Pay Option Arms-The Real Mortgage Killer

Pay Option Arms-The Real Mortgage Killer

Pay Option Arms are probably one of the trickiest and least understood mortgage programs available to consumers.  Let me Stress to you at the very beginning, your Payment Rate is not your Interest Rate. This is how many of these loans are sold to consumers and this is where most get confused. Your Interest Rate is how much interest you will pay on the money borrowed. The Pay Rate is the minimum payment you need to make on the loan to the bank. Payment and Interest are two totally separated issues.

For Example:

I borrowed $200,000 with at an Interest Rate of 7% and my Payment Rate is 2%. The difference between the interest on the loan and the pay rate is then added to my mortgage balance. Since you are adding to your mortgage balance each month your loan is negatively amortizing. 

Once again your Pay Rate is not Your Interest Rate. So when you are told you only need to pay $333 per month on a loan for $200,000 that is just the pay rate the lender requires. My Interest per month is $1167 per month so the difference between the two is then added to my balance.

Sound confusing? Well it is!!!

Please follow up with me next week to see why these loans spiral out of control for consumers.

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How Do I know If Interest Rates are going to Drop?

So many times in the news you hear that the Federal Reserve has cut interest rates. Shortly thereafter clients begin calling and ask me how much the interest rates on mortgages have dropped.
 
First point, the Fed rate is the rate at which member banks may borrow short term funds directly from a Federal Reserve Bank. The discount rate is one of the two interest rates set by the Fed, the other being the Federal funds rate.
 
So what does this mean? Very simply when the Fed Rate drops the interest rate at which banks borrow money drops as well. Therefore when the Fed’s cut rates the banks can borrow money cheaper.
 
Now the real measure of how interest rate will change with respect to mortgage rates is the yield on the 10-yr Treasury Bonds. When these bonds go up the yield goes down (it is an inverse relationship for those of you who understand some basic mathematical principles). When the yield drops the rates on mortgages generally drop. One thing I would like to point out from my observation of the markets, sometimes the Fed cuts rates and the stock market begins to rally. This rally brings the prices of stocks up and people begin to sell bonds. When the price of bonds begins to drop their yields go up and as a result the interest rate on mortgages goes up as well. I have also seen times when the Fed has cut rates and the interest rates on mortgages have dropped.
 
So how do I know if interest rates will drop? The general rule is to track the yield on the 10 yr treasury bonds and if I really knew how to track bonds each day maybe I would be a bond trader on Wall Street.

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100% Financing

This seems to be a topic that comes up a lot. Many times when I am out attending social events, the conversation turns to the mortgage industry and all the half information that the general public has heard through the media.

 People always come up to me and comment about all the risky mortgages that were done and the reasons for the sub-prime meltdown.  I always hear ” I can’t believe they were doing 100% financing!”

And I always rebut with, they’re still doing 100% financing!

Right now, 100% financing is not a very risky loan to the lenders.  The loans that were done over the last couple of years at 100% financing were risky because they were also No Income verified. The combination of those 2 factors are what made those loans so risky.  A mortgage is as good as the ability of the borrower to re-pay the loan.  Most of the loans that went bad, were the result of highly speculative investors who were getting into homes with no money down, with the hope of flipping them for a profit.  When the market turned, these borrowers were left holding the hot potato and just dropped them.  They couldn’t afford to make the payments and let the homes go to foreclosure.

Today, 75% of all my new purchasers are making down payments ranging from 0-3% down.  These loans have very attractive rates but do require good credit and full income verification.  If you’ve been renting for $1500 per month for over 3 years and you could purchase a home for say $1800 per month why wouldn’t you?  The lenders feel the same way.

Generally, 100% financing were risky loans, because if the borrower didn’t pay, the lenders assumed they would recoup 80% of the loan from a foreclosure sale.  ( this 80% mark is the mendoza line of mortgages, ” baseball reference”).

However, on today’s 100% financing products, the 80-100% equity is insured through the use of PMI ( private mortgage insurance). The borrower pays the cost of an insurance policy that insures the lender that if the loans goes bad, the PMI company will cover some portion of the outstanding loan balance.  The lender can now foreclose, recoup 80% from the sale and make a claim against the PMI company to offset it’s loss.  What a wonderful world we live in!

No matter what, the risk of any given loan is set by the ability of a person or entity to re-pay the loan and the collateral that secures the loan if for some reason the loan is not paid back.  Today’s 100% loans are being checked for the ability to re-pay and are being insured through the use of PMI.  There’s no reason why lenders shouldn’t be offering these loans.  As a matter of fact, they are being offered at better terms than were around 2 years ago.

Don’t be swayed by what you hear in the media, often the information is wrong or being told as partial truth. Consult a mortgage professional and do some research.  And the next time you are at a cocktail party and hear ” I can’t believe they were offering 100% financing”, brush it off as another mis-informed 10 o’clock news watcher.

