Did You Get Your Tax Refund or…

April 18, 2007 by 1 Comment

How about something that looks like one?   This arrived the other day to our home in a gold envelope looking very much like an income tax refund.   Per Washington State law, this form of advertising from a mortgage company is illegal.

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That’s just the beginning of what is wrong with this advertisement.   This company appears to be offering to refinance our current mortgage plus give us $44,000.35 (don’t forget that 35 cents) cash in hand at the low rate of 2.20% (obviously a negative amortized/deferred interest ARM)!   The ad shows two asterisks next to the rate… on the bottom of the flier, there is an * in very fine print disclosing an "APR of 6.90% 30 year loan interest rate may increase after consummation".    Duh…ya think?  The fine print also shows this lender is licensed in California, not Washington, to provide mortgages.

My point is, whenever a mortgage company has to resort to "cold marketing"… whether that be phone calling or deceitful pieces of mail aimed to look like something other than what it is (such as your IRS refund), they are not worth trusting your largest asset (your home) and debt (your mortgage) with.   

I always advise getting a referral from someone you trust.   Do your own homework.  If it seems too good to be true, it is.   

Filed Under: Predatory Lending

Subprime LTVs and Credit Scores

April 11, 2007 by 4 Comments

Yesterday I received an email a subprime lender promoting their new loan to value (LTV) limits based on credit scores.    I thought it was a good reflection of the current LTV/credit score guidelines for this current market.

100% LTV @ 660 Credit Score

95% LTV @ 580 Credit Score

90% LTV @ 560 Credit Score

85% LTV @ 540 Credit Score

80% LTV @ 520 Credit Score

Interest rates were not provided with the email that I received, however, I would be they’re undesirable.   

Someone with a 660 credit score, depending on what their actual credit history and financial portfolio looks likes, should actually be able to obtain other financing besides subprime, such as FHA or a Flex type program. 

This is a sharp contrast to what was available a few months ago for subprime borrowers.   And I’m amazed at how many phone calls I’m still receiving from people who know they have a credit score in the 500 range wanting zero down who are living paycheck to paycheck.   I don’t blame anyone for wanting to own a home, it is touted as the "American Dream".  But a 2-3 year prepayment penalty with a double-digit mortgage interest rate, is not. 

Filed Under: Credit Scores and Reporting, Predatory Lending, Subprime Lending

How Do You Find an Ethical Lender?

April 4, 2007 by 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.   

Cmpssmall 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.Campfire

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. Lego_gsr_2 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

Why I Don’t Like Stated Income Loans

March 31, 2007 by 11 Comments

Let me start by saying, I prefer a “No Income” over a “Stated Income” loan.  If you Riskybusiness_2 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: ,

My Biggest Fear

March 26, 2007 by 4 Comments

FearNext to snakes, spiders, deep water and falling down stairs (okay…I have a few phobias!)…and actually this is no laughing matter.   There is so much hype in the media right now about the subprime industry and home owners in trouble with 80/20 loans and interest only ARMs, etc.    Many people are contacting me to confirm they’re okay or to see if the need to refinance.   So far, none of them need to refi (but I’m glad they’re checking with me).  Either they’re planning on selling or their ARMs won’t be adjusting for a couple more years and they’re actually quite happy with payments once they step away from the fear factor.   These home owners with ARMs and/or 80/20 financing are prime targets for unsavory loan originators to scare them into a refinance (there are even ads on TV soliciting home owners to do so) when they don’t need to.   Costing them at least a couple thousand dollars in their equity and rewarding some loser with a commission they shouldn’t have.   

How do they do this?  For starters, the local title companies can provide list of home owners if they have financing through certain lenders (like New Century, for example), or if they financed within a certain time period with an ARM.   The lender may call you (ignoring if you’re on the DNC) or send you a letter stressing their "sincere concern" over your current mortgage scenario.   Please don’t buy into it.   

