How much your loan officer charges you to get your loan done is very much up in the air right now and pending legislation is expected to alter the way these things have been done soon. As in, possibly as soon as January!

The way the regulatory process works is there is a “comment period” and then the governing bodies decide what to enact. Most recently, this was done with implementing new rules for appraisals that turned into the Home Valuation Code of Conduct (HVCC). There was a comment period and then the rules went into effect.

The best video I have seen on this issue was put out by the guys at Think Big Work Small. (Click the picture below to play video, there wasn’t an embed feature that I could find…)

Highlights from the Video:

• On August 26th, 2009 The Federal Reserve Board proposed an amendment to Regulation Z that directly impacts the mortgage brokers ability to earn Yield Spread Premium (YSP).

• The method most likely to be adopted by the industry to satisfy the Federal Reserve Board will most likely be a flat fee…

• “The mortgage broker would have multiple agreements with multiple lenders and each lender would have a separate compensation agreement with each broker - and those agreements could differ from broker to broker.”

• “The broker could have to prove that the lender chosen for the consumer was the best lender for the consumer at that time from all the lender compensation agreements that the broker has in place…”

• This proposal will NOT stop unscrupulous brokers from taking advantage of the consumer. The bad broker will always go for the agreement that makes them the most money - especially since there is no provision within the proposal to monitor the situation.

If you are a consumer, if this rule gets adopted and turned into law is it a good thing?

Not according to the guys in the video.

It has even gotten to the point where the Obama Administration has enacted a plan to start fining lenders who can’t find a way to modify more loans.

“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said Friday. “Some of the firms ought to be embarrassed, and they will be.”

“We’re seeing a failure by some of the bigger banks on execution,” Mr. Barr said. “We’re going to be quite focused and direct on particular institutions that are not doing a good job.”

If the issue has gotten to this point - where fines are going to be handed out and the NYTimes is writing about it - it is clear that there are many people who are frustrated and wondering why it is so difficult to get a loan modification done.

Here is one possible answer as to why it is so difficult to get a loan modification done:

The FDIC has set up sweetheart deals with lenders called “loss sharing agreements” that financially encourage lenders to foreclose rather than modify a loan.

An excerpt from the most well-articulated thoughts on the subject that I have seen: (be prepared to be floored when you read the entire post)

When OneWest took over Indymac, the FDIC and OneWest executed a “Shared-Loss Agreement” covering the sale. This Agreement covered the terms of what the FDIC would reimburse OneWest for any losses from foreclosure on a property. It is at this point that the details get very confusing, so I shall try to  simplify the terms. Some of the major details are:

• OneWest would purchase all first mortgages at 70% of the current balance
• OneWest would purchase Line of Equity Loans at 58% of the current balance.
• In the event of foreclosure, the FDIC would cover from 80%-95% of losses, using the original loan amount, and not the current balance.

How does this translate to the “Real World”? Let us take a hypothetical situation. A homeowner has just lost his home in default. OneWest sells the property. Here are the details of the transaction:

• The original loan amount was $500,000. Missed payments and other foreclosure costs bring the amount up to $550,000. At 70%, OneWest bought the loan for $385,000
• The home is located in Stockton, CA, so its current value is likely about $185,000 and OneWest sells the home for that amount. Total loss for OneWest is $200,000. But this is not how FDIC determines the loss.
• ‘FDIC takes the $500,000 and subtracts the $185,000 Purchase Price. Total loss according to the FDIC is $315,000. If the FDIC is covering “ONLY” 80% of the loss, then the FDIC would reimburse OneWest to the tune of $252,000.
• Add the $252,000 to the Purchase Price of $185,000, and you have One West recovering $437,000 for an “investment” of $385,000. Therefore, OneWest makes $52,000 in additional income above the actual Purchase Price loan amount after the FDIC reimbursement.

At this point, it becomes readily apparent why OneWest Bank has no intention of conducting loan modifications. Any modification means that OneWest would lose out on all this additional profit.

Although I don’t pretend to know everything - it has generally been my experience that in America, banks are organizations that are designed to follow economic laws (translation: their sole intent is to make a profit).

