Financial Planning - The Mortgage Porter

How Do You Find an Ethical Lender?

April 4, 2007 by Rhonda Porter 4 Comments

On Rain City Guide, there are often debates that will arise about measuring one’s ethics (usually referring to real estate agents or loan originators). So how do you determine whether or not someone is indeed ethical? You can have a Code of Ethics plastered all over your web site and at your office…but it really doesn’t mean squat unless you do what you say.

As a Certified Mortgage Planning Specialist, I am to adhere to their Code of Ethics or I will lose my CMPS designation. This includes 11 Statements of Commitment and 8 Duties to the Client Codes of Conduct. There are 10 other Codes of Conduct that apply toward fellow CMPS members and the CMPS Institute. It’s pretty elaborate.

The Washington Association of Mortgage Brokers (WAMB), which I am a member of, also has a Code of Ethics. WAMBs Code of Ethics are more "short and sweet" than those of CMPS.

The company I am employed by, Mortgage Master Service Corporation, has their philosophy and goals on our website. And I was a Campfire Girl while in elementary school. (Our troop was the Blue Bird Blue Stars).

Jillayne Schlicke recently did a post on Vacation Mortgage about a local mortgage company who has "ethics in their name" and touts ethics on their web page. However, if you contact them about their "vacation mortgage" which is heavily advertised on the radio, instead of providing information about the mortgage and answering general program questions (I emailed on several occasions inquiring about their vacation mortgage), they want to run your credit and obtain all of your information information to make sure you’re considering the proper mortgage. Hmmm…dangling a vacation from your mortgage payment, then refusing to explain the program so they can offer you a different program…sounds like bait and switch to me. Hardly ethical in spite of all their efforts to promote being an ethical company.

This is why I will always return to relying on referrals from three different sources of individuals whom you respect to select your Mortgage Professional. Such as a friend, co-worker, neighbor, Certified Financial Planner, CPA or Real Estate Agent. Preferably, one who has recently gone through a purchase or refinance transaction themselves. Your referrals have all ready been tested by those you trust.

Unfortunately, you’re not able to submit a Loan Originator to a polygraph test to determine if they’re straight shooters with your best intentions at heart. And, you cannot follow them around 24-7 (legally) to see what types of decisions they make throughout the course of a day. And although the new legislation to have loan originators who work for mortgage brokers licensed (banks such as Washington Mutual, Countrywide and Wells Fargo; and credit unions are excluded from this law) is a start, it’s still no guarantee of the the person’s moral fortitude. At least unsavory LOs who work for brokers will have a license to lose (or, at least they will not be originating loans at a mortgage brokerage).

One of my favorite examples of a "Code of Ethics" is from Les Schwab Tire Company. They promote that they treat clients just like they would their own mother. I browsed through their web site and could not find a posted Code of Ethics…but I guess this is, perhaps my point. They do what they say, it’s not all talk or print. Simple. Funny, I think some of the best things are!

Filed Under: Financial Planning, Legislation, Mortgage, Predatory Lending

Getting on Track to Buy Your First Home

April 2, 2007 by Rhonda Porter 2 Comments

Last fall, a Mom made an appointment with me to meet with her children about buying a home. It was so cool. First off, she was very proud of her 18 and 20 year olds. Both were hard working individuals…being responsible young adults. Mom thought they should look at buying a house together instead of renting. It was a very interesting consultatation. I was happy to meet with this family to help make sure her young adults are on the right track of becoming home owners and mortgage payers.

Why I Don’t Like Stated Income Loans

March 31, 2007 by Rhonda Porter 11 Comments

Let me start by saying, I prefer a “No Income” over a “Stated Income” loan. If you have to “state” an income, you’re potentially setting yourself up for committing fraud. A “no income” verified loan (where your income is blank on the loan application) does come with a slightly higher rate than a stated income loan, however, there are no questions about what is questionable…your income!

Recently, a home buyer contacted me for a second opinion on their good faith estimate. They had just made an offer that was accepted on a home. After reviewing his information, he revealed that the loan was stated income. I did not have all of their documentation needed for self employed borrowers (2 years complete tax returns, for starters) since I was just looking at closing costs and the rate. So I asked why they were going stated income. Here is his actual response:

“Let’s just say it’s income we’re hoping to achieve, but higher than what is on our tax return.”

