Archives for February 2011

Mortgage Loan Originator Compensation Changing on April Fools

I’m going to start this post by saying I can bet certain people are going to chime in that this needed to happen and LO’s will still thrive and do fine…and I can also bet that those who will sing that song have not recently been a mortgage originator.  They may be exposed to mortgage originators from being employed in the real estate industry, but in my opinion, they are “arm-chair quarterbacks” at best.  Enough said…on to my post.

Effective April 1, 2011 rules regarding how mortgage originators (anyone who takes a residential loan application) may be compensated will be implemented.  Currently most mortgage loan originators (MLO) are paid by the consumer (points), by the wholesale lender (rebate pricing) or a combination of both.  MLOs may also be paid a salary and receive additional compensation based on volume (many banks pay this way).  These rules are created by the Fed through modifications to Reg Z.  Even though the rule goes into effect on April 1, 2011; lenders will probably enact deadlines in advance (sometime in March). 

It’s no surprise to me that there are two different sets of rules based on if the mortgage loan originator is employed by a bank or true corresponent lender (like Mortgage Master Service Corporation) verses a mortgage broker.  MLO’s who are employed by a bank or true correspondent are not paid directly by the consumer, they are paid by their employer (also referred to as the “creditor”).  Mortgage Brokers are once again kicked in the teeth with the changes to Reg Z.  I do wish we all had the same set of rules (including all being licensed) as consumers should not have to determine the type of originator and varying set of the regulations that apply.

Mortgage Brokers will no longer be allowed to receive “dual compensation”.  This means that MLOs employed by a mortgage broker will only be able to recieve compensation paid by the consumer OR paid by the wholesale lender.  Let’s say that today, a rate priced with zero points is 5.000% (rebate pricing is 1 pt to the broker) and priced with 1 point origination fee paid by the consumer buys the rate to 4.75% (zero rebate from the lender), a mortgage broker could offer these scenarios.  If the consumer decided they would like to have the rate of 4.875% and are willing to pay 0.5% in origination fee with the broker receiving 0.5% from the wholesale lender in rebate, this is not allowed per Reg Z.  From my understanding, retail mortgage loan officers (employed by banks and true correspondents) will still have this option because the consumer is not directly paying the mortgage originator.  I’m very thankful that I work for a correspondent lender, however it’s really not fair for the mortgage brokers.

Mortgage Loan Originators may not be paid based on the terms and conditions of the loan.  The loan amount is not considered a term or condition however the interest rate is.   This rule also prohibits “steering” a consumer to lender offering less favorable terms in order to increase the loan originator’s compensation”.  

Owners of mortgage companies are currently scrambling trying to figure out how to compensate their mortgage originators.  

In my opinion, changes to RegZ seem to favor how many big banks have been paying their mortgage originators: volume.  How does a consumer benefit when the MLO who is taking care of their purchase or refinance is compensated by how many loans they can close in a specific period of time?  Banks will continue to pay their MLOs less per transaction as they complete as many loan applications as possible as they sit and wait for next trusting bank customer to walk into the branch.  In my opinion, banks want to pull the industry (quality of mortgage originator) down to their level so they have less competition.

I’m wondering which industry will our government get into next to control how one is paid?  With what’s gone wrong in the housing industry, are the commissions paid to a real estate agent low hanging fruit?

Related post:

If your bank doesn’t charge an overage or points, what do you call this? 

How am I paid? (2007)

Presidents Day

Mortgage Master Service Corporation is closed today in observance of Presidents Day.  We will reopen for business as ususal tomorrow morning, Tuesday, February 22, 2011.

As the markets are closed, I will not be posting mortgage rates today.  If you would like a personal interest rate quote based on your scenario for your home located in Washington state, send me an email or dm me on Twitter.  

Happy Presidents Day!

Your Mortgage Insurance may be a 2010 Tax Deduction

Did you know that mortgage insurance premiums you paid during 2010 may be tax deductable?  This is eligible for mortgage insurance contracts that were issued after 2006 for the use of purchasing your home (primary residence or second home) and is not limited to what you may traditionally think of as "private mortgage insurance". 

