Mortgage Broker category archives

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (called the SAFE Mortgage Licensing Act of 2008) is being made the rule of the lending land even as we speak. Are you safer as a result?

The SAFE Act of 2008 is a form of legislation that has been batted around in Washington for years now. Lawmakers have long been frustrated with the payment of commissions to mortgage loan officers that are based on the cost of the loan to the consumer. In other words, the more lucrative the loan is for the bank (costlier to the consumer), the more money the sales person makes when the loan closes.

The question I’m posing for consumers today is this: Are you safer as a result of the SAFE Act? It’s a fair question. Let me give a little more information and perspective.

In overly simplified categories, the SAFE Act changed the mortgage industry in two main ways. First, it required its loan originators (the sales end of the business) to be licensed by the federal government. And second, it changed the way these sales persons could be compensated for the loans they originate.

First – licensing. Licensing is a good thing. Getting into this business today is supposedly not as easy because entrants are required to pass a test and a background check. Convicted felons, for example, will not pass. The relevant question however, is do all loan officers need to be licensed? The answer is no.

The reason for this is that banks and credit unions are exempt from the licensing requirement. Did you know that more than 80% of mortgage loan volume is done through a bank or credit union? That means, odds are, your loan officer today is not likely to be an “safer” than before the SAFE Act.

I am not one who normally agrees with the government, but I think that licensing loan officers is a great idea and was long over due. It should simply apply to all who are involved, rather than to just some.

The second change since the SAFE act has to do with how these loan officers are compensated. Stay tuned for my next post on that one.

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If there is one component that predicts more than any other whether a home owner will continue making payments when times get tough, it’s this one.

At some point in the process of struggling to make mortgage payments home owners will consciously remind themselves whether or not they put any of their own money into the deal way back when they purchased the home.

If the answer is no – then they will (statistically speaking) be more likely to walk away from the home when times are tough. But if the home owner either put money down or paid the mortgage down more quickly for a time, then they will feel tied to the home because they put their own money into it.

The other issue that is directly related to the down payment is whether or not there is equity in the home in the future. In this kind of market, even folks who put $40,000 down on a $200,000 home purchase three years ago still may not have any equity in the home today. That is hard to swallow all by itself; but if they had put nothing down they would definitely be more upside down than if they had.

Lenders know these stats. They understand the feelings. They’ve . . . .  been to the puppet show already and seen the strings. They like down payments – that’s all there is to it.

For the time being, the Veterans Administration and the USDA both over programs that allow a home buyer who qualifies to buy a home with no money down. FHA is next in line – they will allow for a down payment as low as 3.5%. Conventional lenders (Fannie Mae and Freddie Mac) will require a minimum of 5% down and in some markets – like Michigan for the past few years – they will prefer or even require 10% down.

I tend to look at this issue from two angles, and in this priority order:

First, is the person who wants to own a home ready to be a home owner? Are they responsible with money? Do they owe a lot of money on credit cards? That would suggest that they don’t live within their means. Do they have a savings account balance or are they living paycheck to paycheck? It’s wise to determine the answers to the above questions before moving ahead with home ownership.

Secondly, and after we’ve determined we have a buyer who will likely be successful as a home owner, we ask about which loan program they qualify for. There is no magic in putting in a down payment. If you didn’t have a down payment, you can still be a successful homeowner. We just want to make sure you’re ready for this.

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There are a number of ways to find the best mortgage rates, but all require a little bit of work on your behalf.

The key to all the methods is shopping around, since you can’t really determine if a mortgage rate is any good without comparing it to others.

Try a Mortgage Broker

Sure they’ve taken a lot of flak lately, but if you work with a mortgage broker, you can have them shop your loan scenario with a number of banks and lenders to find the best rate.

They have access to wholesale mortgage rates, which generally price below retail rates, so you might end up with a better deal.

And brokers do the work for you, so you don’t need to shop yourself – just make sure you find a reputable broker to work with first.

Comparison Shop Online (and Offline)

If you want the best mortgage rate, shop around. Get quotes from mortgage lenders online and inquire about rates with your local bank(s).

Just be prepared to get bombarded with phone calls and e-mails from interested parties looking to sell you the best rate.

They’ll probably lay off after a few days (or weeks), but the more you shop, and the more you tell others about yourself, the more you can expect to be contacted, sometimes relentlessly.

Zillow’s® Mortgage Marketplace

Assuming you still want to shop around after those words of warning, consider using Zillow’s® Mortgage Marketplace, which allows you to shop for mortgage rates anonymously.