  1. Contact your Mortgage Planner if you have any concerns with your current mortgage.   Now may be a good time for a credit and mortgage review–you may not need to refinance (everyone’s situations vary).
  2. Get a second opinion if you feel you need one.   Ask a friend, co-worker or family member for a referral.   Most professional Mortgage Planners are happy to discuss your situation without running your credit.  (If your Mortgage Planner all ready ran your credit, you can provide your scores to the person you’re getting the second opinion from). 
  3. Do not do business with lenders who have to "cold call" for business.  Rely on either your past Mortgage Planner or get a referral. 

Bottom line, don’t panic.  The worst decisions are made when someone is being emotional and scared.   Lenders who are predatory prey on the emotions of scared people.    This type of loan originator is ultra smooth…could probably out-sell me (and I’m sure has) on my best day.  (I do not view my career as "sales").  Take a deep breath and do some homework.  Make the hoopla over subprime loans into a personal opportunity to review your credit and get your finances in order.   It will save you in the long run.   

With all this said, some people are in trouble…they are not the majority and regardless, it is unfortunate.  If you are in financial troubles or if you feel you may be near it, please do contact your Mortgage Professional (or get a referral) right away. 

Filed Under: Mortgage, Predatory Lending, Subprime Lending

Will someone please change the channel?

February 28, 2007 by 1 Comment

Mpj031638400001I’m watching CNN this morning while I’m getting ready to head into the office (it snowed a few flakes this morning, so being the chicken I am, I’m taking my time before I venture onto the roads)…when I see three commercials within 10 minutes that I found somewhat disturbing.

First commercial:  Ditech…cash out refinance your home with a fixed rate up to 125% of the value!  Well, thank God it’s not an interest only negative amortized ARM!   In light of the increased foreclosures and troubles with subprime lending, I cannot believe I just saw this commercial.   What happens to the borrower who has overextended their home equity and then they lose their job or they need to sale?  Guess what, they can’t.   There’s not ANY equity to pay for closing costs.   Welcome to Foreclosure City.

Next:  Countrywide…offering a no cost loan.  No origination fee, no credit or appraisal fee and no third party (title, escrow, etc.) fees.   This isn’t so upsetting to me (especially after following the Ditech ad).  Anyone can provide a no-cost mortgage.    What the commercial does not tell you is that no cost mortgages do cost a borrower in the monthly mortgage payment by a higher interest rate.  Nothing is free.  Typically, 1% of your loan amount equals 0.25% to interest rate.   If your closing costs amount to $2000 and your loan amount is $200,000, you can increase your rate by 0.25% and have "no closing costs" from any loan originator.  Please always compare good faith estimates by different lenders.   Their commercial was the least offensive–they just happened to be sandwiched between two commercials that got my goat! 

Last:  Freecreditreport.com.   You know the commercial…the friendly redhead young man challenges you to guess his credit score and encourages you to find yours.   This is great advice.   Where this one slips up for me is that it’s URL sounds just like www.annualcreditreport.com in fact, I think freecreditreport.com is a better marketing name than the one created by the big three credit bureaus by order of our government.    Should you not read the disclaimer on freecreditreport.com’s site, you might believe this is the web site the Fed had created for consumers.   However, this is Experian’s site and should you obtain your "free" report, you’ll be signing up for a credit watch service at $12.95 per month.    Not so free after all, is it? 

I just had to vent a bit.  It’s no wonder people get confused about their mortgages and finances with all of the misleading and deceptive advertisements on television, the internet, and coming to our mail boxes at home.   

Bottom line:  Do your research.   Ask questions.  Be responsible.

Filed Under: Credit Scores and Reporting, Mortgage, Predatory Lending, Refinance

Recently at Rain City Guide…

February 19, 2007 by Leave a Comment

I have been meaning to highlight post over at Rain City Guide on a more regular basis…I’m slipping!   Here are a few I thought you might benefit from reading (or just click on over and check them all out).

Earlier this month, Jillayne tackled why you should not shop interest rates by APR.  This is a must read if you are a "rate shopper".

There have been a couple post forecasting the future of our local real estate marketing, including this one from Ardell and Jon featured two posts that inspired reactions from the "Bubble Bloggers".

If you’re considering buying home at a new construction site, then Ardell’s post is a good read for you regarding dealing with site agents and when lots are released.