Qualified mortgage insurance may include:

  • private mortgage insurance (may be paid monthly, lump sum at closing or both)
  • FHA annual mortgage insurance (paid monthly)
  • FHA upfront mortgage insurance premium (paid upfront at closing)
  • VA Funding Fee (paid upfront at closing
  • USDA Guarantee Fee (similar to a funding fee; paid upfront at closing)

Qualified mortgage insurance is reported in box 4 on your 1098 Mortgage Interest Statementwhich you should have received from your mortgage servicer (who you make your mortgage payments too).  This deduction is treated essentially the same as deductible mortgage interest.   You will need to file an itemized tax return in order to claim this deduction.  If your adjusted gross income is more than 109,000 ($54,000 if married filed separately) you cannot claim this deduction.   You can refer to Line 13 (of the Instructions for Schedule A of the 1040 (on page 7) and IRS Publication 936 more information.

Remember, please seek the advice of your tax professional or CPA.  I am licensed to originate mortgages on homes located in Washington State. 

Related post: 

Mortgage Insurance Tax Deduction Extended (again) through 2011

Are Mortgage Points Tax Deductible?

FHA Mortgage Insurance to Increase in April

Yesterday HUD issued Mortgagee Letter 11-10, making it official that FHA annual mortgage insurance will increase another 0.25% basis points on case numbers issued on or after April 18, 2011.   The annual mortgage insurance is included in the monthly mortgage payment.  There is no change (at this time) to the upfront mortgage insurance which is paid for at closing (typically financed or may be paid as a closing cost).  This is in line with the Obama Administration's plan for reforming mortgages which was revealed on Friday.


Here's how this will pencil out for a 30 year fixed mortgage based on a sales price of $400,000 with a minimum down payment of 3.5% (base loan amount of $386,000).

FHA mortgages with a case number issued prior to April 18, 2011 (current as of this post):

386,000 x .90% = 3,474/12 months = $289.50.

FHA mortgages with a case number issued April 18, 2011 or later:

386,000 x 1.10% = 4,246/12 months = $353.83

Difference in monthly payment: $64.33.

This will also impact FHA 203k rehab loans.

Remember, FHA annual mortgage insurance remains on the loan for a minimum of 60 payments regardless of loan to value.  Even if a home buyer is putting down 20% towards the purchase of their Seattle area home, they will still have FHA mortgage insurance.   FHA mortgage insurance will also remain on the home until the loan balance reaches 78% of the loan to value based on the original appraised value or purchase price of the home (which ever was less).

I have been originating FHA insured loans for the past eleven years at Mortgage Master Service Corporation (a Direct Endorsed HUD approved lender).  I am licensed to originate mortgages for homes located in the State of Washington.  If I can help you with your mortgage needs, please let me know!

Obama Administration Proposes Tougher Mortgage Guidelines and Increased Pricing (Rates) to You

In a time where our housing marketing is not out the woods and many who want to keep their home are having a difficult time refinancing; the Obama Administration released their proposal for "winding down" Fannie Mae and Freddie Mac.  They plan on phasing the government out of the GSEs over the next 5 to 7 years.  

Here are some of the highlights of the reform plan as released by the Treasury Department on Friday:

Phasing in Increased Pricing at Fannie Mae and Freddie Mac to "level the playing field".  The Obama Administration believes that if they increase conventional mortgage rates, it will help private lending have a fair chance at originating mortgage loans.  If you've been reading my blog, you know that Fannie and Freddie have been increasing their pricing by their LLPA's (Loan Level Price Adjustments).   Adjustments to pricing translates to higher mortgage rates in addition to what the market pricing would be.  Higher rates means that Seattle area home buyers and those seeking to refinance will qualify for less.

Reducing Conforming Loan Limits.  Currently in King, Pierce and Snohomish counties, we have a temporary high balance conforming loan limit of $567,500.  This plan confirms the governments intent to "rest as scheduled on October 1, 2011 to levels set in the Housing and Economic Recovery Act (HERA).

Phasing in Minimum 10% Down Payment.  In my opinion, this isn't a huge deal for Fannie and Freddie mortgages…as long as we still have FHA.   Speaking of FHA…

"Returning FHA to its Traditional Role".   FHA has become the mortgage du jour in many cases when a borrower doesn't have 20% down payment…you never know what you're going to get with a PMI underwriter.   The Administrations proposal for FHA includes:

  • allowing current high balance loan limits to expire on October 1, 2011
  • increase the annual mortgage insurance (again) by 0.25 basis points
  • "lowering the maximum loan to value ratios…and adjusting pricing".  FHA plans on increasing the minimum down payment from 3.5%.