You simply fill out a rate request form and the lenders pitch their offers to you – just watch out for bait-and-switchers once you’ve made contact.

In summary, be sure to look beyond the mortgage rate itself – fees (loan origination fee, mortgage points) can add up quickly and greatly distort the mortgage rate you ultimately receive.

Tip: If the lender lists the mortgage rate along with the APR (which includes certain fees), find out exactly what fees are included in the calculation and which are not. All are relevant!

(source: TheTruthAboutMortgage.com)

(photo: thetruthabout)

Please join me in welcoming Eleanor Thorne of North Carolina to our roster of awesome writers. Eleanor is a veteran mortgage expert with over 25 years experience that includes ownership of 2 mortgage companies, a title company, and an insurance company. A self-professed “economic news junkie”, Eleanor works with First Financial Services Inc. and specializes in first time home buyers. Mortgages Unzipped welcomes Eleanor’s experience and insight in consumer mortgage issues.

VA mortgages are a great way for those who served in the United States Armed Forces to purchase a home.  Many Southern California sellers have rejected offers using VA financing because they believe they are required to pay certain closing costs for the buyer.  We call those closing costs “non-allowables” because the VA won’t insure the loan if the veteran pays them.

Those VA non-allowable closing costs are not limited to but include:

• Underwriting Fee
• Processing Fee
• Mortgage Broker Fee
• Administration Fee
• Tax Service Fee
• Wire Fee
• Escrow Fee

If the VA won’t allow the veteran to pay those fees but lender’s charge them, how do they get paid?

Sellers can pay those costs, real estate agents can pay them or the loan originator can absorb them.  I recommend that buyers and their agents ask the lender for a  good faith estimate for a “no junk fee” VA home loan prior to presenting an offer to the seller.

On a $400,000 VA home loan, the non-allowable closing costs could be as much as $4000 in California.  That equals approximately 1% of the loan amount.  If a wholesale VA mortgage rate were 5% today, the lender has two options:

• charge a $4,000 discount fee, in addition to the normal 1% loan origination fee, to absorb the VA non-allowable closing costs OR

• the buyer might elect to accept a higher mortgage rate (about .25%) so that the yield spread premium can absorb those VA non-allowable closing costs

Some real estate brokerages, like Redfin, offer a commission rebate.  That rebate can be used to pay some or all of the VA non-allowable closing costs.

Finally, the seller can but is not required to pay up to 4% of the loan amount of the buyer’s closing costs.

President Barack Obama recently proposed that all lenders offer “plain vanilla” mortgages so consumers could understand the loan terms and the risks associated with the mortgages.  The proposal includes creating a Consumer Financial Protection Agency that would be responsible for these and other laws that help consumers make better decisions.   This proposal met strong opposition by the lending industry for trying to impose too many rules and limiting the flexibility of lenders.

“Under Obama’s plan, a new government agency would be established to monitor the fine print on such products as mortgages and credit cards. The Consumer Financial Protection Agency would require that lenders be up front about the cost of their products and offer customers a standard low-risk alternative.“

On Zillow Mortgage Marketplace we focus on consumer advocacy in a slightly different way.   Instead of limiting what lenders can do, our goal is to educate borrowers on the risks and benefits of each loan program so they can make the right decision themselves.  We have created a number of tools to educate consumers on how to compare mortgage types, analyze the risk associated with different loan programs, and find a trustworthy mortgage lender.

Here are some of the tools we built and why we think they are important:
•    Monthly Payment Graphs – each quote has a graph showing what the monthly payments will be over the life of the loan.  For adjustable rate mortgages, we always show the worst case scenario so borrowers can clearly see any risks associated with the mortgage.
•    True Cost – this calculation shows the interest and fees costs of all loans over any time period.  This helps borrowers compare prices for quotes across all of the different loan programs.
•    Comparison Page – compare all loan details in an apples-to-apples fashion across multiple quotes in one place.  Quotes are completely accurate and show all ARM details including margins, caps, and index.
•    Cumulative Costs Graphs – these graphs show the total cost of the loan over time so you can see how much you will end up paying in interest, insurance, and fees.
•    Lender Ratings – every lender on Zillow Mortgage Marketplace is held accountable for their actions and customer service through borrower ratings.
•    Mortgage Calculators and Help Articles – we created a whole library for consumers so they can figure out how much they can afford and the best way to repair their credit.