So when wondering why your lender won’t modify your loan, you may be well advised to follow the trail of money - as in what is going to make your lender more money.

And if the FDIC is literally agreeing to pay hard dollars to the lender to foreclose rather than modify?

It seems to me that someone might want to investigate this issue further and then start talking about possible ways that it could be fixed.

Related Information:

Making Home Affordable Performance (see page 3 for individual lender performance)

Anatomy of a Government-Abetted Fraud: Why IndyMac Always Forecloses

NYTimes: Treasury Pushes Firms For Loan Relief

A draft of the Financial Stability Improvement Act is currently making its way through the U.S. House. There’s a similar piece of legislation being considered in the Senate. The overarching goal of these measures is to curb the risks associated with lending behemoths like Bank of America and Wells Fargo.

But broad risk-retention provisions in the drafts would effectively kill community lenders, who account for about 40 percent of all home mortgage originations nationwide. Instead of minimizing risk, this new legislation would simply pave the path to home mortgage monopoly for the same “too big to fail” lenders who helped trigger the current financial crisis, according to a joint statement recently issued by the Community Mortgage Banking Project and the Community Mortgage Lenders of America.

“The result would be reduced competition and choice for consumers — an ironic and counterproductive result for a bill intended to mitigate ‘too-big-to-fail’ concerns,” the statement read in part.

The problem is rooted in risk retention. Legislators want to emphasize risk management for lenders and ensure a disaster like the subprime mortgage collapse will never be repeated.

But the House bill requires lenders to retain up to 10 percent of the credit risk on any loan sold into the secondary market. Hundreds of community-based mortgage bankers would likely go out of business overnight if they were required to retain just 5 percent. A company that originates $100 million each year — a normal figure for a small to mid-size firm — would have to have an astounding $5 million in cash reserves.

In contrast, Wells Fargo originated about $230 billion in residential mortgages in 2008. But those cash reserves are easier to maintain for lenders that also serve as depository institutions.

Community-based lenders are the lifeblood of the U.S. housing market. These smaller lenders provide secure, affordable mortgage products to buyers in search of personal service and local expertise.

These crippling risk-retention requirements could put thousands of Americans out of work. Home buyers would likely see a spike in rates and fees, part of a wave of increased cost created by the new requirements and the elimination of competitive pricing.

The country’s three largest mortgage lenders — Wells Fargo, Bank of America and J.P. Morgan Chase — accounted for 52 percent of all new home mortgages in the first half of 2009, according to Inside Mortgage Finance.

In 2007, the trio had a market share of 37 percent. In 1990, no company had more than 5 percent of the market.

Legislation without exclusions and exemptions for qualified lenders would put almost all of the nation’s home mortgages in the hands of the “too-big-to-fail” firms.

“These regulations would thus unnecessarily deprive consumers and businesses of competition for safe and sustainable mortgage options and reduce the available funds for home financing by billions of dollars,” John A. Courson, president and CEO of the Mortgage Bankers Association (MBA), recently said in a news release.

The House Financial Services Committee recently agreed to exempt government loans (VA, FHA, USDA, SBA) from the risk-retention requirement. The Senate Banking Committee draft has similar exemptions for government-backed loans.

But there’s no guarantee that these exemptions — or any future exclusions — will make the final piece of legislation brought to President Obama.

The committee is expected to begin marking up the bill in the next few weeks. Now is the time to make your voice heard if you are so inclined - you can stand up and blog, tweet, make phone calls, or anything else and hopefully someone will hear. Also, if you’re alarmed and inclined to join the organization who is trying to make their voice heard in this matter you can also join CML America, an organization whose mission is protecting small mortgage bankers.

Earlier this week, I received an email from the people at Zillow saying that they were making changes to their Zillow mortgage marketplace and were going to start to charge lenders for each contact with borrowers and my first thought was:

“Well, this oughtta be fun to watch”.

I think it might be the social scientist in me that casually enjoys watching people squirm whenever a perceived “big change” is announced - whether it is a global, national, corporate or maybe even just a marketplace change.

