Loan Originator Leftovers

May 14, 2007 by 2 Comments

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A few weeks ago, one of the Real Estate Agents I work with contacted me to review an estimated HUD-1 Settlement Statement.  She was the listing agent and was concerned that her seller was being taken advantage of by the Loan Originator.   In the purchase and sale agreement, the seller had agreed to pay "up to $10,000 towards allowable closing costs".    The origination fee on the estimated HUD…2%!

It appears to me that the loan originator bumped up their origination fee at the last minute when the $10,000 credit surpassed the amount of legit closing costs.   The origination was not called a "discount" so I highly doubt the Loan Originator used the excess credit to do the right thing and buy down the buyer’s rate.   Especially when the listing agent requested a copy of the good faith estimate or other documentation to support the excessive closing costs.   When the Loan Originator left the closing table, they attempted to take all remaining left-overs and scraps…licking their chops.

This greedy act by unscrupulous loan originators happens more often than you would like to know.    It’s wrong on so many levels, I don’t know where to start!  It’s taking money away from the seller, buyer and not honoring the purchase and sale agreement.   What can an agent (listing or selling) do to prevent this from happening to their client?

Here’s just a few ideas:

  1. Get a copy of the buyers Good Faith Estimate (GFE) before the seller agrees to pay closing costs when an offer is being considered.
  2. If you’re the Listing Agent, have your Mortgage Professional review the buyer’s GFE to make sure the cost and rate are within reason.
  3. Don’t use "up to" for closing cost.  Have the closing cost be a set figure for the credit.   This leaves no question as to what was intended for the buyer.
  4. Review the estimated HUD-1 Settlement Statement prior to closing.
  5. Have the Buyer bring a copy of their Good Faith Estimate and Lock Agreement to their signing appointment.   If the rate and closing costs are the same, yet the origination is increased…you’ve got a greedy gobbler for a Loan Originator.
  6. If you find that your Loan Originator (LO) is indeed taking the extra left over closing cost credit, put your foot down.   Contact them ASAP or your Real Estate Agent and demand to see the GFE and to have the LO explain their increase in origination.

Everyone loses when a loan originator takes more than they should.   If your LO is caught with their hand too deep in the cookie jar, slap it hard!

Filed Under: Escrow and closing, Predatory Lending, Residential Purchase

Mortgage Interest Rate Locks 101

May 8, 2007 by 22 Comments

EDITORS NOTE: With changes to the 2010 Good Faith Estimate, a lot of the information below is no longer relevant (relating to the GFE). However, the pricing is still a good example of how locks work.

I love it when I’m asked an excellent question from a potential client. This person Mpj040062600001_2 is still shopping for his next home and who the lender will be to provide financing.   At this point, I have provided several good faith estimates and a total costs analysis to compare possible scenarios side by side along with how the mortgages may be working for him in 5 and 10 years. 

Here are a few of his questions:

What level of guarantee can you offer me with these rates you have provided on the Good Faith Estimates?

Until your loan is “locked” the interest rates on the Good Faith Estimate (GFE) is simply a reflection of what the rate is at the moment the Loan Originator prepared the GFE.   In fact it’s possible that the rate may have changed just moments after the GFE was provided to the client.   Mortgage interest rates can change throughout the day.   The GFE is not a guarantee of the mortgage interest rate, costs or that one is qualified or approved for a loan program.  (I have addressed guarantees towards the of this post).

Can I lock in my rates and closing costs before I find my new home?

Typically, the buyer has a signed around (agreed to) purchase and sale agreement.   Most locks require a property address along with the borrowers full legal name, social security number, program type, purchase price/loan amount and credit scores along with the length of time required to close the transaction.   

Some lenders, like Mortgage Master, have a “lock and look” feature which does allow buyers to lock their interest rate before finding their next home.   Unless the market is experience ramped rate increases, I recommend not doing this.   The locks are for longer terms (so they are more expensive) and should rates improve, odds are the buyer is not going to want the long term rate they’ve committed to with the lock.

How long is the lock period?

Locks have various time periods that are available to accommodate a borrowers needs.   The most common for a purchase is a 30 or 45 day lock.   Again, loans are locked in based on how many days are needed to accommodate the transaction closing date.   The longer the lock period, the higher the costs is for a specific rate.