Helping consumers make better choices is extremely important to us.  If you have ideas for other tools or features that you think would help educate consumers, please let us know.

These days, shopping for a loan involves more than your average rate comparison.  The lowest interest rate doesn’t necessarily yield the best mortgage to fit your needs.  For example – did you know that you can actually save money by taking a higher interest rate with a 15-year loan?

Today’s homebuyers and investors are exposed to countless rate quotes and market updates – many of which combine different trends from different sources.  That’s why, when shopping for a home loan, the company with the lowest interest rate doesn’t guarantee the best overall experience and financial health for the life of your loan.

Which loan programs are on the table?
Does your mortgage company have a wide array of programs to offer? Banks usually only offer a single set of programs, but mortgage bankers are like personal shoppers — they can search a database of programs and find the best investor for your loan.  That translates to more options and a better chance of finding the right loan to fit your needs.

Do you get a call back right away?
Does your mortgage company call you back in a timely fashion?  Are you getting the right level of personal attention?  Response time is an enormous initial indicator of overall customer satisfaction.

Will the company outsource your loan?
Is your mortgage company’s process simple?  Do they have to outsource your loan to a different office or state? A mortgage banker who can process your loan in-house has more control, can answer more questions in a timely fashion, and provides more security for your sensitive information.

How soon do you need to close?
Can your mortgage company provide you with a closing timeline? A mortgage banker with more control over the process gives customers a more accurate estimate of how long it will take to close your loan.

Did you receive proper disclosures?
Once you go through the initial application process, your mortgage advisor will send you a Truth-In-Lending and a Good Faith Estimate, listing specific fees and the APR associated with your proposed loan.

Did your loan officer fully explain the mortgage fees and APR?
Know your options.  Is your mortgage company up-front about fees associated with the loan?  What about the APR of your proposed mortgage? Are they providing you with enough options?  Make sure you’re working with a company committed to full transparency and an attention to smallest details.

Do you trust them?
The best way to find a trustworthy mortgage broker that you feel comfortable with is to consult friends, family, neighbors and co-workers. You can also use helpful sites such as AngiesList.com and Yelp.com to find or reinforce your decision.

Bottom Line
Use detailed financial disclosures, response time, advice from trusted sources, and your overall intuition to help solidify your choice of a mortgage consultant.

After all, mortgage interest rates change every day.

Long-term relationships stay the same.

This morning we got a question over on the “Ask Zillow” side that reminded me again that the jargon in the lender world is imperfectly understood by the general borrowing public.

No, strike that.  My English teacher would be appalled (right, Mrs. Russell?).  Here’s what I meant to say: It reminded me that most people haven’t a clue what loan people are talking about most of the time.

The question was, “When is my rate locked?” One of the answers was “is this a rhetorical question?  It’s locked when it’s locked.”  I am not making this up.  Obviously, that answer is true, yet monumentally unhelpful.  When we reach a point where the lenders and the borrowers don’t even understand what the other party doesn’t understand, then we’re in trouble.  So in an attempt to bridge the gap, I offer the following.

A rate lock is a commitment by a lender to the party taking out the loan.  This can be on the part of the servicing lender to the funding lender (secondary-to-primary) or on the part of the broker to the borrower, or a number of other possible combinations.  Confused yet?  Sorry.  It’s actually simpler than it sounds.

Here’s an analogy: I have a big vat of lemonade.  You want to buy some lemonade from me so you can set up a lemonade stand.  You come to me and say that you want 10 gallons of lemonade, and ask me how much it will cost.  I tell you it will cost $1 a gallon.  You want that lemonade, but you don’t want to pay for it right now, so you order the lemonade for delivery in 30 days.  I agree to this.  You have now locked the price of this lemonade, and I have set aside for you the 10 gallons you want.  This represents the secondary mortgage market, when your broker locks a loan with his investors.

Now you go and build your stand.  You engage salesmen to hawk your lemonade to the thirsty.  You hire ten guys and send them out.  They sell the lemonade for you.  They come back and say, “I can sell a gallon of lemonade for delivery 30 days from now.  How much will that cost me?”  You consult your accountant, and decide that you can sell that lemonade for $1.50 a gallon.  The salesman takes that information, and makes the sale to the public.  When he gets an order, he goes back to you and tells you to reserve a gallon of lemonade for delivery in 30 days.  This is a rate lock between the borrower and the broker.