Increased mortgage disclosures for consumers.  What happened to simplifying the process?  I've found that HUD's Good Faith Estimate and the Fed's Truth in Lending have not helped consumers.  New disclosures are being worked on and hopefully what ever our government creates, will be more clear and concise than what I've seen.

Here is the entire 32 page Reforming America's Housing Finance Market – A Report to Congress.



Are Mortgage Points Tax Deductible?

It's that time of year when people are thinking about their income taxes and many who bought a home last year are wondering what the can deduct on their income taxes.  Let me start by stating:  I am not a tax advisor;  I am a NMLS Licensed Mortgage Originator.  Please review your tax scenarios with your CPA or professional tax advisor.

A mortgage point is a percentage of the loan amount and is used to reduce the mortgage interest rate.  A mortgage priced with zero points has a higher rate than a mortgage priced with a point.  Typically, but not always, one point (1 percent of your loan amount) equates to 0.25% in interest rate.  Points are prepaid interest, and like the interest your pay on your home mortgage, are currently deductible for your primary residence.   

If you paid points to purchase the home you live in (owner occupied/primary residence), you may deduct the full point on your itemized 1040.  If you paid points for a refinance, the point must be deducted over the term of the loan.   However if your refinance was for home improvement, you may be able to deduct the full point instead of spreading over the life of the loan. 

If you purchased a second home and paid points, the points may be deducted over the life of the loan (similar to a refi that was not obtained for home improvement). 

If the seller paid for your points when you purchased your home, you may be able to deduct them as well as long as the transaction meets IRS guidelines.

For more information on what is required for points to be deductible, see IRS Publication 936: Mortgage Interest Deductions page 5.

In order to claim these deductions, you will need to itemize your tax return.  Tax Form 1098 will disclose the mortgage interest paid and the deductible points paid.  You may also want to review your HUD-1 Settlement Statement to see an itemized list of closing costs and points paid. 

Don't forget, the due date for your 2010 Federal Income Tax Returns (and requests for extensions) is on April 18, 2011 this year.

FHA 203(k) Rehab Loans

mortgageporterhouseEDITORS NOTE: We currently do FULL FHA 203k Rehab loans instead of streamline and loan limits have changed since this post was written in 2011.

HUD’s FHA 203(k) loans are very popular right now considering the many homes that may have been abandoned or neglected and need some TLC.  FHA 203(k) loans allows the cost of certain repairs and improvements to be added to the sales price which essentially provides borrowers an “all in one” home repair loan for permanent financing.  The down payment is basically based off of the sales price plus the costs associated with the improvements using FHA’s minimum allowed down payment. FHA 203k loans are  a great choice for fixer-uppers or homes that need some modernization.

The maximum loan amount for a purchase using 203k financing is the lesser of the “as-is” value of the property (based on the appraisal) plus the rehab cost or 110% of the expected “after value” with the rehab.  The maximum loan amount is limited FHA’s loan limits.  See below for current FHA loan limits in Washington state.

This program is one-to-four unit dwellings and FHA approved condos as long as the homes are owner occupied.  This program does not allow investors.  Most improvements are eligible as long as they add value and are permanently affixed to the foundation. Just a few examples of improvements include painting, room additions, kitchen remodeling, roofing and decks.  Luxury items (such as swimming pools) and improvements to detached structures are not permitted.

Certain expenses are eligible to be included in the 203k loan, such as:

  • the cost of the materials used in the rehab
  • labor
  • permits, fees, inspections by qualified home inspector
  • up to six months of mortgage payments (while your home is being renovated, you will be making the mortgage payments)
  • a contingency reserve (around 15% depending on the project)

A HUD approved consultant works with the borrower to help determine what improvements FHA will require (such as energy conservation, local codes, safety, etc.) as well as the improvements the buyer would like to have done.   The consultant will develop a list of proposed improvements that will be submitted to the lender for review.

Rehabilitation construction must start within 30 days of closing with all work completed within six months of closing.

PS: FHA 203k rehab loans are not just for home buyers, they can be used to refinance an existing mortgage and pay for improving a home too!

If you would like more information about FHA’s 203k Rehab loan for home located in Washington state, please contact me.  I have been originating FHA loans at Mortgage Master Service Company since April 2000.