For example, here is what the difference in fee may look like based on various lock times assuming the 30 day lock is par or neutral (comparing the other locks to 30 days):

  • 15 day lock = 0.125 better over the 30 day price
  • 30 day lock = 0
  • 45 day lock = 0.05 cost over the 30 day price
  • 60 day lock = 0.150 cost over the 30 day price
  • 70 day lock = 0.270 cost over the 30 day price
  • 90 day lock = 0.400 cost over the 30 day price (may have to pay additional upfront lock fee for this long of term)

So if you have a loan amount of $400,000 and a closing date that was just shy of two months away, and you want to have the 30 day rate, the cost may be $600 (400k x 0.15).    If you have a longer closing, a Mortgage Professional should advise you of your options of locking now or waiting until  your close date is more near and what the risk are (rates changing).    At 70 and 90 days, instead of paying an increased cost for the 30 day rate, you could also opt for a slightly higher rate (0.125%) and still have the 30 day pricing (it would be factored into the rate).   Again, the above numbers are just an example of possible pricing.   Rates and pricing do change constantly.

You can lock 90 days and beyond.   However, the cost increased (as you can see from my figures above) and there is often an additional upfront lock fee that is non-refundable.   

Click here for your rate quote for homes located in Washington.

It’s important that the loan is locked in for the right amount of time.   If a loan doesMag7winner_4  not close before the lock expiration date, the lender is put in a position to where they may need to extend the lock. The price of a lock extension varies from lender to lender and, if the market has improved from when the loan was originally locked, there may not be a cost for a shorter extension.    Some lenders charge 0.015 per day of the extension; so if 10 more days were required to close and fund the loan, the cost could be 0.15% (0.015 x 10 days) of the loan amount.   On a $400,000 loan amount, this is an additional cost of $600.   You can see why it’s important to lock your loan correctly in the first place.

I recommend that when you lock in  your loan, you ask your Mortgage Professional to guarantee the closing costs associated with the loan.   Third party costs, such as the appraisal title and escrow fees, the Mortgage Professional has no control over.   I would not work with any Loan Originator who is not willing to stand by their closing costs.   As a borrower, you should be able to bring your Good Faith Estimate with you to closing (your signing appointment) and have the lender’s fees be reasonable close.   

Once you have locked in your loan, you should receive:

  1. Written lock confirmation stating what the rate and points are associated with that rate.
  2. Request an updated Good Faith Estimate (and ask the lender if they are going to guarantee their loan costs) to correspond with the lock.  [2010 UPDATE:  You may find that mortgage originators will provide a written rate quote prior to providing a Good Faith Estimate with an actual Good Faith Estimate to follow.]

What ever you do, please do not select the person who will be assisting you with your largest investment (your mortgage) by interest rate alone.

If you would like a mortgage interest rate quote for your home located anywhere in Washington, click here.

 

Filed Under: Interest Rates, Mortgage, Refinance, Residential Purchase Tagged With: ,

Borrower Beware

May 7, 2007 by 6 Comments

I wasn’t planning this post to be part of my debt series but when I saw the front page of the Seattle Times this morning…the timing is uncanny.   Borrower, beware:  debt disaster looms as rates rise on easy-money.   

This is a tale of a couple who was turned down my many mortgage lenders for zero down financing because they had no savings and $20,000 in credit card debt.  They are a common portrait of a subprime home buyer over the past 2-3 years.

I have issues with both their loan originator AND the subprime borrowers in this report.   

"The couple signed two mortgages to buy their $246,800 house in July. The first loan, a so-called pick-a-payment loan for 80 percent of the deal, had a variable interest rate. The second mortgage, at 12.5 percent interest, covered the rest. The deal included a pre-payment penalty on the first mortgage, and a balloon payment on the second.

Not long after they signed the loan, [the home buyer] decided to dump her sedentary office job to become a personal fitness trainer. The new job paid less, $7.89 an hour, but she had the opportunity to earn commissions as she brought in clients."

There is nothing wrong with an 80/20 subprime mortgage when it’s structured correctly and the clients understand that they have 2-3 years to prepare for refinancing.   This means they need to improve their credit scores (having a mortgage paid on time helps credit scores) and to reduce frivolous spending.   They need to be accountable and take a hard look at themselves and their finances.   Switching from a fixed income, even if it’s a boring job, to a new career that pays commission is irresponsible as a brand new home owner.

The pick a payment program is negative amortization and is not the best program for anyone with 100% financing, let alone a subprime borrower.    In fact, it’s probably the worse program a first time home buyer (subprime or not) could have.    They will 9 times out of 10 opt for the lower (deferred interest) payment and not fully grasp what the consequence are when their mortgage recasts at the higher rate and fully amortized payment.