What is immediately obvious is that there are two different locks here.  One is out in front, what most people call “locking their rate”, which is the second example.  When a borrower locks his rate, he believes that he is going to get the loan at the rate he locked.  What he rarely understands is that the rate has a time limit on it, and is subject to the honor of the loan officer he locked with.  A million things can make the closing take longer than the lock period.  Go over that time limit, and the rate changes.  A million things can prevent the loan officer from getting a borrower’s lock transmitted to the guy that owns the vat of money.  Fail to get that lock down with the investor, and the rate could get very expensive for the loan officer.

The other is the back-end lock, between the secondary market investor and the broker.  That contract is fairly inviolate, but has zero flexibility.  If your broker locks with an investor, the lock will be honored.  But there’s no way to extend it for nothing – the investor will demand to be paid for any extension.

So what does all this mean?  If you’re a borrower, keep these things in mind:

• Your loan is not locked until you are explicitly told it is.  Do not assume that your rate is locked just because you got a Good Faith Estimate.
• Your rate lock is not guaranteed.  Your broker may or may not honor the commitment he gave you.  Likely he will, but if he does not, you’re not going to have recourse.
• Once you lock, the clock is ticking.  You cannot afford to dawdle.  You need to take it upon yourself to provide everything you’re asked for as fast as you can.
• Your broker has certain flexibility.  If it’s definitely his fault the loan took too long, he can often be induced to pay for the extension.  Also, if rates drop while your loan is locked, he may be able to slide your rate down.  Mortgage shoppers should remember, however, that that rate lock has provided them protection against rate increases, and that rate protection has cost their broker something.  You might consider being loyal to a person that has stuck his neck out for you, even if someone else comes along that seems to have a better deal.

If you’re a broker or a loan officer, here are some things to remember:

• If a client tells you he wants to lock, do not make a commitment to him until you have one yourself.  It sounds easy to take one phone call and make another one right away, but you and I both know that what sounds easy often isn’t.  Never promise what you cannot be sure you can deliver.
• Do not roll the dice.  It is tempting to take a lock from a borrower, then roll the dice, holding off locking with your investor and betting that pricing will get better and you’ll make more money.  Don’t do this.  The stress of watching the market isn’t worth the few bucks you’ll occasionally make.  And if you blow it – you know what I mean here – you’re going to get killed in reputation and in dollars.  It’s not worth it.
• Stand by what you say.  If you tell a client his loan is locked, honor that lock, whatever it costs you.

Hope this sheds some light on one of the obscure-but-critical terms we use in the mortgage industry.  Next time, we’ll tackle the term “securitized mortgage derivatives”.  Wait.  On second thought…

On July 30, 2009 the new Housing and Economic Recovery Act (HERA) regulations will go into effect.

• They require all mortgage lenders and brokers to help prevent deceptive lending practices and protect customers by helping them become more informed.

• These new requirement could impact your closing dates.

The Four key elements you need to know :

1. If the homebuyer is financing the property, these new regulatory and investor guidelines will impact – and could even dictate the closing date
2. Upfront fees cannot be collected by the lender until the initial disclosures are received.  Fees are needed to order the credit report, appraisal and get the process underway.
3. The homebuyer must be provided with a copy of his or her appraisal a minimum of 3 days prior to closing
4. An increase of more than .125% in the APR from the initial disclosures requires the Truth in Lending to be revised and reissued to the homebuyer at least 3 business days before closing.

Last year, the Secure and Fair Enforcement (S.A.F.E.) Mortgage Licensing Act of 2008 was signed into law as part of the Housing and Economic Recovery Act. This law outlines procedures, requirements, education, testing, and standards for mortgage loan originators. 

Part of the law includes mandatory registration and state licensing of loan originators through the Nationwide Mortgage Licensing System in order to give consumers easy access to a loan originator’s employment history, and any disciplinary or enforcement actions taken against him or her.  This is great news for consumers, since a national registry will help stop fraud, giving regulators the ability to more efficiently track bad actors.

The registry was begun in January 2008 with a handful of states, and to date, 26 states are actively participating, tracking 66,469 individual originators and 11,459 mortgage brokers and lender companies.  An additional 20 states will register by the end of this year.  Three states — California, Pennsylvania and Massachusetts — have not yet passed bills but have legislation pending, and Minnesota is expected to address the issue in 2010.

The law defines a mortgage loan originator as someone who takes an application and negotiates the terms. What hasn’t been decided yet is whether that definition should include servicers and loan modification officers.