FHA 5/1 Adjustable Rate Mortgage

FHA ARMs are extra special in my eyes.  I like that they have very low caps limiting how much they can adjust after the fixed rate period is over.  Plus, FHA loans may be assumable to a qualified borrower in the future should you decide to sell your home.  Today's fixed rates have about a 1 point difference between a 30 year and a 5/1 ARM, but with a 1% rate cap, worse case scenario, the 5/1 ARM will reach today's 30 year fixed rate at it's first adjustment and keep that adjusted rate for one year.  Let's see how this pencils out. 

NOTE: for a current rate quote for an FHA ARM or any mortgage for a home located in Washington, click here.

As of 12:45 p.m. Feb.  2, 2011, based on a credit score of 720 with a sales price of $400,000 and a down payment of 3.5%, I would quote the following:

30 year fixed FHA with zero points: 4.750% (APR 5.497).  Principal, interest and mortgage insurance payment:  $2,321.16.  ($2033.69 plus $287.08 monthly mortgage insurance).

5/1 FHA ARM with zero points: 3.750% (APR 6.521).  Principal, interest and mortgage insurance payment: $2,082.58.  ($1805.50 plus $287.08 monthly m.i.). 

Based on this pricing, the difference in monthly savings with the ARM is $238.56.  Over five years, the savings is about $14,315. 

The FHA 5/1 ARM has caps of 1/1/5.  This means that the most this rate can adjust on the first adjustment date (after 60 months) is up or down 1%.  Using the scenario above, the highest the rate can adjust to is 4.75% and the lowest is 2.75%.  The rate will continue to adjust annually no more than 1% up or down for the remainder of the term or as long as the mortgage is retained.  The highest the rate can ever be 5% higher than the note rate (this is called the "ceiling").  With this scenario, that would be 8.750%; however it would take 5 years (after the five year fixed period is over) for the rate to adjust that high. 

Here's what the principal, interest and mortgage insurance (PIMI) would look like "worst case" scenario assuming your first payment is made today and the rate only adjusts upwards:

PIMI Payments from 2/1/11 – 1/1/16 at $2,082.58 at 3.750%.  (Rate fixed for 5 years).

PIMI Payments from 2/1/16 – 1/1/17 at $2,259.96 at 4.750%.  (Maximum increase in rate of 1%).

PIMI Payments from 2/1/17 – 1/1/18 at $2,454.06 at 5.750%. 

PIMI Payments from 2/1/18 – 1/1/19 at $2,650.82 at 6.750%.

PIMI Payment from 2/1/19 – 1/1/20 at $2,849.23 at 7.750%. 

MI Payment (see NOTE below) from 2/1/2020 to 1/1/2021 at $2,818.20 at 8.750% $310,638.

The rate will continue to adjust annually (on the anniversary date of the first adjustment) and will be reamortized based on the remaining term. The rate can adjust by as little as 0.125% but never more than by 1% up or down and never higher than 5% of the Note rate.

NOTE:  FHA monthly mortgage insurance drops off after the loan balance reaches 78% of the value (based on the original value of $400,000 = $312,000) and a minimum of 60 payments have been made.  Assuming all payments are made as scheduled, the home owner will reach 78% around 108 payments (9 years) with the adjustable rate mortgage.   With the 30 year fixed rate, it will actually take closer to 120 months (10 years) to reach the 78% threshold before the monthly mortgage insurance drops from the payment.  Additional payments can be made towards principal but the earliest the mi will be removed regardless of loan to value is 60 months.

The scenarios above are assuming that we finance the upfront mortgage insurance premium of 1%.  Another option is for the 1% to not be financed and paid as a closing cost…even the seller can pay for the upfront mortgage insurance premium.  At this point, Sellers can still contribute up to 6% of the sales price towards closing costs and prepaids; they cannot pay any of the down payment.  

Although my quote was based on a 720 mid-credit score.  We're currently approving FHA loans with low mid-credit scores down to 640.

The loan limits for FHA loans in King, Pierce and Snohomish County is currently $567,500 (until October 1, 2011).   

Is an adjustable rate mortgage right for you?  It depends on your personal scenario is and if you can stomach having your rate change.  The 1/1/5 caps are certainly more tolerable than the 5/2/5 caps that most conventional ARMS tend ot have.  At any rate, it's good to know what your mortgage options are.

If you are considering buying or refinancing a home located in Washington state, I'm happy to help you!