The Times…They ARE a Changing

March 8, 2007 by 3 Comments

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For the first time ever in my career, I had to contact a client to tell them that the Good Faith Estimate that I had provided him earlier today is no longer valid.   This is a person who was getting ready to buy a condo utilizing an 80/20 and stated income.  His mid credit score is above 750.

I received an email just after 7:00 p.m. tonight from Greenpoint Mortgage (more of an “alt-a” than a subprime lender) stating that all 80/20 mortgages must be funded by the end of this month.    Regardless of how high the credit score is or even if the loan is “full doc”, Greenpoint, along with many lenders, is pulling in the reigns tight.   

Just another warning to double check your preapprovals if you’re planning on buying zero down, stated income, interest only…even if you’re not considered subprime.

Filed Under: Current Affairs, Mortgage, Refinance, Residential Purchase, Subprime Lending

My First Subprime Client

March 7, 2007 by 2 Comments

Mpj042856200001_2It 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

Your ARM May Not Be Broken

February 26, 2007 by Leave a Comment

Mpj040739600001_1You may have noticed on the evening news and the local papers all the bad press about mortgages lately.   Specifically sub-prime, negative amortized ARMs a.k.a. payment option plans (which I am opposed to for 99% of the population), 100% financing and interest-only ARMs…to name a few.  Many sub prime lenders are restating their earnings and are suffering losses.  Some are closing their doors and the remaining are changing their underwriting guidelines.   It use to be very easy to obtain 100% financing with a credit score of 600…some lenders would even consider 580.   Now, the benchmark is 620.   Throughout history, lenders change underwriting guidelines based on market conditions.

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Filed Under: Adjustable Rate Mortgage (ARM), Credit Scores and Reporting, Financial Planning, Mortgage, Refinance, Residential Purchase, Subprime Lending Tagged With: ,

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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