Artisan Mortgage Blog

Double Dip, At Least where Rates are Concerned

Several weeks ago, economic signs were looking great. The DOW was in rally mode and mortgage interest rates were beginning to creep up. But then, out of nowhere, interest rates crashed.

I believe this dip to be short lived, but if you are thinking of refinancing or purchasing, you better get a move on it. Depending on fees and point structures , the 30 year fixed interest rate is available at 4.375-4.75%. This is awesome ! I have 15 year fixed rate mortgages slightly under 4%.

I don’t know what is driving this market, but money is cheap and now is the time to get a handful.

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I would suggest you Lock In !

Of late, the main question I am hearing from borrowers is whether or not they should lock in. Nobody really knows for sure what the market will do, but there is more risk of rates going up than down. The federal government stopped purchasing their own debt as of March 31st, which had been keeping rates artificially low. We all expected a major jump up, but we only had a minor increase. I still believe there is great potential for rates to move up to about 6%, so if I were applying for a mortgage I would want to lock in early on in the process. Yes, it’s possible rate may dip a little , but it is more likely rates will move the other way. When rates are at historically low numbers, in the long term there is only one direction rates can go. If you would like to gamble and try to time a bottom, go for it. However, if you asked me I would Lock IT IN !

Don’t Fear the Math !

The numbers never lie! I have many clients that I work with you are in the process of shopping for a mortgage. Their biggest hurdle is usually the math. They are OK with shopping  around and getting different quotes but often struggle with analyzing the numbers and making sense  of what is being offered. If you can take the time to understand the forms and understand what you are being presented , you will always get the best deal. So, don’t fear the math, embrace it! Only people lie and misdirect, the numbers always tell the truth!

GFE 2010

So here we are, in a Brave New World, 2010.  As the mortgage industry continues to come under scrutiny, we are working with mountains of new guidelines and procedures designed to create better transparency and protection in the market.  I agree we need it but it’s often like the drug commercials we see, where the side affects sound worse than the initial problem, but let’s move on.

There is a new Good Faith Estimate in place designed to improve clarity and accuracy in loan proposals.  I will give you some basics on it and then talk about its real affects in the marketplace.  The GFE has 11 boxes designed to simplify the proposal.  Certain fees must be guaranteed while others have tolerance change levels ( 10% ).  Other boxes have no tolerance levels , meaning no matter what it says on the GFE it can change to any number.  These are usually pre-paid items and not loan costs.  Anytime we can have better transparency in the process, I applaud the action. However, we are still working with commodities and not goods!  No matter how much you try to simplify the mortgage, it will always be tied to the market.

Now, there are some changes to the GFE that make no sense at all.  The number 1 worse change, is that it no longer gets signed!  All the effort and time to streamline a document and now the customer doesn’t even sign it. They sign another form that states that they have seen the GFE and got a copy.  If anyone can make sense of this let me know.  Also, we no longer itemize the fees, rather we lump categories of fees together in order to focus more on the totals rather than the individual costs.  Missing is the old details of transaction, which would show the total breakdown of the loan proceeds with a clearer picture of the entire transaction.  Two steps ahead, 3 steps back. 

In end it’s just paperwork and people don’t read anyway. Those who read before are still reading and understanding what they are dealing with.  The fact of the matter is not all people are strong with math.  After you have reviewed 50 documents the picture gets fuzzier. It makes me think about the dozens of prospectives I get each year pertaining to my retirement account. I have tried to read them before and it goes right over my head.  The same goes for mortgage paperwork to many people. Do you know the difference between a pre-paid item and closing cost? Do you understand the ins and outs of a rate lock agreement?  The mortgage process can be a complicated equation and the lay person needs to be able to rely on the knowledge of a true professional.    The real answer is that paperwork changes nothing! I am a big believer in Adam Smith’s hands off approach and I believe the marketplace will always cleanse itself.  Someone will always get ripped off and some people won’t. If you ask around, check better business bureaus and ask for referrals of your friends and family, you will probably be able to find a reputable person in any vocation.

So let’s ask the question, do all these new laws and regulations really help or does it just keep other people working?  There is nothing better as a bureaucrat than  to create work and increase your budget in the name of protecting the people.  If you have ever seen a magic show, you know the power of mis-direction.

Looking forward to 2010

2009 has been a great year but also a very trying one. Our mortgage industry continues to go through growing pains as we try to distance ourselves from the meltdown of 2 years ago.  We are trying to put policies in place that will help prevent another meltdown from happening in the future,  while hopefully spurring the industry to continue growing.

