So, you are facing foreclosure, and are worried and scared and don?t know what to do? Well, you are not alone. Millions of people nationwide have been foreclosed on or will be soon. There?s been all kinds of blame and finger-pointing (see my Who?s to Blame post for further info on that), but that’s not what this article is about. Something happened, and you got behind on your mortgage (and surely a lot of other things), and now you?re in a pickle.

What is foreclosure?

You Can Push Back on Foreclosures...Despite What You're Told

Foreclosure, or FC for short, is when a bank or lender takes steps to take your house away because you have not made the payments. You took out a loan, and for whatever reason fell behind on your payments, and the bank is trying to cut their losses by taking the house and selling it. It?s perfectly legal, and although it may appear that they are your nemesis, they aren?t necessarily the bad guys. I?m not taking the banks? side or defending them, I?m just telling you that they are in business to make money, like any business. Some time ago, you signed a promissory note saying you would send them a check every month, and for whatever reason, you couldn?t hold up your end of the bargain. I?m not here to judge; it happens to a lot of people, but if you don?t make your payments, they get to take your house. Maybe it?s not really your fault, and there were circumstances out of your control, but that?s just the way it is.

What is the Foreclosure Process?

I want to start off by saying don?t panic too soon. Some people think that if they are 15 or 30 days late on a payment, the hammer is going to get dropped on them, but this just isn?t so. Banks don?t want to foreclose on a house. Almost all of the time, they are going to lose money on a foreclosure. They would much rather get your monthly check and go about their business. Banks don?t want to take your house; they have to take it because they aren?t getting the money that was promised to them.

Typically, the foreclosure process doesn?t get started until the homeowner is 120 or 150 days past due. So, if you become 30 days past due, but keep sending in one payment every month, that is called a ?rolling 30?, and you honestly aren?t in any risk of foreclosure at that point, despite what the schmuck from the collections department is telling you. I have heard of times when a homeowner is 60 days down, and they offer up one month payment, but the lender refuses it. If you are 30 days down, they may take only one payment, but once you become 60 days delinquent, the answer is ?No, you cannot give us one payment, you now owe us two, and it?s two or nothing.? This one has always mystified me; it just doesn?t make sense. So, the moral is, if you can prevent becoming 60 days late by hook or crook, do it. I don?t want to throw out bank names for fear of getting sued for libel or slander, but some of the big names are guilty of this.

Try to See Trouble Coming Before It’s Too Late

If you had some unexpected expenses, and it looks like you might not be able to make a payment, but you are still working, and you aren?t late yet, and your credit is still OK, you can possibly refinance. There are programs out there for people who have current loans with Fannie Mae, Freddie Mac, or FHA that allow people to refinance with little or no equity. You do need to have a job, though. If it?s the end of May, and you don?t think you are going to be able to make you June payment, call to do a refinance NOW. Even if you can only lower your rate and payment just a little bit, you can likely skip one or two mortgage payments, maybe get an escrow refund, and have a new, lower payment. It may be just enough of a shot in the arm to keep out of trouble.

How Can I Fight Foreclosure?

So, 120 days passes. You get a knock on the door from the sheriff, or maybe a bonded messenger because there are too many being served for the sheriff?s department to handle. This can be a scary moment and very intimidating. ?Are you Joe Homeowner?? he asks. ?Umm, yes I am,? you reply. He hands you the envelope with court papers and your heart sinks. Maybe you want to cry. This would be one of the times that it is OK for a grown man to cry. After you are done sulking, inevitably you will say, ?What now?? That?s what I want to help with.

Sometimes the papers will have a court date already assigned. Most of the time, it will give you 30 days to file a response with the court. And then if a response hasn?t been filed (it will cost over $100 to file, by the way), the plaintiff (bank and their attorneys) will file for a default judgment of foreclosure because of a failure to respond, which you will get a copy of, along with the date and time of the court hearing. GO TO YOUR COURT HEARING. On your first time through, the judge will almost always grant another 28 or 30 days continuance to respond, but usually only once.

So what kind of ?responses? can you file? Well, I want to start off by saying that I am not an attorney, but I know what I know because I talk to a lot of people, and kind of know the ropes. Two of the most common, and most effective, are alleging RESPA violations, and requesting that the servicer, ?produce the note,? which I will get into shortly. There are many things that can count as RESPA (Real Estate Settlement Procedure Act) violations, many of them small technicalities, but enough to help your case. I can tell you from experience that most loan officers aren?t terribly detail orientated. This means there can be small mistakes on your paperwork you can use to your advantage. The documents you?d likely want to focus on are the Truth-in-Lending disclosure, the Good Faith Estimate, the Servicing Disclosure, and the HUD-1 Settlement Statement. If you are going to try this route, it may be wise to get an attorney, as they will know what mistakes are ?fatal blows? and which ones aren?t. These mistakes are more common than you might expect.

If you do nothing, a default judgment of foreclosure will be entered. With the judgment comes a 90 day ?redemption period?, meaning that you get 3 months to get caught up, should you win the lottery, get a big bonus, or maybe an inheritance. Assuming you haven?t gotten any windfall, after the 90 days is up, they can set a sale date for your house to be sold. They must give you a minimum of 60 days notice prior to the sale date. After the sale you have a minimum of 30 days after to get out, or risk being thrown out, which you really, really don?t want to happen. If the sheriff knocks on your door with an eviction order, you have about 15 minutes to get your bare essentials, and they change the locks, and put your stuff in storage, which you can pick up later. This is a very ugly scene you want to avoid. So, from the time you get papers, you should have a minimum of 7 or 8 months to get out (30 days to file a response, 30 days continuance, 90 days redemption, 60 days for sale, and 30 to eviction), and like I mentioned earlier, you don?t get papers until you are 4 or 5 months down, so you are probably looking at a year or more from the time you made your last payment until you have to get out. Another sad fact is that after foreclosure, many houses sit vacant for a year or more. There was even one non-profit agency advocating the evicted break back in and take back their house because it ?s better for the neighborhood to have an occupied house than a vacant house. Not that I?m recommending anybody do anything illegal, but if you resume residence, and can prove it (with utility bills and such), they have to go back through the whole eviction process again, even though the house isn?t yours anymore.

Produce the Note Defense

The other defense I like is the ?produce the note? strategy. As you probably know, your mortgage note can, and probably has, be sold one or more times. A common scenario is you close with mortgage company XYZ. Within the first month, they sell the servicing (who takes your checks) to mortgage company ABC. ABC might sell it again to mortgage company DEF. Now, theoretically, all the paperwork gets moved with the sale or transfer. But, in reality, many times it does not. And, even if it does get transferred, it may be lost, or may be stashed in a warehouse with tens of thousands of others, and very difficult to locate. There are a few steps to this process. First you have to mail a legal request to the lender and their attorney to ?produce the note,? and file this request with the county. After that you wait 30 days and file a ?motion to compel? asking the judge to order the bank to come up with the original promissory note. They then have 30 days to produce it. If this is done before the judgment of foreclosure, it may not make it to foreclosure. There was a story on TV about a lady who was basically living free for 2 years because the lender couldn?t come up with the note, and about a judge who threw out many foreclosures because of this. They have to prove you owe them the money. If you do this after the judgment has been entered, and the note is not produced, you may have to file an appeal, or a motion to vacate the judgment, or a motion for a stay on the sale and eviction. If the judge grants a stay until they can produce the note, you are still technically ?in foreclosure,? but your house won?t get sold, and you won?t be evicted. It?s sort of ?in limbo,? but it beats getting kicked out. And, if they do produce the note, you go back to the 60 days notice before sale, and another 30 to vacate, so it?s not like they can just come up and throw you out with no warning. There is a great site that details how to mount this defense, and has template forms you can fill in.  Again, you can probably do most of this on your own, but it?s not a bad idea to hire some legal help.