Yours truly added two post to RCG dealing with zero down buyers and the future for subprime borrowers.

Enjoy!

Filed Under: Adjustable Rate Mortgage (ARM), Financial Planning, Mortgage, Predatory Lending, Real Estate Agents, Residential Purchase, Weblogs

Prepayment Penalties: Foul or Fair?

February 18, 2007 by 12 Comments

Mpj040179500001A prepayment penalty is a fine charged to a borrower if they payoff their mortgage before a certain time period (typically 2-3 years).   The fine is commonly 6 months interest (just shy of six months mortgage payments less your monthly taxes and insurance) and may vary.   

Most often, the prepayment penalty is "hard", meaning that it will be assessed whether someone is refinancing or selling their home prior to the time period being met.   Sometimes, the prepay may be a "soft" penalty and is forgiven in the case of a person selling their home, but charged if the borrower is refinancing.

For example, on a $200,000 loan amount with 6% interest, a prepayment penalty based on 6 months interest would be $6,000.  It’s expensive.   It may be a tax deduction since it is prepaid mortgage interest, however, if you’re paying if off for a refinance, it is also taking away home equity.

Some times, prepayment penalties are required for the certain mortgage program.  This is most often the case with subprime mortgages.   This has potential to cause a dicey situation if a subprime borrower has 100% financing, like an 80/20 with an adjustable rate mortgage, and the borrower does not work on improving their credit before the prepayment is over and the ARM adjust.   Subprime loans are becoming tougher to qualify for and  some subprime lenders have closed their doors.

If the borrower has good credit and equity or a down payment, then the prepayment penalty should be optional and the borrower’s choice.   The prepayment penalty may be used to lower the mortgage interest rate.  If this is the case, the Loan Originator should show the borrower the difference between the two rates and payments and fully explain the terms of the prepay.    If the "a paper" borrower is not receiving the benefit of the choice between having or not having a prepayment penalty, then it could very well be lining the pockets of the loan originator.    If your loan originator is telling you that you must have a prepayment penalty, and you have great credit PLEASE GET A SECOND OPINION.

Prepayment penalties need to be disclosed to the borrower up front.  This should not be a surprise to a borrower at signing.   Review your Federal Truth in Lending statement that accompanies your Good Faith Estimate.   There will be a sentence with a box stating:

Prepayment:  If you pay off your loan early, you  ( X ) may (   ) will not  have to pay a penalty.   

If the "may" box is checked, you have a prepayment penalty on the proposed loan scenario.   If the loan originator did not disclose this to you upfront, contact them to find out if and why there is a penalty.

The Good Faith Estimate and Federal Truth in Lending are required to be provided to you from the loan originator within 3 days of providing you a rate quote.   At signing, you will also receive a disclosure regarding the prepayment penalty.

Whenever a prepayment penalty is optional, even if it is to lower a borrower’s interest rate, I am opposed to them.  You never know when life will happen and you need to sell your home or if mortgage interest rates improve and you want to take advantage of the lower rate.    With some programs, such as subprime loans, the prepayment penalty may be required.   If this is your scenario, ask the loan originator if the prepayment penalty can be "cashed out" or reduced upfront. 

Regardless of your situation, your loan originator should fully explain all of your options to you.   Should you decide to obtain a second opinion from a Mortgage Planner, simple provide them with your credit scores, loan-to-value (sales price or value of the home and the loan amount), documentation (is it easy to document your income and assets or do you need a no-income verifier type of loan), and program type.   You may also consider providing the lender with a copy of your good faith estimate to review from the first loan originator.  The lender who provides you a second opinion should not  have to re-pull your credit at this stage.

It’s your money, your assets, your home and your responsibility to make sure you understand (ask questions…don’t be shy) your mortgage scenario.    Prepayment penalties are fair IF you understand how and why you have one with your mortgage.  If it’s helping someone with an iffy credit past (assuming the new home owner is now responsible with their credit, debts and cash flow) become a home owner, then I’m all for it.   If it’s to increase the commission of a loan originator, it’s FOUL.

Filed Under: Mortgage, Predatory Lending, Refinance, Residential Purchase, Subprime Lending
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