For us mortgage professionals, there are a whole slew of new disclosures, policies and procedures that will be taking place in 2010.  Our wonderful bureaucrats dance with our powerful lobbies to create puddles of muddy disclosures designed to improve transparency and consumer protection. However, in truth these new rules and disclosures just make it more difficult for consumers to obtain loans and at the same time do nothing but create work for those who need it the least.  I agree with the notion that customers obtaining mortgage loans need a clear picture in the fees, costs and types of mortgage loans they are receiving.  The fact of the matter is that disclosure #87 does nothing to clarify disclosures 1 through 86. Creating rules to explain rules only muddies the water.

In addition, there is some continued tightening of guidelines that will further prevent consumers from obtaining mortgages.  Most importantly, Fannie Mae is instituting tighter guidelines on debt to income ratios putting a firm cap in place of 45%. There will be some wiggle to higher ratios but it seems for the time now, 45% will be the rule.  You may think this sound s like a good idea to further verify some-one’s ability to repay debt, however when you deal with this firsthand and are unable to get a mortgage because your underwriter won’t let you qualify overtime income, you may think twice about the firm and fast rules.

There is nothing I despise more than rules and guidelines designed to profit some in the name of protecting all.

Tough Times Call for Tough People

This is definitely a crazy time for the mortgage industry and the banking industry as a whole.  From a person who has been doing this for 15 years , things have never been crazier. 

I come to work everyday trying my best to deliver people honest information and great mortgage loans.  I strive to earn every-one’s trust whether or not I get their business.  From my side of the table, it’s more about perception rather than reality. With the amount of information that is out in the world, some right, some wrong and some half right, my job has been to educate those on recognizing the difference between the three.

I watch the mortgage markets everyday and I know where the rates are being priced by the various lenders in the market, and my rates and pricing are typically in the top 95% of what is being offered. On top of that, I can offer unmatched levels of service and knowledge, but in the end none of that matters. The only thing that rings true in a clients mind is whether or not they believe that they got a great deal. 

Sometimes too much information is available and customers have a hard time filtering what they hear, read and are told.  In the end it comes down to trust and relationships.  I can show you the math, I can educate on the process, I can help you shop my competitors but none of that matters if you can’t trust me.  In the business of selling a commodity, consumers have a hard time sifting through countless explanations and often give up when trying to make heads or tails of a deal.

I recommend people look back at one of my previous posts ” The Elusive Mortgage Price” to get some insight on where I am going with this.  It can become very frustrating as a salesperson when you knowyou have the best deal but still lose the client. It’s usually the result of fear that consumers have of the unknown, a company they never heard of , or a price better than the big banks.

It reminds of a client I worked on a couple years back.  Bear with my whining for the time being.  The customer was referred to me by a realtor I’ve known for years. It was a complicated buy and sell purchase transaction and I spent several weeks going through all the options and structuring a loan that would accomplish all of the goals. I provided several GFE’s ( Good Faith Estimates ) on the various options and thought I had done a great job earning their trust.  A couple weeks went by and I followed up with the customer to see where we were at.  He informed me he had went with another lender ( A large retail Bank ) . I inquired on the rates he was offered and found that he took a worse deal than I was offering him.  He explained that although I did have the better deal, that something had to be fishy. He had a hard time understanding how I , a small local mortgage broker who rides his bike to work,  could offer him a better loan than this large corporate American banking institution.  Basically, after all the time I spent with them, he didn’t trust me.  He got to know me, knew where I lived and worked, was referred by some one he trusts and I still couldn’t earn his business.  C’est La Vie!

This is a good lesson for those struggling to press forward in today’s market.  You don’t always win! However, you must be confident in yourself and continue to push on through all the red tape, mis-information and hurdles to your business. These situations are the same in business as in life.  You know yourself best, get up early work hard and let the chips fall where they may.

Making Home Affordable Refinance

The Obama administration rolled out the Making Home Affordable program.  This program has 2 main components, the refinance side and the modification side.  In this post I will focus on the refinance section

Making Home Affordable refinances are broken up into two categories, Fannie Mae or Freddie mac.  Each GSE ( Government Sponsored Entity) is doing the program their own way but there are key differences between the two.  I just want to  give you an overview of each program.