Loan Modification Can Help

One other option may be loan modification. This is where a lender agrees to modify the original loan terms to allow for you to stay in the home under new terms. These can be hard to get, and I have heard stories where a servicer has agreed to a modification over the phone, the homeowner has signed the papers and sent them in, but their house has gone into foreclosure or continues through the process in the meantime. The right hand may not know what the left hand is doing, so don?t put all of your proverbial eggs in the ?loan modification? basket, because the lender likely isn?t. You can try to make a loan mod go through, but don?t ignore the above advice either. It?s also noteworthy that above defensesw (produce the note and RESPA violations) can be used as leverage to force the bank into a modification.

Ownership Defense

Another option is called term ownership. It?s something between renting and owning, and relies on an obscure aspect of the law known as conditional ownership. A good description of the system can be found at www.termownership.com. Stephen Weeks is the attorney that developed this defense. I?ve corresponded with him a bit, and his a good guy, and very knowledgeable. He can be contacted at Weeks@WeeksLaird.com

Final Option: Bankruptcy

One last option is bankruptcy. There are two kinds of bankruptcy, or BK. One is a Chapter 13. This is where the court mandates a repayment plan over the course of 3 or 5 years, and all of your debt is included. You must prove the ability to repay for the court to approve a Chapter 13. And if you fail to make the required payments, the bankruptcy can be dismissed, and the foreclosure is back on. Most BK attorneys will give a free consultation to those interested in filing. Chapter 7 is where all of your ?unsecured? debt (credit cards, etc-not mortgages or car loans) is wiped out. You must be current on your mortgage if you plan on keeping your house, and there are very tight income requirements now (as opposed to a few years ago) for filing Chapter 7.

As you can see, there are several ways to help you fight foreclosure. I hope I?ve given you a better understanding of the process of foreclosure, and maybe some hope for those of you in trouble now. I also want to ask any of you who are behind on your mortgage or facing FC to take a hard, honest look at your situation. For many people, if you lost your job and have been out of work for several months, or had some sort of medical problem where you couldn?t work, but now are back on track, fighting to save your home may be a good idea. For some, if you are just in over your head, you have to ?know when to fold ?em?. Don?t let your emotional attachment to your house cloud your logic. Sure, you love your house. It?s your home. You have memories built there. But if you are making much less now than you were previously, or maybe just bit off more than you could chew, you might want to consider the steps here as a stall, so you can save up as much as possible so that when it comes time to move, you have money for a security deposit and all the other costs associated with moving, and be in a better position when it?s ?go time.? Yes, uprooting your life and you family to move to a new (and probably much smaller) place is no fun, but having to move with no money saved up and no plan in place is even worse.

I sincerely wish the best for anybody reading this. I know we are living in trying times right now.

We would like to thank redjar for sharing today’s photo via the Creative Commons License.

Ok, so just about everybody has heard about loan modifications, or loan mods for short. They are also called loan workouts, loan restructuring, among others. I’m going to explain what types of loan mods exist, and who can or can’t likely get them.

What kind of loan modifications are there?

The stress of problem mortgages can be overwhelming

There are a few different flavors.

Tack it on the back A common one is for people who are behind in their mortgage payments right now, to take the past due and put it on the end of the loan. Let’s say somebody has a $200,000 mortgage, and is behind three payments at $1500 each. If there was a temporary reason the homeowner got behind, like a job loss, and now they are making income again, the bank can put the past due at the end of the loan and give the homeowner a fresh start.

Recasting If somebody had an adjustable rate mortgage (ARM) that went up after 2, 3, or 5 years, and the payment jumped up, the lender can “re-cast” the ARM for a longer period to keep the payment the same. Let’s say somebody had 5.5% on an ARM, and on the adjustment date it went up to 7.5%. Depending on the loan size, the difference can be hundreds of dollars monthly. This can obviously cause some hardship for the homeowner, especially if they are making less now than before, like much of the country is experiencing. What the bank might do in this case is either “fix” the rate for another 2 or 3 years so the payment stays the same, or just convert it into a fixed rate at the same rate. These types of modifications are almost always contingent on the homeowner having good payment history prior to the adjustment.

Debt forgiveness A third type is debt forgiveness or principal reduction. This is common in short sale scenarios. Let’s say somebody owned a house that was once valued at $300,000. They had 90% LTV financing for a loan amount of $270,000. And now they have to sell the house because of job relocation or because their income level has changed and they need to downsize. But the problem is that the house that was once worth $300,000 can now sell for only $240,000 (a 20% drop from peak value is not uncommon these days). The bank knows that if they have to foreclose on the house, it would sell at auction for much less than the $240,000, so they agree to accept a smaller payoff because it is a smaller loss. Short sales are also common for somebody facing foreclosure for the same reason-the bank is taking the lesser of two evils. If a $300,000 house goes into auction, it may sell for $170,000 or $200,000, but if the homeowner sells it, it will go for much higher, and the bank will save thousands in principal and legal fees.

Payment or rate reduction One last type is payment reduction or rate reduction. Again, if somebody is struggling, but the lender believes they could stay current with a lower rate or smaller payment, they might agree to it because it is the lesser of two evils. They are making less on the loan, but it beats foreclosure. If somebody is making less income now, the bank may agree to lower the payments to help the homeowner stay current. Another way to lower the payment is to stretch out the note for 40 or 50 years. Many banks will do this in lieu of lowering the interest rate because then they can lower the payments to help the homeowner and still make the same interest. In a settlement with the State of Illinois, mortgage giant Countrywide had to re-cast all of its stated loans that their retail branches originated to do the new payments on full documentation, and give homeowners payments they could actually afford. There were people who got 2 or 3% over 40 or 50 years because of this.

But why can’t I get a loan modification?

So here is the hard pill to swallow: most borrowers who have been perfect on their pay history cannot get any help. “But I pay my mortgage on time, why won’t they help me? That doesn’t make any sense!” Oh, if I only had a nickel…

Banks, lenders, and investors (who buy mortgage paper) do it to make money. It’s a business. They don’t care about you, or your home, or your kids’ college fund. They care about the bottom line. I’m not bashing them; that’s why any business exists, be it insurance, car dealers, or any of the hundreds of retailers at the Woodfield Mall: to make money. UNICEF doesn’t do mortgages. Once you understand this, you’ll understand why you may or may not be able to get a loan mod. If the bank doesn’t see you as a risk for default, they won’t do a loan mod, plain and simple. If you make timely payments, and have been doing so, and are still living in the house, your odds of getting a loan modification are slim and none. (And slim just walked out the door.) Because, “I want a lower payment, and because I don’t want to be upside-down on my house,” are not compelling reasons for a lender to do a loan mod. I’m sorry to say it, but that is the harsh reality.