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Mortgage Outlook For 2008

Lenders are continuously tightening guidelines and are restricting many loan programs available to borrowers. With major lenders and investment banking companies still having billions of dollars in bad mortgage debts to write off their books it will be some time before things loosen up. Also, major players such as Fannie Mae and Freddie Mac have implemented many changes to their loan programs which will result in an across the board tightening of  guidelines which will result in fewer loans available to borrowers.

Forget Sub-prime, there are still sub-prime lenders out there in the marketplace but their interest rates are not what they used to be and the loan programs available to the sub-prime borrower will only meet a small select few borrowers. With all this said I believe 2008 will be a year of tighter guidelines, fewer loan programs and a tougher market for mortgage brokers, Realtors and other professionals related to the housing market in general to survive.

 Don’t get me wrong, even in the harshest environments there will be those that flourish but the days of overwhelming prosperity for the broker with a loan application and the borrower with a pulse is such a thing of the past.

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What It Means to Be A Mortgage Broker

Being a mortgage broker is something more than quoting a person an interest rate and getting an appraisal done. Too often I hear about people that have worked with other companies and so called “loan officers”. They say to me the guy at the company said I can get a low rate and all I need to do is get an appraisal done. If it was that easy then anyone would get a loan and there would be no need for underwriters at banks and guidelines set by lenders.

Getting a loan is more complex than that and it really takes  knowledge, skill, experience and constant research of the indusrty so that you are aware of all the changes going on. Especially in these times when lenders are falling out of the business and the lenders that are still out there are changing their loan programs it seems almost weekly.

 For myself being a broker is something that is requires dedication, commitment and continuous education. If you want to survive in this market you really need to know what your doing and also know how to get it done. The days of having your account executive structuring your loans and lenders giving exception after exception is a thing of the past.

I truly believe this is a good time for the brokers that have sat on the sideline for the past couple of years and had to deal with competition from uneducated, ill-trained, immoral and unethical individuals who only cared about making a commission. This will now create an opportunity to shine for brokers who know what they are doing and have put their clients first since borrowers have been burnt a few times and are much more cautious to get tricked again  and with lenders having very tight with guidelines only the smart will survive 

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Loan Officer Vs. Mortgage Professional

Being in the mortgage industry for over 10 years now, I have narrowed down some of the basic problems that consumers often run into when applying for a mortgage.  A mortgage application and process can be a very complex situation.  Most loan officers are trained to take the application and submit the file and see what happens. Often, the loan application gets turned down or gets re-structured by the lender into a loan product that may be worse than the actual loan applied for.  Why does this happen?

90% of all loan officers do not have the knowledge and skill to pre-underwrite a loan application themselves.  As a mortgage broker we have access to thousands of loan programs and we need to be on top of all the rules and guidelines pertaining to these products.  Not only do the products vary greatly but they also can change week to week.

As a mortgage professional, we here at Artisan Mortgage Company have the skills necessary to take an application and actually quote you a loan that you will get approved for.  Artisan Mortgage takes the extra steps to looker deeper into the loan application and make sure that many of the potential pitfalls have been addressed.

I hear story after story from clients who have been quoted loans they don’t qualify for, or even worse have been given loans where there were better loans available.  If you talk to many people who have taken out a mortgage in the last 2 years, you will find this to be a common theme.  Many times a simple detail is missed by the loan officer because he or she doesn’t have the knowledge or ability to pre-underwrite the deal,  to look at ALL the aspects of a loan file, not just the credit score and equity position.  The client who was expecting to get 6% is now being offered 7%,  3 days before closing is supposed to take place.

Even worse, I see clients who close at 7% and are told that was the best rate they could get.  Sometimes it’s true but more often than not, there was a better loan available however the loan officer took the easy way out. Rather than spending hours of their time to research and find a better loan, they simply sell you the one that is easiest to get done.  The loan is worse for the client but the commission is the same for the loan officer.

I suggest you talk to several mortgage people whenever looking into applying for a mortgage. Ask many questions and try to pick out the mortgage professional.  A few minutes of shopping around can often save you thousands of dollars. Also, don’t be afraid to walk away from a mortgage that you deem to be unfair or too costly.  The mortgage process can be very frustrating for consumers but if you find a true mortgage professional, he or she will make the process very smooth and calming.  Just because a loan officer tells you are being offered the  best loan available doesn’t make it true.  You should be able to understand why you don’t qualify for the better loan and if you’re loan officer can’t explain it, they probably don’t understand it either.

 I.E   see if your local Home Depot clerk can tell you how to install new plumbing for your bathroom?  and then call a 40 year master plumber!

Get the Idea.

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