"I had no idea the interest was going to climb like it is — they didn’t tell us that at all," Fultz insisted. "Maybe I wasn’t listening. Maybe I’m not good at words. Negative amortization? I never even heard of that."

Their Loan Originator’s response to this (you might to sit down and put away any sharp objects before you read this): 

"I agree, it isn’t explaining it in full… But…it’s explained to the client 47,000 freaking times."

And to top it all off, the Loan Originator, who’s business primarily consist of feasting on subprime buyers says she can’t make her mortgage payments now due to the decline in the subprime market.

The pullback has cratered the business model for brokers like Mills. She used to write 10 to 15 loans a month. In March, she wrote two. In February? None.

"I didn’t make my own mortgage payment this month," [the LO] said in April. "But nobody feels sorry for me."

Oh boy…someone pass me a hanky!  This Loan Originator closes 10-15 deals typically a month and I’ll eat a shoe if she’s not making more than 1.5% on each transaction.   And a few tight months SHE’s missing her mortgage payment?   

Please work with a professional Mortgage Planner.   And not the first person who tells you "yes".    That type of LO smells your desire to own a home and will take you to the bank.   And they will not be there for you after closing…unless you want a new mortgage! 

Buyer beware, indeed.

Related post:  The Debt Disease:  Dollar Buy Dollar

Filed Under: Financial Planning, First Time Home Buyer, Predatory Lending, Residential Purchase, Subprime Lending

Is your agent in bed with a title company?

April 30, 2007 by 3 Comments

Mpj040977300001In the Sunday issue of Seattle Times, Ken Harney addresses the cozy set ups (affiliated business arrangements) that drive up the costs of title insurance.  Before I dig into this topic, I thought I’d give you a little bit of title insurance 411.

Title insurance is required by lenders when you purchase or refinance a home.   With a purchase, the seller pays for the buyers policy (owners policy) and the buyer pays for the lender’s policy.    With a refinance, a new title insurance policy is again issued to insurance a lender for the new mortgage.   Unlike other forms our insurance, such as life or auto, a consumer only pays for title insurance when they have a real estate transaction utilizing a mortgage.  Most title insurance policies are the same, regardless of which company they are issued from.   They are all ALTA policies (American Land Title Insurance Association), typically 1992 Standard or 1998 ALTA which provides additional coverage yet sets deductibles on certain coverages.  Expect to pay 10% more for this policy  (1998 ALTA) which is most commonly used and is the default on purchase and sale agreement.  There are also various amounts of coverage available (standard, extended, etc.).   Title insurance rates in Washington State must be approved and filed with the State Insurance Commissioner.

With a purchase, typically, the listing and selling agent negotiate on the purchase and sale agreement who the title insurance and escrow company will be.   Currently most title commitments are ordered when the property is listed.   Rarely does the consumer have the opportunity to select the title insurance.   Even when there is not an “arranged relationship”, real estate agents want to choose “their preferred” title company.    When real estate companies have an “affiliated business arrangement” (aba or joint venture), odds are, the consumer will have even less say in where their title insurance will be.

Locally, Coldwell Banker Bain, John L Scott and Windermere have aba’s with LandAmerica Title Insurance Company which operates under Commonwealth of the Pacific and Rainier Title.   These companies are required to disclose their interest in the title company by an addendum on the purchase and sale agreement.    Most office managers will lean heavily on the real estate agents to use their affiliate title company.   In addition, these managers will not allow competing title companies to present materials within their office to their agents even if it is promoting lower rates and fees to the consumer.   It is common knowledge within the industry that there is significant incentive for the managers to control this relationship.    Other real estate companies have also entered into various marketing agreements with other title companies.    Many real estate companies will also try to steer mortgage and escrow for the same reasons (business arrangements).

Ken Harney’s bottom line to consumers it to not “roll over when it comes to title and settlement services.   Be aware you can shop for lower-cost alternatives.”   One way to have the most significant savings (in Washington state) is to find a title company that offers a 10% discount off the owners policy (this saves the seller money) when  using their escrow in conjunction with their title insurance company.   The lenders policy (what the buyer pays for) typically varies 5% from company to company.    Although there the variance in cost is not huge, the level of service from title companies can vary significantly.    It’s been my experience that when the business is arranged (when there is no competition), the service from that title company suffers.