And loan mods will likely not be offered to somebody who has a lot of equity. If you owe $100,000 on a house that is worth $250,000, and you are having trouble with the payments or facing foreclosure, you are also unlikely to receive help. Why? Because if that house goes into foreclosure, the bank will get all of its money and then some. If that house goes to auction, it might fetch $135,000 or $150,000, more than enough to cover accrued interest and legal fees. Lenders and investors will take the route that is the most profitable or causes the least loss. Again, it’s a business, and they make business decisions. The president wants to stop foreclosures, the lenders just want to stop their losses.

Loan modifications often depend on your lender

And it matters matters a lot who has your loan. If yours was a Fannie Mae or Freddie Mac “conforming” loan, you are more likely to get a loan modification. This is because Fannie and Freddie are government-controlled; they are better able to absorb losses, and they are under pressure to help stem foreclosures. And if you have a HUD-backed FHA loan, your odds are even better. FHA rules state that a lender MUST try to work something out before foreclosure. Since the loan is insured by HUD, they can call the shots. Now, a FHA lender may not offer a modification up front, but if the borrower asks for it, they are obligated by law to try to come to some resolution before foreclosing. This certainly slants in favor of the homeowner, but most people aren’t aware of this, and just throw their hands up in defeat. And certain lenders, including Countrywide and Chase, have made headlines for their efforts to try to stem foreclosures.

What if your loan isn’t a Fannie Mae, Freddie Mac, or FHA loan? Well, unfortunately, your odds are much worse. If you have a “sub-prime,” “portfolio,” or “alt-A” loan, you will likely only get a modification if you fit one of the above described scenarios. Lenders and investors have taken huge losses on these types of loans, and if they aren’t at risk of taking further losses, it is unlikely you will be able to accomplish any kind of loan modification whatsoever.

Don’t kill the messenger, I’m just telling you like it is.

It looks bad for me getting a loan modification, but I want to try. What do I do?

This part won’t make me any friends. I’m sure you have probably heard of loan modification companies. Many of them are very good at what they do. But, they aren’t doing anything for you that you likely couldn’t get done yourself. As a loan officer, I get approached by loan modification companies all the time, but I can’t, in good conscience, charge somebody (who is already in financial trouble and doesn’t have much to spare) for something they can do themselves. Now, I want to forewarn you, it will be an uphill battle regardless of your situation. If you think it is worth it for somebody else to fight for you so you don’t have to worry about it, then a loan modification expert may be for you. When you call, you don’t want to talk to the customer service schmuck. He can’t do anything for you. You want to get to the loss mitigation department. It’s an entirely separate department from the general customer service. They should be able to give you a phone number and an address for them. Loss mitigation is the department that tries to minimize losses, and that’s who you want. The best advice I can tell you is to be the “squeaky wheel.” Call them and write them. And call again and write again. You may spend an awful lot of time on hold. You may wait days or weeks to have a call returned. It absolutely will not be easy. But, if you are talking to right department, and are persistent-call, write, fax, send smoke signals if you think it will help and you fall into one of the groups that should quality for a loan mod, you should eventually get it done.

Thoughts on loan modification companies? DON’T pay up front

I have a few final thoughts on loan modification companies. This is for the most part uncharted territory, and the rules and regulations around them are murky at best. Sometimes the law has to catch up with modern day reality. First and foremost, DON’T pay huge fees up front. I have read a press release from the Illinois Attorney General’s office saying that it was illegal for loan modification companies to charge anything up front, and that they can only get paid once the mission is accomplished. I don’t know where the legal battles have ended up, but it seems fair to only charge people that you accomplish something for, or to keep the up front fees modest. I have heard of companies that charge a smaller fee up front, like $300, and a larger one once it is worked out. I have heard of companies charging $3500 or more for their services. The going rate seems to be around one mortgage payment, or maybe one and a half. Like almost all things in life, these fees are negotiable. The people who do loan mods are making commission, I promise you. Not that commission is a bad thing; loan officers and real estate agents typically get paid commission also, but you should know up front what you are dealing with. I heard one story where a homeowner was asked to pay a few thousand up front, but it would be refunded if they couldn’t complete the loan modification for him. What?! Why would you take anything at all up front then? That makes no sense to me.

Bottom line is: do your homework. Just like if you were going to buy a car or get a mortgage, you would do some digging, ask some questions, get some advice, and maybe shop around some. If you are going to hire a loan modification guy, do the same thing.

I wish the very best to anybody reading this in these trying times.

We’d like to thank spaceodissey for kindly sharing today’s photo via the Creative Commons License.

How much do you qualify for?

203k's are about fixer-uppers

Qualifying for a 203k loan is very similar to qualifying for other types of loans. To give more exact numbers, I generally like to spend some time on the phone or in person with the borrower, and take a look at their credit, income, and assets. A rough guide is to buy a home worth 2.5-3.5 times what you make combined in a year. Some people recommend, “buying as much house as you can qualify for, because it’s the biggest investment you’ll likely ever make.” I don’t agree with that. I believe that you should have a payment you are comfortable with, and one that gives you enough room to save a bit, and allow for unexpected expenses. For example, a couple making $80,000 per year should be looking in the $250-300k range, tops.

There are mortgage calculators available to tell you how much the payment would be at a given interest rate and loan amount, but real estate taxes and insurance also come into play. FHA loans require escrows for taxes and insurance. Take 1/12th of the annual taxes and add that to your payment and 1/12 of the annual insurance also. Rough numbers would be somewhere around $75-100 per $10,000 borrowed, including taxes and insurance. So, depending on the county, etc, a $250,000 house would be in the $2000-2500/mo range, roughly.

The FHA guidelines are 42% debt-to-income ratio, but depending on credit scores and reserves, you might be able to get away with 50%. For example, let’s say you make $6000 per month, and you have $600 per month in car payments, and $400 a month in student loans and credit cards. $6000/2=$3000 mo (50% DTI) – $1000 (other debts) = $2000/mo maximum for total PITI (principle, interest, taxes, and ins), which means the maximum loan would be somewhere around $200,000 to $225,000 or so. The minimum down payment for a FHA loan is 3.5% of the purchase price (15% for 3-4 units). You also want to have at least 3 to 6 months PITI reserves after the down payment.

What is the process to get a 203k loan?

FHA loans are only for owner-occupied properties, not investments. The first part of the process is to get pre-qualified. For clients I take a look at income, credit, etc, and make sure you can get a loan. We’d write up a pre-approval letter that the buyer and/or real estate agent puts in with the offer. You reach an agreement with the seller, get estimates on any needed repairs, then process and close the loan. The seller gets the money for the purchase price, and the money for the repairs goes into an escrow account to be disbursed by a HUD counselor as repairs are finished. And, of course, there are inspections along the way.

Very important: There are two types of 203k loans: regular 203k, and a streamline 203k.

• If you can keep the total to less than $35,000 the hardest part is getting a “spot approval” for the contractor.
• A “full blown” 203k is much harder to get the contractor approved, and everything gets reviewed much more thoroughly, and just makes your life a little tougher in general. You can also set some of the money aside to be put toward your PITI payments until the work is finished, so that you aren’t paying rent and a mortgage.

What is the interest rate on FHA vs. 203k vs. conventional?