It has been my experience that whenever change occurs, there is almost always a group of people who thinks change is “fun” - no matter what it is - and finds a way to adapt to the change and continue on with life. It has also been my experience that there is also a group of people who resist change and can’t figure out why they never end up on the good end of the changes.

If you enjoy seeing both sides (and everything in between), be sure to follow the debate about the recent changes Zillow announced and how people are reacting to them.

What This Change Means For You: The Consumer

If you are a consumer, be sure to put Zillow on your Holiday greeting card list. They did you a big favor by making sure that lenders are valuing your contact - in fact… they are making your interest and qualifications a “market”.

If you are interested in a loan, have good credit, good income, good assets and want to buy a $500,000 house do you think you are more valuable to speak with than someone who has lousy credit, no money and wants to find out how to use the $8000 tax credit to buy a house?

Of course you are.

So now the lenders on the back end are going to be actually “bidding” for that interest and hoping that you contact them.  When you do contact them (hint: if I were you, I would contact one of the ones who has a stellar reputation), then they will be charged.

Just a hunch here, but I wouldn’t be surprised if Zillow doesn’t start out segmenting you as a customer and assigning a different value to you based on certain criteria, they will over time.  Which will only help the process.

I know, I know - it still remains to be seen just exactly how much money Zillow will be willing to pay lenders to talk with people who have lousy credit and no down payment (that was a joke) but one thing is almost certain:

Now that there is a price-tag that lenders are going to be paying each time you contact them - you as a consumer have an even higher chance of getting the best service from your loan officers working right here on Zillow.

Or, maybe I should say it like this: It seems to me that if a lender has to pay $100 for you to talk to him, you have a better chance of getting his/her full attention than if they didn’t have to pay anything for you to talk to them.

Or at least that is where I always try to put my mouth… where my money is.

Starting at :38

We will be providing a mechanism for putting non bank financial institutions out of everybody’s misery.

[Is Secretary Geithner smiling?]

There will be death panels enacted by this congress.
But they will be for non-bank financial institutions that will not be considered too big to die.
And I say that because we have this euphemism that we are going to be resolving these institutions. It has not been my experience that when someone says that they are going to resolve something, they kill it. We are talking about dissolution, not resolution.

We are talking about making it unpleasant for the entities…

Note: The underlining emphasis and [commentary] was mine of course.

I don’t know for sure what the future will hold, but it sure seems like the winds of change are starting to blow when it comes to how mortgages are originated.

Hat Tip Rob Chrisman (by far one of the smartest mortgage people I have ever followed) for sharing the video.

Is your landlord in foreclosure?

Are you sure?

According to the National Low-Income Housing Coalition, one in five homes in foreclosure nationwide is occupied by a tenant.

One of the common stories about landlords in foreclosure that is happening all across the US is where the landlord allows a property to go into foreclosure and then the tenants are “surprised” when they find out they have to move.

Thanks for a federal law that was passed on May 20th, in some states, the lender will be forced to honor a lease agreement of a tenant, but not in all cases. For example, if a lender forecloses on a property and then sells the home to someone who will occupy the property as their primary residence, the tenant in place then has 90 days to vacate the property.

But no matter what, if your landlord goes into foreclosure, you will incur extra moving expenses that you are not likely to get back from your landlord.

Foreclosures can create expenses for tenants, such as moving costs. If the foreclosure forces you to move before your lease expires, you can demand that the landlord pay your moving expenses. If the landlord refuses, you can sue in small-claims court, said Janet Portman, managing editor of legal self-help publisher Nolo Press and author of several books on landlord-tenant law.

Finding out if your landlord is in foreclosure is easy to do - once. But going back and keeping an eye on your landlord by seeing if a foreclosure notice has been filed can be time consuming. At least one new startup has a solution to this problem - LemonLandlord.com — where you can monitor whether or not your landlord has had foreclosure proceedings start.

