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.

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.

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 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 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!