Lakeview graystones in Chicago...yep, they qualify for 203k loans.

Regular FHA rates are pretty close to conventional rates. Right now they are around 5% or so, with no points. I want to put an asterisk (*) by this, because obviously we haven’t locked a rate, and lower credit scores (under 660 on FHA, and 700 on conventional) can be slightly higher. Also smaller loan amounts (under $150,000 or so) are usually a little higher.

The biggest difference is the mortgage insurance. All FHA loans have mortgage insurance (MI). If you are putting down 20% or more, and have very good credit scores, a conventional loan probably makes more sense. For higher loan to values (LTV), or slightly lower scores, FHA is probably the way to go. But, 203k rates are considerably higher. Right now, it’s probably about 6% with 1.5-2.0 points (a point is one percent of the loan amount), so take that into consideration for your down payment, along with underwriting fees, title fees, FHA counselor fee, and transfer tax if you are buying in Chicago.

FHA does allow for a seller concession of up to 6% of the purchase price to go toward your closing costs. It may be more advantageous for a buyer to negotiate a little more back for closing costs rather than just lowering the price as much as possible. On the plus side, once the work is completed and a few mortgage payments have been made, the homeowner can do a FHA streamline refinance and take the rate down to the current market FHA rate. Also, single family residences (SFR) are much easier to get done through an FHA loan than condos or townhomes. Associations can be deal killers to FHA loans.

We’d like to thank rioncm for so kindly sharing today’s photo via the Creative Commons License.

Almost anybody who has ever purchased a home, or refinanced a mortgage has probably heard of a ?rate lock? or ?locking the rate.? However, what does it mean to you, the borrower, and how can it affect your financing? Well, let?s do a bit of the back-story first.

This Might Not Make Me Any Friends But…The Higher the Rate You Pay, the More the Broker Makes

Locked In or Out?

Most mortgage brokers and mortgage bankers get paid on something called yield spread premium (YSP), or service release premium (SRP). These terms are essentially interchangeable, and they represent the same thing, only differing in that if a loan is brokered or banked. It?s same end result, only differing in how the loan is delivered to the investor. For more on how rates are determined, see my article called What Causes Mortgage Rates to Move.

So here?s the juicy part: the higher the rate you get, the more the broker makes on it! This is something many would like you not to know. For example, on a 30-day lock at 5.0%, I might get a ?rebate? of 1.0% of the loan amount. For that same borrower, I might get YSP of 2.0% at 5.5%. Now, this is not a ?linear? relationship. Because of the way the markets work, there are usually a couple of ?hiccup? lines, or ?sweet spots? where pricing is better or worse. And, more importantly, the SRP or YSP can vary greatly from one borrower to the next, based on risk factors such as loan-to-value (LTV) or credit score. For a thorough explanation, see my article called Why You Might Not be Able to Get a 5% Mortgage. A person with a 745 score at 60% LTV would be able to get a better rate than somebody with a 700 score at 80% LTV. And the loan amounts factor in, too. There are differing guidelines for different lenders, but the rate on a $80,000 loan would be higher than for a $150,000 loan, and a loan over $250,000 or $300,000 would likely get an even better rate. And condos are worse?a lot worse. I like to be transparent to my borrowers, and I typically make around 1-1.5% on most of my loans.

What If the Closing Is Delayed?

So, if we take our above example of 5.0% on a 30-day lock paying the mortgage broker 1%, it might pay a little more on a 15-day lock, maybe 1.25%. It might be a little less on a 45-day lock, maybe around .75%, or .5% on a 60-day lock. You probably could only do a 15-day lock on a loan that was already submitted and approved, but you might have to do a 45 or 60 day lock for a purchase that isn?t closing for 30-45 days. And with the way underwriting has been going these days; you generally need to lock for a longer period, as loans aren?t going though very fast. And you have to pay to extend locks. For instance, let?s say the loan took longer to process, or a closing got pushed back. If we locked it for 30 days, we?d probably have to pay .25% to get a 5 or 10 day extension. Many places have a minimum of 1% per loan, so in this case we might have to raise the rate, or add a quarter point (.25% of the loan amount) to get there. This is what we are talking about when we say ?blowing a lock??the lock has past its expiration date, and the loan has not funded, or extending a lock so you don?t blow it.

What If Rates Get Better Before Closing?

You probably know that if rates go up, but you have your loan locked, you are essentially ?protected?, and that you will get a lower rate than anybody who applies after you did, assuming your loan actually clears underwriting and closes. If something unexpected pops up, and the lender asks for conditions you can?t provide, we might have to take the loan to a different lender, and then the rate would be higher, in accordance with the market.

But let?s say you loan was locked at 5.5% (paying the broker 1%), and rates go down after you lock?for example the current market is 5.0% paying the broker 1%. You should be able to get 5%, right? Well, not necessarily? Here we may have a couple options, none of them very good for the mortgage broker. One option, depending on the lender, might be to ?float down? the rate. We keep the loan with the same lender, and adjust the rate. But they don?t just give it to you. If we were submitting a new loan at 5.0%, we could get 1%, but we already locked it at 5.5% paying 1%. If we float down, we have to pay for it, just like an extension. In this scenario, they might give us 5.0% paying .625% because we have to pay .375% for the float down. So, if the broker has to get 1%, you?d have to pay .375% in points. The other option, which isn?t always an option, is to cancel the loan and take it to another lender. If it?s a retail operation, this might not be an option, or if there were any unusual circumstances that might prevent your loan from getting approved at a new lender, moving it may not make sense.

So…What Is a Rate Lock? It’s Kind of a Big Deal.

Locking a loan basically means that the bank or lender has earmarked a given amount of money at a given rate to be delivered. They have earmarked this with investors or with Wall Street. The interest rate and YSP are determined by Wall Street, and depending on where the markets are, they will buy a loan at a given price when it?s locked.

And it?s kind of a big deal. A lender would rather have a broker send in a file, and they spend the time and energy of the underwriters, processors, appraisal reviewers, etc. and not have the loan close than to have a lock that doesn?t get delivered. Lenders sometimes cut off brokers from locking, or from doing business with them altogether, if they lock too many loans that don?t close. They likely wouldn?t cut a broker off for just sending them loans that end up not closing. This might be one of the reasons why we couldn?t just pull the loan and go elsewhere if rates go down, as I mentioned above.

That is why it is the mortgage broker or banker?s job to explain to the customer what a lock is, and what it means to lock. A good mortgage professional understands the market and how it moves, and should be able to make good recommendations to his or her clients on whether to lock or float (not lock) a loan, but the decision should be borrower?s. And what it comes down to is essentially a gamble; you agree to a rate, and lock it, but if the market improves, you can?t necessarily take advantage of it. If you thought you had a great rate two weeks ago, it should still hold true today. Sure, hindsight is always 20/20, but if you are taking your rate from 6.5% down to 5.25%, then that is beneficial, and you shouldn?t be kicking yourself because your friend or neighbor got 5.0%.

Essentially, You Have Agreed to a Price

An analogy might be if you bought a new car for $25,000, and three months later the same car is on sale for $22,000. You can?t walk in and demand $3,000, or trade your now 3-month old car in for the new one. Markets change, supply and demand changes, and the price you pay for anything from mortgages to milk can change. All you can do is make what is a good decision at the time.