Does that sound a wee bit concerning to you? For one, they are stating income they don’t make in order to qualify for a mortgage. When you’re self employed your income can vary quite easily. What happens if they don’t make the income they “hope to achieve” and they cannot swing their new mortgage payment?

I asked if his Loan Originator was going to have him sign a 4506 or 4506T. These forms are sent to the IRS so the lender (and what ever company your loan is sold to) can verify the income you are stating on the loan application by accessing your tax transcripts directly from the IRS.

“I did ask [our LO] about that, and she said it’s basically a formality – that they don’t actually pull the tax return…it’s just put [the 4506 form] in the file.”

Often times, the 4506 may stay “in the file”. However, if the borrower defaults on the loan, you can bet the first thing the lender will do is to grab the 4506 to compare what was stated on the loan application to the actual income reported to the IRS.

“Since I certainly don’t plan on defaulting, I’m going trust [the LO] and the bank on this one. She’s got an interest in this as well!”

The LO certainly does have an interest in the loan. She’s going to get paid and keep her real estate agent happy. Stated income and no-income verifiers are very easy loans to do as compared to doing a full document loan for a self employed borrower where you have to review and average incomes for the past two years. Yikes…the LO might actually have to pull out their calculator and do some hard math and go through someone’s tax returns. Oh dear!

Let’s assume worse case scenario for this borrower who is all ready admittedly overstating income at what he hopes to achieve…what he suffers a loss with his business and and is not able to keep up with his mortgage? As a self employed person, your income and costs are not secure or stable. This could quite easily happen to the best of people. Now you’re in a mortgage that you could not afford to begin with because you had to ~~over state~~ lie about your income. Should your mortgage go into default, will the LO who put you into this loan stand by you? I doubt it. Plus, she’ll probably state something like “I had no idea they didn’t make that income.” She won’t go down holding the borrower’s hand in this case, far from it.

If you are considering a mortgage where you “state” your income on the loan application, you should know:

Stated income loans are not created to exaggerate your income so you can qualify for a mortgage.
Your stated income should compare to what you have reported on your gross income tax returns.
Consider a “No Income Verified” loan vs. a “Stated Income”. The difference to rate, with good credit, is often not that significant. With no income stated, there are no figures to lie about. You’re qualifying on credit and down payment alone.
Don’t lose sight on whether or not you can actually afford the mortgage payment. Qualifying for a mortgage does not mean that you should have the mortgage if you cannot make the payments.

Lying about your income, or anything on the loan application, is mortgage fraud. There are many other types of documentation available so that borrowers do not need to go this route (unless it makes sense–ie they actually have the income).

Still thinking about stated income? Watch this video from CBS.

Filed Under: Financial Planning, Mortgage, Predatory Lending, Refinance, Residential Purchase, Subprime Lending Tagged With: stated income, subprime

My Encounter with The Seattle Bubble Blog

March 24, 2007 by Rhonda Porter Leave a Comment

My husband teases at me when I talk about the Bubble Bloggers…not because they’re funny (they can be), it’s simply the phonetics. Our local bubble bloggers are a very serious and determined group of individuals. In a nut shell, they believe that Seattle’s home values will plummet or burst like a popped bubble and when this happens, it will reek havoc for current home owners. Many of them feel it is much better to rent than to own a home for financial purposes. The Seattle Bubble is probably the most well known local blogs on this topic.

Recently, an article I posted on Rain City Guide, The Great Rent vs. Own Debate, was featured (or should I say, "flogged") on the Seattle Bubble and Priced Out Forever (these blogs share writers). Eleua, one of the "bubble bloggers" asked me if they could do this and I must tell you, I was a bit nervous about how this would all shake down. For starters, where ever there are numbers and stats, there is opportunity for debate. Numbers can be twisted and recalculated to prove anyone’s theory. I must say they were very fair and kind in their "flogging" of my post.