The Fannie Mae version, known as the Fannie Mae DU Refi Plus, allows homeowners to refinance up to 105% of their home’s value without the requirement of private mortgage insurance.  It is basically the same as the standard program except for the liberal Loan to Value guidelines.  A key aspect is the fact you can not pay off a second mortgage. You may only refinance the main mortgage and you must subordinate any existing 2nd liens. The maximum LTV for the 1st mortgage will be 105% and unlimited CLTV’s for the subordinated 2nd lien.  As well, they are a little looser on late mortgage payments. As long as you didn’t go 60 days late on the mortgage you are still eligible. You are still subjected to standard fico score price adjustments and loans are being underwritten full income and asset verified.  This will help some but not all.

To be eligible your current mortgage must be secured by Fannie Mae and you must not have private mortgage insurance currently.  This has been the biggest problem for most people who would love to refinance under this program. Chances are that if you are at a high LTV currently, you probably already have PMI. There has been some talk about opening this up, but not yet.

I believe the Freddie Mac version is a better program but can be difficult for some to obtain due to the limitation on financing closing costs.  Under the Freddie Mac Relief refinance you can only finance $2500 in closing costs and escrows.  So if the cost to do your loan is $5000, you need to come out of pocket for the remainder above the $2500. In certain states not an issue, by like in my home state of New York this can be difficult due to the high cost of financing stemming from state mortgage taxes and general cost of doing business.

Another key component to Freddie’s version is that you MUST go back to your existing lender.  You can not move to another lender. You can still go through a broker for access to wholesale rates, but  only if your broker has an existing relationship with your current lender.

The best part to Freddie’s version is that there are no rate bumps for credit scores or LTV’s.  If you’ve been no more than 30 days late on the mortgage, you will get the best possible rate regardless of credit score. This is huge!

Now how about this, Freddie will not need to verify your current income or assets! This makes perfect sense. If you have been paying the mortgage and we are simply lowering the rate and payment why wouldn’t we do it. It’s the same loan, same borrower regardless of income. Someone at Freddie Mac has their brain working, kudos to them.  Many times Freddie Mac will waive the need for a physical appraisal if automated information is available. This makes the process a little easier and a little less expensive.

Both of these programs are strictly for rate and term refinances, no cash out available.  In addition no pay off’s of second mortgages allowed on either program.

If you can qualify for one of these programs and make your mortgage payment more affordable, success has been had.  Look for more openings in this program throughout the coming year.  It just might keep some people in their homes.

HVCC and What It Means to You

HVCC    ” Home Valuation Code of Conduct ”

HVCC is a new guideline imposed May 1st, 2009 that requires all appraisals on loans sold to either Fannie Mae or Freddie Mac to be completed through an Appraisal Management Company.

There are many nuances to this rule and certain aspects that are still being explored. I am going to give you a quick overview on how I see this guideline and how it is affecting consumers.

In days past, loan originators would develop relationships with local appraisers who knew their market and conducted the appraisals required for consumers to obtain loans at various lending institutions.  We would tend to try several appraisers and find out who do a better job at the most competitive price. Personally I would look for appraisers that had good people skills, were professional,  friendly, on time , diligent and knew their local market. I would also expect the work to be done in a timely fashion and would also look for someone who understood that sometimes certain jobs needed to be rushed when the situation called for it.

HVCC came about because people in and around the mortgage industry felt that loan officers were strong arming appraisers into creating false values or inflated values to get loans done. The idea went like this, the loan officers would threaten the appraisers that if they didn’t “stretch” the value they would no longer get business from that source. Believe me, many times this was true and if the appraiser complied, he was in violation of many existing rules and laws. Appraisers are licensed professionals who must at all times adhere to a code of ethics. For those that didn’t , well this is the reaction.

The problem now with HVCC is that there is no competition in the appraisal business. The AMC’s ( Appraisal Management Companies ) have pretty much price fixed the market so that no one company can go out and earn your business with better and more competitive products.  Lenders are requiring that all appraisals be ordered through one or two designated companies that are often owned by the lending institutions.   For more info check out Relsvaluation and Landsafe and see who owns them!

The thought is that now the loan officer and appraiser have no contact,  so that no pressure can be placed on the appraiser to inflate values.  This may be true, however if a licensed appraiser was submitting false values for the sake of more business he or she was already committing a crime that we have laws in place for.  This HVCC rule only helps the lenders and owners of the AMC’s.  Now the pressure is going the other way!  Lenders are pressuring AMC’s ( very discreetly ) to be conservative when appraising homes in a declining markets and leaning towards appraising homes at the lower end of the spectrum.  Believe me, appraised values on residential homes is more art than science.  The old saying was that an appraised value was just one man’s opinion. Send 3 different appraisers and you will probably get 3 different values.