We would like to thank Rohit Gowaikar for sharing today’s photo via the Creative Commons License.

There are two things I?d like to cover: Why should I refinance? And, what is the process for refinancing? I think there are some misconceptions and confusion about these, and I?d like to help clear these up, or maybe just give you a better understanding.

Why should I refinance?

Hmmm...a bit much.

The obvious answer is that it will save you money. But it?s more than just your monthly payment going down. You might say, ?But Brad, I have no problem making my payments right now, why should I bother?? If I know you well enough, I might reply ?Hey, if a couple hundred dollars a month really doesn?t matter to you, just write out a check to me for $200 the first of every month, and I?ll come by and pick it up.? That sometimes gets me a laugh. So, let?s take an example. Let?s say you have a $250,000 mortgage, and your current interest rate is 6.5%. Late summer 2008, 6.5% wasn?t too bad. And for those of you too young to remember, in the late 90s, 8% was doing good, and when Carter was in office, mortgage rates were in the teens. So the P&I (principle and interest-payment for the mortgage only, not including taxes and insurance) would be $1,580 per month in this scenario. Now, let?s say we do 5% on this particular loan. For now, I am going to leave out closing costs and other expenses?we?ll get to those below. So $250,000 at 5% is $1,342 a month. That?s over $200 a month, and nothing to sneeze at.

But, let?s elaborate on this a little further. It?s not just a couple hundred of bucks a month. You are also chipping away at the principle faster. How much interest would it be on $250,000 at 6.5%? $250,000 x .065 = $16,250 in interest per year. Now, take $250,000 x .05. That?s only $12,500 in interest per year. If you take 12 payments at the higher rate ($1,580 x 12), that?s $18,960 per year, and at the lower rate ($1,342 x 12) it?s $16,104 per year. So, you?ve save almost $3,000 a year. But, if you subtract the interest from the payments, you can see how much more the principle would go down. At 6.5%, you?d take $18,960 (total payments) – $16,250 (interest paid) = $2,710 toward principle. Now take the 5% loan – $16,104 ? $12,500 = $3,604 applied toward principle. See that? Not only did you save a couple hundred dollars a month, but you paid 30% more toward the principle than you would?ve if you’d kept your old loan. And long term? 360 payments (30 years) times $1580 per month comes out to $568,800 (!) over the life of the loan. $1342 x 360 = $483,120. Not worth it? OK, I?ll stop by your place in 30 years and pick up my check for $85,000.

What else can refinancing do for me?

All right, so you are 40-something, and don?t want to start over with a new 30-year loan. ?Brad, I?ve already got 5 years into my current mortgage. I?d hate to go backwards that much, and I don?t have a problem making my payments where they are at.? Sure, that makes sense. Let?s do a 20 year mortgage. And, let?s make the rate 4.875%, since 15 or 20 year loans usually have a slightly lower rate. $250,000 at 4.875% on a 20-year note is $1,632 per month. So, now, you?ve kept the payments close to the same, but shaved five years off your term. And you?d save a whopping $177,000 over the life of the loan ($391,600 vs. $568,800). Don?t even get me started on what your money could do for you if you took the difference and invested it. And you can do the same thing with a 30-year mortgage. Let?s say you like the lifetime savings, but the payment scares you a bit. That?s $300 a month, you know. If you send in just one extra payment per year, you pay off your loan in about 24 years. So in our above example, send in $1,400 each year from your tax return, or send in $1,476 per month ($1,342+$134), which is still less than the $1,580 per month you were spending, and you save huge over the life of the loan. 24 years times 12 months is 288 months. At $1,476 per month, that?s $425,000 over the life of the loan, which saves you almost $60,000.

So why is my loan amount going up so much?

OK, Brad, you?ve convinced me that it?s worth it to refinance; what comes next? Let?s start off with the nuts and bolts.

Take Interest Into Account

Pay Less Green For Your House?

Your mortgage payoff is always going to be higher than your principle balance. Mortgage interest accrues daily, and is paid in arrears. When you made your April payment, it paid all of the interest that accrued from March 1- March 31, and your March 1 payment paid the interest from February 1 ? February 28, and so on. So, let?s say you started the refinancing process now, and plan on closing within the first half of May. If your mortgage statement says $249, 345, how much will your payoff be? So you?ve made the April payment, but since we?re closing early May, you can skip your May payment. Let?s say we close May 10, and the loan funds on May 15 (3 day rescission for refinances). We have daily interest then that will accrue from April 1 through May 15, a full month and a half. $250,000 (your original loan amount) x .065 (6.5% interest) = $18,960 of interest in a year, divide by 365 (sometimes 360 is used for this), and we have $51.95 per diem interest. Multiply that by 45 days, and we have $2,337.50 interest to be accounted for. $249,345 + $2,337.50 = a payoff of $251,682, and that?s if there is no escrow shortage or accrued late fees. Plus the title company usually pads the payoff by a couple of days, which you?d get refunded in a couple weeks.

Closing Costs & Fees Happen

Now, we have to add in closing costs. These can vary widely, and depending on the situation and the rate, there may be points involved. But not counting points, you can figure a couple thousand dollar for closing costs. There is always going to be title fees, processing and/or underwriting, maybe some miscellaneous ?junk? fees, county recording fees, etc. Let?s not forget about the per diem interest on the new loan. If we have 15 days of interest (the loan is funding the 15th of May, and your first payment isn?t due until July 1, and interest is paid in arrears), and round to $50 a day, that?s another $750. And you want (or are required to have) escrows for the tax and insurance? Let?s say your taxes are $6,000 per year. That?s $500 per month. Let?s say your insurance is $900 a year, or $75 per month. In Cook County, taxes are due in March and October. (Most of the surrounding counties are June and September.) So, our loan funds in May, and your first payment is July. You make three payments (July, August, September) before your taxes are due. $3,000 is due, but you?ve only paid in $1,500. That means we need to set aside at least $1500 for ?reserves? into the escrow account. And almost always, they add another 2 months ?pad? in case the taxes go up, which does happen inevitably. So let?s make that $4,000 for tax reserves into escrow.

Don’t Forget Homeowner’s Insurance

Let?s say your homeowner?s insurance is also due October 1. Using the same formula as we did for taxes, $900 will be due, but you?ve only paid in $225 with your three payments. So that?s $675 needed in reserves, plus 2 months? pad, for $825 into escrow reserves for insurance. I?d like to mention here that you will likely be getting a refund from your current mortgage company for the monies in your current escrow, if you have one, and they would be close to what we are setting aside in reserves. So if you want to keep your new loan amount down, you could bring in $4800, and you?d be getting a check back for around that amount in 2 to 4 weeks after your current mortgage is paid off.

Bring It All Together

So, the question will pop into your mind ?Why is my mortgage going from $250k up to $260,000???? And the answer is this (rounding for easy math): $252,000 payoff to the current mortgage, plus $2,000 for closing costs, plus $1,000 for per diem interest, plus $5,000 into the escrow account, brings the loan to about $260k. And if it?s an FHA loan, you have 1.5% up-front Mortgage Insurance Premium (MIP), which goes to HUD. In this case that would be $3,900, bringing your loan up to almost $264,000. So that?s how your loan amount can go up ten grand with only a couple thousand in closing costs. But, you have almost as much in increased short term cash flow. Skip two payments (May and June), and that?s over $4k here (including taxes an insurance), and you?re getting almost $5k back from your old escrows. If you want to keep your loan amount down, you could come to the closing with that $9k, and you would not get the benefit of increased short term cash flow, but you wouldn?t have your loan amount going up so much, if that?s a concern. It?s your house, and your mortgage. You decide which way to go.