Here are some points they make on why it’s better to rent than to own a home (I’m not going to debate these points in this post):

Renters are not responsible for repairing or maintenance of the building. (I do spend many weekends at Home Depot with my husband to work on our house…and I love it).
Freedom to pick up and move when your lease is up without the cost of selling a home (approx. 8-10% of the sales price including commissions, 1.78% excise tax for King County and closing costs).
You can invest the funds you would use for down payment and earn interest on it (your home equity does not earn interest).
You may be able to rent a nicer home than what you can afford to buy for the same payment.
The standard tax deduction may be better than the deductions you’re allowed as a home owner itemizing your mortgage interest and taxes. (As always, check with your CPA regarding any tax matters).
And of course, home values are going to tank once the Seattle bubble bursts.

I wrote The Great Rent vs. Own Debate over an exchange of comments on one of Rain City Guide’s post where I stated something along the lines of "owning a home is an automatic savings plan for some borrowers". I still believe this to be true based on what I’ve seen in my past seven years as a Mortgage Consultant.

Many people are not putting away money into savings accounts, retirement, planning for college…you name it. When you make a mortgage payment (assuming it’s not interest only), you are applying a small portion of that mortgage payment towards reducing the principle balance. For Americans who do not put 10% of their gross income (or anything) into an investment vehicle (no…not a new car!), this is their only source of savings. They are at least putting some money away where they do not have immediate access to it (unless they treat their home equity like an ATM).

I will be the first to admit that a big reason why I have bought homes is emotional. I have "a need" to own a home. I grew up renting and moving around quite a bit as a kid. I feel grounded and I have control over the home…it’s mine! With that said, owning a home has proven to be the best investment for me. I would not have realized the appreciation and profits from renting that I have as a home owner over the past 18 years.

Home ownership is not for everyone. Especially people who are careless with their credit and spending. You need to be responsible, plan for repairs and improvements and make your mortgage payments on time. Buy a home because you want to live in it and you want to be your own "home sweet home".

Filed Under: Financial Planning, Mortgage, Residential Purchase, Seattle, Weblogs

That New Car Will Cost You

March 15, 2007 by Rhonda Porter 3 Comments

If you’re considering buying a home anytime in the near future, please think twice before purchasing your next car. I’ve had a couple different scenarios lately where the car payment has really impacted the home buyers. Don’t get me wrong, I love cars. Old and new alike. Here’s how it impacts your home purchasing power (based on a 6% mortgage interest rate amortized for 30 years):

Part 2: Know Your Credit Score

March 14, 2007 by Rhonda Porter 4 Comments

EDITORS NOTE: What is considered a “good score” has changed quite a bit since the subprime era.

In Part 1 of the Subprime Series, you should have found your Note and contacted your Mortgage Planner. The next step is to review your credit report. I suggest having your Mortgage Planner pull a tri-merge report. They may or may not charge a fee for the cost of the report (around $20).

Whats your mid-score? Just last year, a score of 600 was an easy mortgage transaction (for subprime)…now the bar is raising due to all of the foreclosures. Typically, your “mid score” is going to be how you’re judged by the mortgage companies. With a tri-merge report, you should have 3 scores ranging from 350 – 850. Your mid score is literally the number between the highest and lowest score. 680 and above is considered to be a good credit score. 720 and higher is excellent.

Humor and Taxes

March 13, 2007 by Rhonda Porter Leave a Comment

With April 16 rapidly approaching, the phone calls and emails from clients begin to really pick with with questions about their tax deductions. I recommend using a CPA to help you with your taxes, especially if you’re itemizing (which you need to do in order to deduct mortgage interest). Here are a few links you may find helpful regarding mortgage income tax deductions:

Your Home as a Tax Shelter: Top Ten Tax Deductions for Owning Your Home

10 Real Estate Tax Breaks You Should Know

IRS Publication 530/Tax Information for First Time Homeowners

IRS Publication 936/Home Mortgage Interest

Now…a little humor to lighten this post up a bit.

"The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin." Mark Twain

"The hardest thing in the world to understand is the income tax." Albert Einstein

"The purpose of a tax cut is to leave more money where it belongs: in the hands of the working men and working women who earned it in the first place." Robert Dole

If you find you’re getting a nice big return back on your income taxes, you may want to consider adjusting your withholding by increasing your exemptions. Again, this is a matter to discuss with your CPA. There’s no reason to give the Government an interest free loan of your money when you can be taking home a little extra each month…just my 2 cents!