So enough background, here is the problem for consumers. Lower values equal higher interest rates and we know who benefits here. Secondly, the appraisal is no longer portable. If you have an appraisal done for one company and decide to go to another, you need a new appraisal. In years past, the lenders would accept an appraisal from any licensed appraiser. But now, if you want to shop around after the initial appraisal, you will need to pay for an appraisal at every lender you want to apply with. This makes the process of shopping a mortgage very pricey and deters you from doing so.

As well, the AMC’s which collect the fee for the appraisal and farm it out to anyone who will do it on the cheap are taking a hefty portion of the fee for arranging the order.  Example, the appraisal fee is $400 to the consumer, the AMC takes $200 off the top and strong arm’s  an appraiser into doing  it for $200. Sounds familiar right?

They promise these typically novice and inexperienced appraisers a large volume of orders if they can do it on the cheap. So the seasoned appraisers who would collect and retain the fee for the cost of the appraisal, have to split their fee with the AMC for the sake of HVCC.  Most veteran appraisers have decided to find another field of work because they can’t make a living working for half price.  As well, all the relationships they have developed over 20 years of being honest and hardworking are out the window, because business can not be sent to them directly.

This HVCC rule has many other components to it and in theory sounds like a good idea. However, this is un- American and  against our capitalist nature. If lenders were losing money because corrupt appraisers were submitted false reports, they should have had the licenses revoked and moved on.  Rules to cover rules are usually designed to protect the corporate interests in this country and not the consumers.  We need to enforce our current laws to the fullist before creating new ones.  I feel bad for the veteran, quality appraisers who are now out of business and the consumers who were forced to pay for 3  appraisals just to try a get a good mortgage loan.

The only people who benefit from this rule are the AMC’s, the large banks that own them and the bureaucrats who got paid for months working on this rule to justify their job.

” If we settle for nothing now, then we’ll settle for nothing later”

Our politicians need to re-visit Adam Smith’s book on capitalism and understand that the laissez-faire model will always work itself out.  It seems these new rules are designed to pacify investors and at the same time make the rich richer, but I am a rebel and always will be.  If you believe what you read and hear without question you are doing yourself a disservice.  Get the facts!

Interest Rates Spike Up

Rates on 30 year fixed rates mortgages have jumped dramatically in the last 2 days.  I’ve been searching for the reason why and still no answer. It seems as though investors are getting nervous about the amount of debt the US government is putting on the street and in reaction investors have been selling off bonds. The average rate on the 30 year fixed rate has moved up to roughly 5.5% from 4.5% last week. This is huge. My common sense tells me we will have a small pullback off that number, but this is a sign that the economy is moving in the right directions and investors are more comfortable putting money into stocks.

Keep your eyes on that market and make sound rational decisions.  This may be the time to take your lumps on your mortgage application rate and lock or if you have the time you might be able to try and wait this out.   I’ll give everyone another update early next week.

The Elusive Mortgage Price

Most consumers have always been taught to shop goods and services based on price.  In the mortgage industry this can be very elusive.  There are many factors that determine the “Price” of a mortgage, that are often too complicated for the basic consumer.

The easiest formula to determining price on a mortgage is a combination of the interest rate and the costs associated with the loan. The problem with this equation is that the price is ever moving.  You could do all your homework, call 10 lenders get your quotes and by the time you are all done the prices have moved!

 Now, let’s talk about our ability to determine the price. Many consumers get confused when discussing “closing costs” because they often mistake pre-paid items for costs and tend to focus more on the “settlement charges” rather than the actual costs.  I’m going to give you a little tutorial I often give to my clients and even then not all people will completely understand.  As well, when you are given costs up front they are only an estimate!  The actual costs of your loan are determined at the end of the loan process, so that all the due diligence you did in the beginning didn’t even provide the actual costs. I know this can be a lot to handle, so bear with me and give it a shot.

 When you close on a mortgage, at closing you must pay for all settlement charges.  For refinances, settlement charges will consist of both closing costs and pre-paid items. On purchase transactions you can add adjustments to the total settlement charges.