Oh, Those Underwriters?

Now, obviously I don?t want to scare anybody off from purchasing a home or refinancing; that?s how I make my living. But, I do want to set the right expectations. These days, investors (like Wall St., who buy the loans in bulk from the lenders), are a little skittish about investing in mortgages. So, every lender, every underwriter, and every appraisal reviewer out there wants to make sure they have done their due diligence. They want to make certain that nothing snuck past them on their watch. So it is possible, dare I say probable, that we will be required to produce additional documentation or support above and beyond what would ?normally? be required. Maybe they ask for tax returns or a written verification of employment in addition to 2 pay stubs and 2 W-2s. Maybe they ask for additional sales on the appraisal. Maybe they ask for something that doesn?t seem to make sense to you or me. But, there is likely some sort of reasoning behind it. And the bottom line is that they control the purse strings, and they can ask for whatever they want. They are trying to minimize their risk, and you and I simply have to deal with it. The loan might take a little longer to close. You might have to send a couple extra faxes. But, as long as you know this up front, it?s really not the end of the world. It might be a little more hassle, or a little more time, but 99% of the time, if I tell you I can get your loan done, then it gets done.

We’d like to thank Colin and WoodleyWonderWorks for today’s photo that he so kindly shared via the Creative Common’s License.

I hear people say all the time, ?Oh, a reverse mortgage? I’ve heard those are bad,? or some variation. I?d like to tell you why they can be a lifesaver for the right person.

First, Who Is Not Right for a Reverse Mortgage

For instance, my parents are debt free, and pay for everything in cash. They aren?t rich, mind you?my dad was a union plumber, and my mom stayed at home with us, and they have a modest house which they have lived in my whole life and which has only had one mortgage on it that was never refinanced?but they were very good with their money. If there was something they wanted to buy, they saved up until they had enough to buy it. So they have two cars free and clear, and a free and clear title to their house. They now subside on a monthly social security check and a plumber?s pension, which is more than enough for their monthly bills and a couple of dinners out a month. They are not the kind of people who would benefit from a reverse mortgage. I wouldn?t even bring it up to them.

Description of Someone Who Could Use a Reverse Mortgage

Then there?s my uncle. He buys a new truck every few years and finances it. He refinanced his mortgage a couple of times in the last several years to take some cash out for home improvements and to lower his interest rate. I don?t know his exact age, but he?s a little bit younger than my father, and is going to be coming up on retirement age soon. I don?t know exact figures, but I can give you a ballpark of what his income will be upon retirement. Probably somewhere in the neighborhood of $1000 a month for social security, and $2000 a month for pension, give or take. So, he might have a mortgage payment of $1200 per month, and a car payment of $600 per month for the SUV. And if he?s been making $60,000 per year, he has been making his payments no problem. So, he retires, and figures he?ll have enough coming in that he shouldn?t have any problems. But all of the little things add up-gas bill, electric bill, cable bill, water bill, phone bill, cellular bill, sewer and waste bill, etc. And let?s not forget about the normal maintenance items that we have: car tires, oil changes, license plate renewals once a year, repairs and maintenance around the house (water heater, furnace, air conditioner, windows, paint, etc), a new lawn mower or snow blower every so often. You get the idea. And before you know it, he has almost nothing left in savings, and is scraping by and juggling monthly bills.

If you?ve never really been broke and struggling, you probably don?t appreciate what a terrible place it really is to be in. And there are probably people you know: friends, relatives, people you see at church or at your child?s school who are in a very bad place financially, but you?d never know it. They might be embarrassed or ashamed, or be private people, and nobody would ever know what they are going through. And it?s a pretty easy place to slip into, especially for seniors living on a fixed income who can?t just go out and get a job.

Many Seniors Can Use Some Help

Retirement can be a long journey

I grew up in Northeastern Wisconsin, a little south of Green Bay. Our neighborhood?our whole town in fact?was very middle class. When I was a kid, I had a paper route. It was $3.50 a week, or $14.00 month, for the daily paper, including Sundays. (Yes, it was over 20 years ago, and I am showing my age.) I had a lot of older couples on my route. I had one lady pay me every week with all change-and no quarters. She?d give me a little baggy with pennies, nickels, and dimes, with exactly $3.50 in it every week. I had a few customers that I could only collect after the 3rd or 5th of every month?after their check came in. Looking back, I didn?t realize at the time that many of them were fairly strapped financially.

Now, let?s fast forward, back to today. Let?s take a senior living solely on social security (which probably won?t be around by the time I retire, but that?s a whole other article entirely), and a modest pension. Over the last several months, nearly all investments have taken a serious beating, so their retirement checks are likely less than what they were getting. And if somebody has some serious medical problems, it can throw the seniors into a tailspin. There can be medications or rehab that isn?t entirely covered by insurance. Or if one of the partners has to go into a nursing home, it can be devastating. Now you have somebody who had a modest living, and has been thrown into a desperate situation.

If that person has a home worth $150,000 with a mortgage of $50,000 on it, they probably have payments somewhere around $500 a month. They?ve lived in that house forever, and really don?t want to move. They can do a reverse mortgage, get $50,000 cash, and have their mortgage payment gone forever. And the title to the house stays with them, and they can?t be foreclosed on. Now, you just replenished their savings, enabled them to be in control of their monthly expenses, and helped enormously with their security and peace of mind.

What’s the Other Side of the Coin?

This sounds too good to be true? What?s the downside, you ask? Of course, there is no free lunch?ever. Yes, it is a mortgage, it is a loan, and yes, there is interest on it. It is a negatively amortizing loan, which means the balance goes up over time because no payments are being made. But, if it ever ended up being upside down, the homeowner is not responsible for that amount. They can sell the house, and HUD eats the difference. Reverse mortgages are fully government insured, backed by HUD and FHA, and have many protections in place for the seniors.

Looking at Some Myths About Reverse Mortgages

• MYTH: They can take my house away from me.
• FACT: As long as one of the seniors lives in the house, the loan stays in place, and they retain title indefinitely. They can leave the property to the heirs.

• MYTH: I can end up owing more than the house is worth.
• FACT: If the balance increases, or home values go down, and the balance is higher than the current value, the homeowner will only owe what the house is worth, or what they can sell it for. If the borrower(s) should pass, the heirs have a full year to sell the house or refinance the loan into their name.

• MYTH: I will have to pay all that money back.
• FACT: The loan is only secured by the property, and as long as one of the borrowers is living there, nothing can change, even if one passes, or is moved to a care facility.

• MYTH: I will have to pay taxes on that money.
• FACT: The money is taken from the equity in the house, and does not count as income, and will not be taxed.