More About Landlords in Foreclosure:

• Tenants evicted because of landlords being foreclosed upon
• Renters too can face the hit of foreclosure
• Tenants suffer when landlords are in foreclosure

What I am about to suggest is called The Better To Be Lucky Than Good Plan and it’s success can largely depend on what your connection with karma is with the Gods in Charge of Decisions on Bank Owned Properties.

Step One

Once you have found a house and you realize that there is currently multiple offers in on it - maybe even at least one of them is for cash, it is time to get creative. In this case, creative is known as something called an escalation clause. The escalation clause can be worded in a number of different ways, but the essence of it is “buyer agrees to pay X% or X$ over the next highest offer.”

Step Two

Being creative can be fun, but unless you are also smart and creative, it could backfire on you. So now that you have been creative, you can protect yourself by being smart. Being smart in this case requires that in addition to your escalation clause, you also use a “subject to appraisal” clause such as this one The Phoenix Real Estate Guy stated in the comments from a post I wrote last week:

Appraisal Contingency: Buyer’s obligation to complete this sale is contingent upon an appraisal of the Premises by an appraiser acceptable to lender for at least the sales price. If the Premises fails to appraise for the sales price, Buyer has five (5) days after notice of the appraised value to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency shall be waived.

Once you have submitted your offer that is both creative and smart, it is time to sit back and let the fun begin. From what I can tell, the people who work for the Gods in Charge of Decisions on Bank Owned Properties are seldom able to turn one of these offers with an escalation clause in it down. I am sure it happens, but I just don’t see it happen very much.

Step Three

Once the offer has been accepted by the people who work for the Gods in Charge of Decisions on Bank Owned Properties, it is time to order the appraisal. Due to HVCC laws, appraisals today can be tricky and usually drive people nuts… but in this case, don’t let it drive you nuts - if the Better To Be Lucky Than Good Plan works out, you are about to save some money and be able to buy the home you want.

Step Four

If my math is correct so far, once you get the appraisal back, you will quickly realize that as a result of you being creative, you currently have an offer in that is possibly tens of thousands of dollars over the appraised value of the home.

Good thing you were also smart. Now is the time when you go back to the person who works for the Gods in Charge of Decisions on Bank Owned Properties and ask them which one of these three choices they want to pick:

1. Cancel the contract because the property did not appraise for the sales price
2. Get a different appraisal done with the seller paying for it
3. Negotiate with the seller to lower the sales price to the appraised value

How do you tell if you are one of those people who think it might be better to be lucky than good?

The person who works for the Gods in Charge of Decisions on Bank Owned Properties chooses door number three from the choices above and you end up with the house you wanted at the appraised value.

It might be easier than you think to be lucky… especially if the short sale department happens to be part of the “Retard Division“.

Other Recent Multiple Offer Thoughts:

Escalation Clauses: Bad or Good?

Multiple Offers and “Winning” The Bidding War

Multiple Offers is the Question of the Week

Can A Buyer Submit Offers on Multiple Properties?

Disclaimer: I am not a Realtor but I get to watch them work every day and most days it is more fun than not. Be sure to consult with a licensed Realtor before trying any of this at home.

Sometimes I do.

And lately, I have found that one of the things that makes me nervous keeps cropping up in the currently-crazy-real-estate-market that is happening in Arizona and other parts of the country as well.

Multiple offers from buyers on a house make me nervous.

Anytime I have a client who “wins” a bidding war on a house and then comes to me to talk about financing options, I get a little nervous.

I want to tell them “congratulations” and be as excited as they are that they just beat out all of the other offers on the house, but I find myself offering words of caution.

Why?

Because if you want to finance a house, your financing is going to be based on the appraised value of the house, not the sales price.

And whenever there are multiple offers involved, I get a little nervous that if you were the “winner” of the bidding war - the property that you just “won” won’t appraise for the sales price.

If you just won a bidding war, and the appraisal on the house is for lower than your agreed sales price, there are 4 common possible outcomes regarding multiple offers and appraised values:

1. Your agent goes to the seller (often it is the lender because the property is bank-owned) and gets them to agree to a lower sales price.
2. You agree to bring in the difference between sales price and appraised value in cash to closing.
3. Order another appraisal and hope the appraisal comes in at the sales price
4. You cancel the contract and go find another house.