Many consumers want to rely on their real estate agent or mortgage professional to help guide them on selecting a title insurance company.   It is important to know exactly what the relationship is between the title company and your agent or lender.

The State Insurance Commissioner is expected to come out within a few weeks with findings of their most recent audit of local title companies along with possible fines…stay tuned!

Filed Under: Escrow and closing, Real Estate Agents, Refinance, Residential Purchase, Title Insurance Tagged With:

Seattle’s Home Prices Buck the National Trend

April 26, 2007 by Leave a Comment

Housingprices0425The Seattle PI reported yesterday that Seattle home prices are still strong (for now).   

"The latest figures, from Standard & Poor’s S&P/Case-Shiller Home Price Indices, show that Seattle-area house prices were up 10.6 percent in February from the same month in 2006 and 0.5 percent from January. Both were the largest increases among the indices’ 20 cities — most of which posted declines year-to-year and month-to-month."

I attribute Seattle bucking the national housing trend to our strong economy and employment.  In my opinion, Seattle has been behind in appreciation when you compare our city to other "big cities" in the United States.   Another factor is our reduced exposure to foreclosures:

"Statistics from the national Mortgage Bankers Association and RealtyTrac, an Irvine, Calif., company, show that the percentage of subprime loans in Washington — those for borrowers with weak credit — delinquent mortgages and foreclosures are lower in than those for the country as a whole."

What does this mean for home buyers?

  • Be fully equipped with a strong preapproval letter from your Mortgage Professional.     You may need to make several offers before landing a signed purchase and sale agreement.  Be ready to pounce when a home you’re interested in is available.
  • Try to be flexible with your goals of your next home.   Purchasing further out from Seattle or condo may provide you more bang for your buck.   
  • If  you are considering purchasing a home within the next year, meet with a Mortgage Professional now to review your credit and to develop a plan to be in the best position when you are ready to buy down the road.

Filed Under: Real Estate, Residential Purchase, Seattle

When are you obligated to a Loan Originator?

April 19, 2007 by 4 Comments

Commitment…ah hah!  I bet I just lost have of my readers out of fear from that oneMpj038482500001  word!  We’ve had a series of post recently at Rain City Guide that has developed some very interesting comments and dialog.    Here’s are excerpts from a recent post of Ardell’s:

Me:  “…if a buyer comes to you with a lender and has gone through the preapproval process, you might steer them to another one?”

Ardell:  “Absolutely YES….Are you suggesting that the “pre-approval” comes with some kind of “obligation” to use that lender? “   

A response from a real estate agent like this should not surprise me…but it did.  This probably served as a much needed personal wake up call.   I know when consumers are shopping me…and I have worked with a few real estate agents who have counseled their buyers to shop.   They call me with the same script almost word for word, “All I want is a Good Faith Estimate…”   I believe this agent (it’s not Ardell) is using my GFE to keep her preferred lender “honest” with his rates and costs.   

As I’ve mentioned many times in this blog…odds are you cannot successfully shop interest rates–they are a moving target and change throughout the day.   Any Joe Schmo L.O. can quote an enticing rate to get you drooling and then…when it’s time to lock (assuming he’s really locked in the rate and not gambling it) you may have your real rate.   At closing, with Joe Schmo L.O. you’ll discover your real closing costs.   (Always bring your GFE to your signing appointment).

The big issue I had with the post was the practice of going through the steps of getting preapproved with a Mortgage Professional just to drop them at the curb when you have a bona fide transaction.    Ardell brought up an excellent question though, when are you committed to a Mortgage Professional?

When somebody contacts me for the first time.   I’ll ask them a few questions, including what are their expectations of me at this point in time.   Some just want rates, have questions or would like to have an idea of what they qualify for.   This takes anywhere from five minutes to a half hour.   I certainly hope that I’m beginning to develop a relationship and to show the client that I’m worthy of their business…but if they move on and elect to work elsewhere, that’s fine.   There is no commitment at this stage.   You’re just dating and getting to know each better.

Once you decide to move forward with a preapproval, if you are working with a Mpj042298200001 Mortgage Professional who has been referred to you, they are responsive to you, have earned your trust and you seem to have a decent relationship…I think you should “commit” to them.   With the preapproval phase, you’re providing a Mortgage Professional with all of your income documentation for the past two years, savings and assets and allowing them to delve into your credit history.   The preapproval process may take hours or it may take days (depending on the situation).    This is a lot of work for Mortgage Professionals…and yes, this is what we do for a living.   Keep in mind, as much as a Mortgage Professional would love you to feel like you are their only client, we are often juggling quite a few transactions along with various potential buyers who are just interested in quotes or are in the “dating phase” as I mentioned above.   