What Does It Take to Qualify for a Reverse Mortgage

So many of the things you may have suspected or heard are likely untrue. Ok, so reverse mortgages aren?t all bad; who qualifies for them? The qualifications are fairly simple:

• There is no credit requirement. Somebody could have poor credit, or the house could even be going into foreclosure, and they can get a reverse mortgage.
• There are no income requirements. Since the loan never has to be repaid, there are no income requirements to qualify. The only requirements are age and equity.
• The homeowners have to be at least 62 years old. If one is 62 or older, and the spouse is not yet 62, it probably makes sense to wait until both are 62, so both can be put on the loan, and both are covered.
• Generally, the maximum loan to value (LTV) is around 60%, so there has to be a good amount of equity. They can bring money to the closing to get down the necessary amount if they don?t have enough equity in the house.
• Reverse mortgages can be used to purchase a home. Instead of buying a $300,000 home, putting down $150,000, and making mortgage payments on $150,000, they could do a $150,000 reverse mortgage and never have to make a mortgage payment.

I?d personally never try to give somebody a reverse mortgage if I didn?t believe 100% that they were the right kind of candidates for it. And the government has put protections into place for the seniors, including required counseling before closing, to help guard them. Feel free to contact me with any questions, concerns, or comments.

The Chicago 77 would like to thank la4ko for today’s photo which he shared via the Creative Commons License.

So far, people have not been able to get the pump running.

The Stimulus Bill Has Passed. Are You Feeling Stimulated?

I want to preface this by saying this is not a political commentary. I don?t like debating politics, because there is never any resolution. I can talk until I?m blue in the face, and I?ll never change somebody?s political views whose don?t match mine. I honestly believe that most politicians are actually well-intentioned. Sure, they play the game, and have some of their own agenda, but I do believe that most  elected officials, at all levels of government, are doing what they genuinely believe is best for the people, whether we agree with them personally or not. I want to talk real estate and finance.

At the very heart of our recession is the credit crunch. Banks and lenders at all levels are tightening up, making money less available. And at the heart of the credit crunch is the mortgage and housing mess. I think most of us can agree on that. For an insider?s view on that, read my article, Who is to Blame?

So far, what has happened with the stimulus bill (both the first and second versions) is this: the government has printed more money, and handed it to the top of the financial food chain: the big banks, and, as you know, the American auto industry. In theory, they give billions to the banks, who then have increased capital and liquidity, and then they loosen up just a bit to make money more available to Johnny Public.

No Loose Purse Strings Yet

However, being someone who deals with dozens of banks and lenders daily, I can emphatically state that the banks have not been loosening up the purse strings. They take the money, and extend credit to only the most-well qualified, who likely aren?t feeling the brunt of the recession anyhow.  The federally-controlled mortgage giants, Fannie Mae and Freddie Mac, as well as the Department of Housing and Urban Development (HUD)?the entity that backs Federal Housing Authority (FHA) loans?have themselves tightened up underwriting guidelines significantly, making mortgage money harder to get and mortgage loans harder to qualify for, which seems to contradict the federal government?s goal of loosening up credit markets and making money more available.

Who among us that owns a home didn?t refinance and take cash out sometime in the last 5 or 7 years? I can tell you from a mortgage guy?s perspective, it seemed everybody wanted in. It went something like this ?OK, I can lower your interest rate, and save you $200 a month on your mortgage, or I can give you $10,000 cash, and still lower your mortgage payment $140 a month.? The answer was almost always, “Yes,” to the cash. Some took out $20,000, $30,000, or more. Skyrocketing property values and plummeting interest rates made it a no-brainer. In areas that really skyrocketed (and subsequently have fallen the worst), like Boston, Miami, Las Vegas, Phoenix, or southern California, it was even easier than it was here in Chicago. But now, even people with modest goals, like just trying to lower their interest rate and mortgage payment, or get into a fixed from an adjustable, are having a hard time getting the financing they need. See my article, Why you Might not be able to get a 5% Mortgage for more detail on why. At a time when we all need to save as much money as possible, it is becoming harder to do so.

Low Mortgage Rates Are Only Half the Story

Now, there is one really bright spot. Again, if you?ve read, What Causes Mortgage Rates to Move? you know that investors buying mortgage bonds causes the price or value of mortgage bonds increase, according to supply and demand. A couple of times in the past few months, the Fed has bought, or pledged to buy, billions of dollars worth of mortgage bonds. Wall Street investors respond in kind, buying up mortgage bonds to catch them on the upswing. And when mortgage bonds go up, mortgage rates go down. We had record-low?or near record-low?rates at the end of November 2008, and mid-January 2009. On March 18, we saw another sharp jump in mortgage bonds, which really produced some low mortgage rates on Thursday the 19th and/or Friday the 20th. But, low rates are just half the picture. Extremely well-qualified borrowers will be able to take advantage of these low rates, but I?d really like to see some letting-out of the purse strings to allow more borrowers to refinance or purchase homes.

Let?s all hope for the best from our current lawmakers and regulatory agencies, because we surely have a while to go before we are in the clear.

Risk-Based Pricing Is Part of the Equation

People Standing in a Line Means There is Demand...and Prices Go Up

I?m not talking about risk-based pricing. (See my article on Why You Might Not Be Able To Get a 5% Mortgage for more information on that.) Risk based pricing?which is normal on all loans now, including conforming and FHA?refers to the increases in pricing you take depending on the loan-to-value (LTV) of the home or your credit scores. If your home is worth $200,000, the rate you get on a $180,000 loan (90% LTV) loan wouldn?t be as good as the rate you?d get on a $160,000 (80% LTV), and the rate on a $120,000 (60% LTV) would be even better. Additionally, the pricing isn?t as good for somebody with a 660 credit score versus a 720 score. There are now actually differences at 620, 660, 680, 700, 720, and 740.

Rather than risk-based pricing, what I would like to discuss in this post is if you take the same borrower, and the same house, why can he get 5.375% one week, and 5.75% the next? Why do these rates change? It simply boils down to Wall Street, and what investors are willing to pay for mortgage paper. This is one of the major reasons we will not see a 4.5% rate, like some officials are talking about. (See my article Why 4.5% Mortgages More Myth Than Reality? for more details.)

Mortgage Rates Are Strongly Connected to the Stock Market

Most of you probably have a good idea about how stocks work. You buy shares of a company at a given price, and hopefully the company is turning a profit and growing, and the stocks go up in value, at which point you can sell them and make a profit. But, these days, the markets here and abroad are generally decreasing in value…not increasing. Sure, there are some companies individually that aren?t hurting as much as others, or there are the occasional good days in the market, but anybody who has an IRA, 401k, or stock options has lost a lot of money in their investments recently.

What else can you do with your money? Sure, you have the low-risk options like savings accounts, certificates of deposit (CDs), or you can try your luck on futures. However,  mortgages bonds (a bond secured by a mortgage on a property) are a good fixed investment. Generally the yields on mortgage bonds are better than a savings account or CD, but you can?t make as much as you could on a good run of a stock.  In the late 1990s, when the stock market was doing nothing but flying upward, everybody was buying stocks, and investors were not buying lower-return options, like mortgage bonds, because they were all making double-digit returns on their stocks. But now, when all stocks seem to be slipping downward, making even a modest return, like you would on mortgage bonds, isn?t a bad investment.

