can’t use you and I can’t get a straight answer out of my broker.

I am going with an FHA loan but I expect to be able to pay 20% of the principal within five years. What is not clear to me is if MIP on FHA loans can be removed *without* refinancing — i.e. just based on having paid 20% of the loan amt. I read something on the FHA site that said that this can be done only if the upfront MIP is paid at closing — I am trying to figure out if that means cash as opposed to rolling it into the loan.

Every time I’ve attempted to get an answer from my brokers they keep talking about refinancing in a few years and house appreciation — I really want to know the deal in case I CAN’T refi (due to market tanking or rates climbing, for example)

Advice is very very much appreciated.

FHA insured loans have mortgage insurance regardless of down payment or equity until two qualifications are met:

From HUD’s Mortgagee Letter 00-46:

Regardless of the computed loan-to-value ratio, all but 15-year term mortgages will have annual premiums for the greater of five years or until the amortized loan-to-value reaches 78 percent; there is no annual premium on 15-year term mortgages with initial loan-to-value ratios less than 90 percent.  All other mortgages with terms greater than 15 years, regardless of the initial loan-to-value ratio will have annual premiums for the greater of five years or until the amortized loan-to-value reaches 78 percent.  If a computed loan-to-value ratio is not possible, due to missing data or previous refinancing without an appraisal, the new loan-to-value will default to 89.99 percent.

If a borrower elects to make additional payments towards principal, they may request the monthly mortgage insurance payment be removed only after 60 payments have been made with no late payments in the last 12 months.

Those loans reaching the 78 percent loan to value threshold sooner than projected (but not sooner than five years from the date of origination except for 15-year term mortgages) due to advanced payments of principal will have the annual premium collections canceled upon the servicing lender submitting supporting information to FHA following the borrower’s request provided that the borrower has not been more than 30 days delinquent on the mortgage during the previous twelve months.

Whether or not you elect to pay your upfront mortgage insurance as a closing cost (cash) or finance it, is up to you.  It will not help expedite the removal of your monthly FHA mortgage insurance.

One of the present benefits with an FHA loan is the ability to refinance without an appraisal.  If the market tanks and homes continue to depreciate, as long as you can obtain a rate with a lower rate (the refinance must make sense), you can do an FHA streamline refinance.  I say “present” because we are in a climate where guidelines are changing….even for FHA.

Thanks for your question and for reading The Mortgage Porter.

EDITORS NOTE: FHA guidelines for mortgage insurance is changing in 2013. Please check current guidelines.