Once you are preapproved, the Mortgage Professional issues a preapproval letter in the buyers name stating they have gone through all of these steps and are committed to providing the buyer financing.  We know this is not the perfect and that commitments from unsavory lenders or individuals are worthless…however if you have a solid Mortgage Professional, you as the client should honor that commitment as well.    In addition to the time spent with the preapproval process, there are often countless emails, phone conversations, letters…you may have several weeks invested into each other.    You are “going steady”.   Please don’t date other LO’s behind your mortgage professionals back…at this stage.  If there’s something you’re not happy with, communicate with them or move on before spending more of their time and resources.

 

 

Mpj042847600001 Once you find your home and have an accepted offer (signed around purchase and sale agreement)…I hate to say the “m” word…if you’re still reading this…but you’re almost married!   After a lot of hand holding, late night chats and frequent emails together, your transaction is coming to fruition.   By now, you should really know your Mortgage Professional.   If you doubt your rate when you’re locking in, you can always ask them.   Tell them you noticed xyz rate at the bank this morning…what ever…kind of a “is that a blond hair on your collar” check. 

My point is…in this post that is all ready too long (my apologies), when  you have a signed around purchase and sale agreement on your home is NOT the time to begin shopping for lenders.   Especially if you all ready have, as Brian Brady put it, used someone else to do all of “the grunt work” to get you preapproved.   Now is when the Mortgage Professional who has worked with you to get your loan approved really has a chance to do their job and see your transaction through to closing.   

And, ideally, I hope to maintain my relationship with my clients long after closing.  I hope they will continue to rely on my expertise when they have mortgage needs in the future, whether that just be a simple question or if they need to refinance or buy their next home.   

This is a relationship business and it’s a two way street.  If you expect to have your Mortgage Professional to be devoted and available at your beckon call, shouldn’t they be able to have a little faith in the borrower?   

Filed Under: Mortgage, Real Estate, Residential Purchase

Is it better to buy or rent?

April 12, 2007 by 3 Comments

An article in the New York Times was brought to my attention from Tim at Seattle Bubble on whether or not you should buy or rent.    The article is very slanted towards renting and considering the part of the country it’s originating from, they are right.   Our local economy and housing market remains strong and is not experiencing any sort of a slump.   

What I really liked about the article is the on-line calculator to help you determine if you should rent or buy.  The calculator is flexible and friendly with adjusting appreciation, down payment, rent increases and the costs associated with owning a home (funny how many potential home buyers forget about that).   If you’re considering buying a home, I encourage you to check it out.

Tim, where was this calculator when I did my post at Rain City Guide and Seattle Bubble Blog countered it? 

Filed Under: Financial Planning, First Time Home Buyer, Residential Purchase, Seattle, Weblogs

Are You Getting An Income Tax Refund?

April 9, 2007 by Leave a Comment

Lucky you!  If you are, may I offer you a few suggestions?

  1. Look at adjusting how much income you are withholding from your pay.  A refund always feels like a bonus, but in reality, you’ve given the government an interest free loan.   Why not adjust how much is withheld from your paycheck each month by increasing your exemptions?   Give yourself a monthly spiff instead.
  2. Do you have credit cards with a balance over 50% or 30% of your credit limit?  Pay them down to below 50 or below 30% and give your credit score a boost.   
  3. Imagine how satisfied you would feel paying off a credit card with a high interest rate and cutting up the card? 
  4. Invest your refund into a traditional or Roth IRA or other retirement plan.
  5. Start a 529 account for your child.  It’s never too early to start saving for college.
  6. Save your refund towards a down payment or closing costs on your next home.  "Zero and low down" loans are much tougher to qualify for.   Especially if you have credit issues (which in that case, you should probably refer back to items 2 and 3).

Please do not get a income tax refund loan.   These loans are loaded with high interest with all intentions of you not paying them back once your refund shows up.  E-file and try to be patient.

As always, consult with your professional Mortgage Planner, CPA and/or CFP.  Everyone’s personal situation is unique and may call for a specific strategy and complete review of your financial information.

Filed Under: Credit Scores and Reporting, Debt Restructuring, Financial Planning, Residential Purchase
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