Supply and Demand Drive Interest Rates

So mortgage bonds, like stocks, and just about everything else in a free-market society, work on supply and demand. When demand goes up, so do prices. And when prices on mortgage bonds go up, rates go down. The first big drop in rates we?ve had recently came just before Thanksgiving 2008. The federal government said they were going to buy billions of dollars of mortgage bonds. So, investors, reacting to this news, started buying up mortgage bonds, and, all of a sudden?BAM!?mortgage rates went way down. The Dow, the NASDAQ, and the S&P 500 continued to slide downward, along with all of our retirement funds, and investors tried to move toward a safer return, like mortgage bonds.

Right now, I believe the only thing preventing bonds from going even higher, and rates even lower, is that investors are still generally skittish regarding anything related to mortgages because of all of the recent foreclosures. That, coupled with bank and lender over-cautiousness, will keep rates form dipping ridiculously low.  We did see a nice little drop in rates Thursday the 5th and Friday the 6th, but not to the lows seen in January.

Everybody knows there is a huge housing crisis. Foreclosure rates are higher than ever, and property values are plummeting as a result. There?s plenty of blame to go around, from Wall Street, to the banks and lenders, to the individual loan officers, to the home buyers and homeowners.

How Did It Start?

Lots of fingers...but who is the plant?

Wall Street investors decided to buy the mortgage paper, including subprime and exotic products like the option arm, believing they are a sound investment. Banks and lenders made the loans to borrowers and then sold them to Wall Street. Mortgage brokers and loan officers offered the loans to home buyers for purchases and homeowners for refinances, believing they are providing a valuable service to the borrower.  Borrowers take the loans offered to them, believing it is the right financial decision, and planning on keeping up on the payments.

Is Wall Street to blame for enticing banks and lenders to make the loans so they could buy them as investments? Maybe. Are the banks and lenders to blame for enticing mortgage brokers and loan officers to make the loans? Maybe. Are the mortgage brokers and loan officers to blame for offering the products, and making a profit by doing so? Maybe. Are the borrowers to blame for taking a loan that maybe they didn?t understand, or really couldn?t afford? Maybe.

Was The Problem Mortgage Brokers?

I say it’s supply and demand. Like Chris Rock said, you don’t have to sell drugs. (?C?mon and try it, this is some goooood crack?).  And from a mortgage guy’s perspective, most, if not all, mortgage brokers thought we were helping people by doing 100% financing, or giving them a 2 or 3 year adjustable rate mortgage (ARM) on subprime products. Somebody might be in a jam, and it was maybe a band aid, but we usually thought it was a good move nonetheless.

The one product I never liked and steered people away from was the option ARM. That was a very dangerous product right from the start, but they were easy to sell, and brokers made a lot on them. I never liked them. But every person I did 100% financing or an ARM for, I could look in the eye and tell them it was a good deal. Sure, it’s not charity work, I get paid for what I do, but there was always benefit to the borrower, be it coming up with less out of pocket for a purchase, getting extra cash for home improvements or debt consolidation, or saving money and lowering their interest rate.

Did Buyers Go Beyond Their Limits?

NOBODY ever envisioned the type of meltdown or plummeting property values that we have seen. Sure, I knew values can’t skyrocket indefinitely, but I thought it would be more of a gradual stoppage, or just kind of level off. I can’t speak for all mortgage people, but I always tried to do right by the borrower. I had people approach me that wanted to buy way too much house. Say, for instance, they make $70k a year combined, and they were looking at a $350,000 or $400,000 house. I’d tell them, “sure I can get you a loan because you’ve got great credit on a stated income or no income verification program, but you’d honestly be in over your head. I really think you need to scale back a bit.” Probably more often than not they’d just go somewhere else to get the loan. In that instance, I believe the blame lies squarely on the borrower. Not all of the time, it wasn’t, but that scenario happened to me fairly often. In any field, there will be bad seeds. There are bad doctors, bad lawyers, bad car salesmen, and bad mortgage brokers and loan officers. But everybody was a cog in the machine. Real estate agents sold the homes and made a commission. Loan officers and mortgage brokers made the loans and made a commission. Banks and lenders sold the paper to investors and made money. And some borrowers got loans they might not get today, and maybe got the house they really wanted, or got the extra cash they wanted, or got the lower payment they needed.

Where do we go from here?

Well, there has been a 180-degree paradigm shift in mortgage lending to the extreme conservative. Yes, we have to learn from our mistakes. No, the aggressive lending that was available will never be available again. But, I believe there has to be some happy middle in between. It will probably take a long, long time for things to correct themselves. Foreclosures have to ebb and property values have to eventually come up. Investors have to become a little less skittish with mortgage lending, and allow guidelines to loosen up some.  Everybody, from Wall Street, to the loan officer, to the end borrower, has to be a little smarter, and also has to shoulder some of the blame. Mortgage brokers and loan officers have been demonized, and even compared to drug dealers.  I feel that we were simply offering a product that was available, the same way a convenience store offers soda and chewing gum.

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There seems to be a lot of misunderstanding and many misconceptions around what mortgage insurance (MI for short) actually does. Mortgage insurance is typically required on mortgage loans where the amount borrowed is 80% or more of the appraised value. The other distinguishing characteristic of mortgage insurance is it can be expensive.

Mortgage Insurance Is for Lenders, Not Borrowers

I a friend of mine asked me, ?Where are all the MI companies in all this mess? Shouldn?t they be helping stem some of these foreclosures??  Well, MI is actually to cover the lender’s butt, not the borrowers. Let’s say somebody buys a house for $200,000, puts $10,000 down, and finances $190,000. Let’s say they live in the home for a year, and then start running into trouble. Over the year, they got the principle balance down to only $189,000 (yes, your first couple years of mortgage payments are mostly interest). At first they’re slow with their payments and eventually they don’t make payments, go into foreclosure, and 9 or 12 months later, finally have to leave the house.

A year’s worth of interest, which was not paid when the mortgage went unpaid, at 6.25% on this loan would be approximately $12,000. This means the total to pay off the debt would be $201,000. (It would actually be higher because of court costs and attorney fees.) Foreclosed houses typically get auctioned off for around 50-70% of the the true value?even less if the home is in bad condition?which means the lender just lost $60,000 to $100,000.

This loss is what the mortgage insurance covers. It?s an insurance policy to cover lender’s losses that must be paid for by the borrower. That?s right, the homeowner pays, and the bank benefits. Hardly seems fair, right? Well, I don?t make the rules; I just play within them. But, to be fair to the banks, they still lose tens of thousands on a foreclosure, even with MI, because the MI typically only covers 25-35%. Also, as you can see from the above scenario, the losses can be much greater than that.  And, the above scenario has been happening, as you probably already know, way too often. That’s why, along from lenders, the MI companies have been tightening up guidelines too.

Mortgage Insurance Not Always Available

This makes mortgage financing more difficult, because a bank or lender will not make a loan if mortgage insurance is required but not available for a given scenario. And it?s because of these huge losses associated with foreclosure that so many banks and lenders are willing to negotiate with borrowers who are in trouble; taking a smaller, short-term loss can help prevent a much larger one.

Mortgage Insurance Is Tax Deductible

On a positive note, mortgage insurance?along with mortgage interest and real estate taxes?is tax-deductible. It wasn?t always so, and I wouldn?t be surprised to see this deduction disappear sometime soon.

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