Let’s start with closing costs. These are costs you pay to obtain the mortgage. You pay the fees and never see that money again. 95% of all fees can be determined up front, but some costs are not actualized until the loan has been completed, such as actual recording fees or complete title costs.  Sometimes a lender may ask for an appraisal review during the underwriting process which would add to your costs after the initial estimate. Things like these are why actual costs can differ from original estimates. My saying is your Good Faith Estimate is only as good as your loan officer.

Pre-paids items are not costs. Repeat, pre-paid items are not costs.  Pre-paid items consist of three items, interest, taxes and insurance. These items are expenses that you would need to pay no matter what, however the lender is requiring you pay some of these expenses in advance. Most pre-paid items are associated with setting up an escrow account, however pre-paid items exist regardless of whether or not there is an escrow account. Pre-paid items will be what they are no matter what we estimate them to be. A good loan officer will be able to give you an accurate estimate of pre-paids, but the truth is most loan officers don’t understand it either. They use a basic formula for estimating pre-paids separate from the actual transaction which is never 100% accurate.

So when shopping for a mortgage, my advice is to ignore pre-paid items if you can tell the difference between a cost and a pre-paid item. Pre-paid money is your money and always is your money, pre-paids are used to pay your taxes, insurance or interest which would have to be paid no matter what.  Sounds confusing right? Well it can be!

Adjustments are items on a purchase that are paid back to the seller for misc. costs and reasons. Example, you purchase a home where the seller has oil heating. There is a 100 gallons of oil in the tank, so the seller requires that you adjust back to them for the cost of the oil in the tank.  This will be money you need to provide at closing that wouldn’t be part of your loan estimate because it has nothing to do with your mortgage. So don’t think the costs of your mortgage changed because you needed an extra $300 at closing for this adjustment.

Alright, now let’s talk about rate. When a rate is quoted to you, it is quoted based on many factors. If one of these factors changes during the process so does your “Price”. I will provide a list of factors that can affect rate and I’m sure I might leave a couple out, but these are the main ones.

Credit, your credit score will affect your rate. Also, your credit score can change if a new report is needed on top of the initial one used for the price quote. Sound familiar anyone?

LTV, :Loan to Value. The equity position at which you borrow is major component of your “Price”. If the estimated value of loan amount changes from the initial estimate so does you price. Here’s a tip, when shopping for a mortgage ask your loan officer at what equity position is your loan be quoted at?  By estimating the value of your home high, I would be able to quote you a lower rate. However the final rate will be determined by the actual value.  Value change equals rate change.

Property type. You get a quote for a mortgage and your loan officer assumes a single family home. However you want to buy a 2 family home, well this changes your “Price”.

Here’s a quick list of lesser factors but factors just the same that can change your price:

Loan amount -  the amount you borrow can change your price

Lock period -  the number of days you lock the rate in for can change your price

State -   the state you in which your home is located can change your price

Subordinate financing -  Whether or not another mortgage exists on the property can change your price

What you do with the loan proceeds can change your price. Use money from your mortgage to pay off credit cards and that’s right your price can change.

Whether or not you set up an escrow account can change your price. Really? yup. Don’t escrow for taxes and insurance and watch your price go up.

And many more factors that can affect your price. Now you can see why the the elusive “Price ” of a mortgage can be a daunting task to obtain.  That’s why consumers should not only be educated on what they are buying, but also need to know they are working with a professional who knows what factors to look out when quoting a “Price”.

Most importantly, rates change all day every day.  Our mortgage prices can move throughout the day and are issued every morning. So the loan quote you got on Monday may not be valid Tuesday.  You are never guaranteed your rate until the rate is locked in, and if one of your factors change so does your locked in rate.  Just because the rate is locked doesn’t mean it can’t change during the underwriting process.

 My only advice is seek a true mortgage professional who you can trust.  Don’t think because you are going to a BIG BANK that they will have everything right. Employees at BIG BANKS don’t always know what they are doing.  BIG BANKER BOB may have funny commercials and sleek letterhead but know, you are being put through a process and not being dealt with on a one to one level.  Corporate process’s can get things right but they can also get them wrong.  And if you’ve ever dealt with a big corporation who got things wrong and something was outside the PROCESS, you know how frustrating it can be to get it fixed.

Try to absorb some of this knowledge and I will follow up in a couple of days. Please feel free to post your questions to me, as I may make an attempt to have you better understand.  Knowledge is not knowing everything, but it’s knowing how to obtain the facts!!

Jim Barry