Now.

If my math is correct… you have a 25% chance of a positive outcome (the sales price is lowered to the appraised value), a 25% chance of a hail-mary-hopefully-will-be-possible-outcome (order another appraisal and hope it comes in at sales price) and a 50% chance of a less-than-positive-outcome (bring in the difference in cash or cancel the contract and find another house).

25% chance for a positive outcome?

No wonder I get a little nervous.

So I thought I would take the time to list out the Top 10 Reasons Someone Shouldn’t Use Zillow’s Mortgage Marketplace to Shop for a Mortgage.

Number Ten

You much prefer filling out a form on the Internet somewhere that looks like this…

because you wonder what will happen if you do.

Number Nine

When you fill out a form that looks like number ten, you also want to give your personal information - just in case someone needs it.

Number Eight

You sometimes get lonely. You like to get phone calls. From lots of different people. Forget it if they want to talk about your mortgage - you want to tell them all about how your garden is doing. You know that by filling out a form, you will soon have lots of different people to talk to from all over the country. And they sound like such nice people when they call.

Number Seven

Your Realtor’s brother seems like he is so smart about mortgages. You feel lucky that you found the World’s Best Realtor who has a brother who is the World’s Best Loan Officer on the back of the shopping cart at Safeway.

Number Six

You really don’t have all that much time to fill out any forms on the internet. Can’t you just sign a form or two and be done with it?

Number Five

Your sister said that she found her loan officer on MySpace and he was so cute - he even gave her a ride in his BMW to the title company.

Number Four

You can’t find any loan officers on Zillow who are offering you any cash-back-at-closing when you buy your house and you really need to find someone who can offer “creative financing”.

Number Three

Your mom used a loan officer that she liked before - and he said that he could “help you out” even though he has a side job now stocking shelves at Home Depot.

Number Two

You like the fact that you can go to the Realtor’s office and stop by the Loan Officer’s office right there in the Real Estate Office. Having them together makes it so easy.

And finally, the Number One Reason Someone Shouldn’t Use Zillow’s Mortgage Marketplace to Shop for a Mortgage?

You feel sorry for your brother. Who also happens to be a mortgage broker.

For three quarters in a row, homeowners have effectively called a bottom, with the majority thinking their home’s value will not decline any further.  This quarter, the number of “optimists” was our largest yet:

• 34% think their home’s value will increase
• 47% think their home’s value will stay the same
• 19% of homeowners think their home’s value will decrease

Something to think about:

I have never had the chance to be a car salesman, but I have hired my fair share of them to be loan officers (no comments about used-car-salesmen-turned-mortgage-broker please… I know, I know) and over the years when I have bought a small handful of cars and have noticed one thing:

They almost always try to sell you a monthly payment rather than the total cost of the car.

Heck, I have even heard stories from ex-car salesman that many people will walk into the dealership and actually ask “what can I get for $xxx per month?”

I think when buying a house, the mindset of people might be a little different - but honestly, most people I work with generally seem to be more concerned about their monthly payment than the total amount of debt that they are taking on.

Since your total monthly mortgage payment is a function of 1.) loan amount, 2.) term of loan and 3.) interest rate - any change in any one of these variables can cause changes in your monthly payment. What I worry about is how dramatically your monthly payment can be affected when just one of the variables change.

Say for example that interest rates go to 10% — which is not out of the realm of possibility. What would that do to a monthly mortgage payment on a $300,000 home?

It would make the monthly principal/interest payment on a $300,000 loan go from $1,610 per month to $2632 per month - or an increase of 63% or $1,022 per month.

So if the theory of “people buy payment and not total debt” holds true - the obvious next question is “how much house can someone buy if interest rates are at 10% for about $1,610 per month?”

The answer?

About $185,000 vs $300,000 or so when interest rates are at 5%.

What happens if interest rates go to 10%?

I am no fortune teller, but I can’t see how it can be good for real estate prices.

Especially if what I learned from all of those ex-used-car-salesmen turns out to be true and people really do buy a monthly payment and not total price.