Filed Under: Current Affairs, Financial Planning

My First Subprime Client

March 7, 2007 by Rhonda Porter 2 Comments

It happened quite on accident back in 2002. When I began my mortgage practice seven years ago, I was pretty much an "A Paper" lender. Conventional, FHA and VA loans were my bread and butter. The thought of doing a subprime loan made me shudder. I knew they were out there, but I was perfectly happy sticking to my 680 and higher credit score clientele and not diving into the subprime pool.

Then one day, a Realtor, Ima Agent, asked me if I would review her brother and sister-in-law’s good faith estimate since she felt the rate and fees were a bit high. Ima Agent told me that they had challenging credit in the past and were looking to buy "zero down". What could I say? I would at the very least talk with them to see if I could help. I reviewed their good faith estimate and was surprised at the cost of doing the mortgage. Most of our loans (to this day) are Correspondent and the closing costs are fairly low. Brokering to a subprime lender often has Broker Fees around $795 in addition to the regular closing costs. Of course the rates are higher too since the risk to the lender is greater.

Mr. and Mrs. Buyer are a very nice couple who were recently married and wanted to stop paying rent. She admitted that he had a troubled past with his credit and that they had been working on improving his (and their) finances. Their mid credit scores at the time were around 610. Back then, I would not have known where to go for an 80/20 with a credit score below 700…except the other loan originator they had met with previously had the name of the mortgage lender he was brokering to…BINGO! I called the lender and priced out their loan. I was able to provide my clients a much better rate so they elected to leave the other loan originator.

Here is what the basic guidelines were back in 2002:

600 minimum mid-credit score

100% total loan to value using an 80/20

50% Total Debt to Income Ratio

First mortgage is a fixed for 2 years and amortized for 30.

First mortgage has a 2 year prepayment penalty of 6 months interest.

Second Mortgage is amortized for 30 years and due in 15.

Reserves (taxes and insurance) were OPTIONAL.

Funds for closing were not seasoned (no bank statements provided) or sourced.

Seller can pay up to 6% of closing costs and prepaids (taxes and escrow).

I reviewed their credit history with them and we developed a plan on which debts they should focus on eliminating. They had all ready established a budget since they were working on reducing their credit card debt. I began to feel more comfortable with helping Mr. and Mrs. Buyer with their subprime financing since I could tell they understood the responsibility of having a mortgage and being a home owner. Ima Agent found Mr. and Mrs. Buyer their next home and we financed it with the subprime lender. They were extremely happy in their new home they purchased in March of 2002 in Seattle for $239,500.

Shortly before their prepayment penalty was over, Mr. and Mrs. Buyer contacted me to restructure their mortgage. They were excellent borrowers; they paid their mortgages on time as well as their other obligations and did not over extend themselves with credit. Mr. and Mrs. Buyer with having a mortgage (which helps improve credit score) their credit scores were now in the low 700s. I was able to provide them a long term mortgage (30 year fixed) for 5.75% and their home had appreciated to $310,000.

I’m thankful that I took the subprime plunge. I’ve since been able to help many home buyers who would not have qualified for an FHA or VA mortgage. Many first time home buyers lack the 3% down or are better off leaving the 3% down in their savings account as a cushion.

Since my first subprime loan 5 years ago, the guidelines have gone through dramatic changes. Soon Subprime lenders were promoting 80/20 programs with interest only payments, stated income and credit scores down to 580…yikes! With these loose guidelines, lenders are now facing record foreclosures and are now tightening their requirements for a subprime loan. Every day I’m receiving updates from various stating that the minimum credit score for 80/20 financing is now 620 and stated income is disappearing.

I have just added a new category to Mortgage Porter: the market toughening up, these home owners really need to minding their credit and budget so they don’t wind up in the deep end with no way out of their subprime mortgage after the rate adjust.

Filed Under: Credit Scores and Reporting, Financial Planning, Mortgage, Refinance, Residential Purchase, Subprime Lending