Archive for September, 2006

The loan process — for a tough loan, can you handle the truth?

September 28, 2006

One of the things that has changed drastically in the past few years in the mortgage industry is the speed at which things can be done.  When I started in the business almost ten years ago it took 24-48 hours just to get a credit report (that doesn’t count the 5 minutes that it took the dot-matrix printer to print it out and the 2 minutes it took to fold the pages back and forth to tear them apart and then to pull off the two little side-strips of paper with all the holes in them) — now, using the internet, it takes about 30 seconds to pull up a report.  Back in the “old-days” (ouch), the processing of a loan — verifying credit information and employment, the appraisal report, the title report — moving the loan through the underwriting review, preparing the closing documents and getting all of the documents to the closing table took every bit of the customary 30 day contract.  It is hard to imagine, but, before email, people would have to physically wait for the closing package to arrive at the attorney’s office — what could take a courier an hour or two (or more, in Atlanta traffic) now takes all of two minutes for Outlook Express (email) to pull into the attorney’s inbox.

With this exponentially faster mortgage process — credit reports in seconds, automated underwriting in minutes, and closing packages emailed at the click of a mouse — customers and Realtors alike have come to expect quick answers, quick results and quick closings.  Thankfully, most of the times, these expectations can be met.  I generally tell my clients that three weeks is the perfect amount of time for us to move through the loan process.  It gives them time to gather financial documentation and sign loan papers; it gives the appraiser a week to get his/her report done; it gives the attorney a week or so for the title report; a few days for underwriting and clearing conditions (if any); and it gives the attorney plenty of time to get the closing paperwork a couple of days early, and to prepare all of the final numbers for all parties to review.  Realistically, this process can be moved up to two weeks — or what I call a “comfortable-sprint” — if everybody moves at a sprint pace, we’ll get there fine.  In extreme cases, the loan process can be squeezed into an even shorter time-frame.

So here is the question . . . you call one mortgage lender to get pre-qualified and told that everything (as far as you can tell) looks great, “No problem,” he says, “we can get that done, no problem.”  The next lender you talk to (let’s assume for good reason) has some concerns about (take your pick) — your credit history, your debt to income ratio, the fact that your bonus income has been inconsistent, that your rent history is hard to document, about closing in 5 days, etc.  And tells you that he “thinks” everything will be ok, but the sooner he can get your loan documentation in front of an underwriter, the better.  What do you do?  Does lender #1 have a special program that simply solves the issue that lender #2 is so concerned about?  Quite possibly, yes.  Or is lender #1 trying to “sugar-coat” the situation to keep you at ease and win your business?  There is value to sales confidence, right??

The real question at stake comes from one Colonel Nathan R. Jessup, Marine Ground Forces, Guantanamo Bay, Cuba (“A Few Good Men” for those of you who apparently do not have Net Flix or Blockbuster or a DVD player or a television that has TBS and who apparently did not live near a movie theatre in 1992) . .

Col. Nathan R. Jessup:  You want answers?
Daniel Kaffee: I think I’m entitled.
Col. Nathan R. Jessup: You want answers?
Daniel Kaffee: I want the truth!
Col. Nathan R. Jessup: You can’t handle the truth!

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Ok.  So maybe it wouldn’t be the BEST in customer service to approach the situation exactly like Col. Jessup.  But, here’s my point:  if you have a unique qualifying situation, or a unique credit situation, or a slightly confusing employment situation, etc. make sure that you address it in the beginning.  And don’t take “oh, yeah, no problem” as an adequate solution to what you know is a legitimate problem.  The loan process is not about glossing over things and hoping that the underwriter will still let the loan squeeze-by.  The loan process (and the role of a good mortgage consultant) is about documenting your situation, explaining why your loan makes sense (despite it’s unique _____ ), arguing your case, and fighting to help you get the best possible rate and the best possible terms for your mortgage — even if it means that getting a truthful answer will take a few extra days.

0% origination fee — deal? or no deal?

September 21, 2006

A good faith estimate with 0% origination fee? or the guy on the radio who promises a loan with no closing costs? There is just really one question to ask (dramatic pause) . . .

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Deal . . . or no deal?

In shopping for a mortgage, one of the first things that you should understand is that there is a direct correlation between the $$ amount of closing costs you will pay and the interest rate that you will receive. The higher the closing costs, the lower the rate. The lower the closing costs, the higher the rate. This truth is fairly obvious when comparing origination fees and discount points on competing options from different companies. In the newspaper for example, if you find the lowest interest rate in the Sunday rate-finder section, and move across the row to the right, you will find that the listing with the lowest interest rate has the highest origination/discount points. (1% origination or 1% discount point is a cost of 1% of the loan amount. For example, on a $200,000 loan, a 1% origination fee would cost $2,000 in closing costs.)

So which is better — the lower rate? the higher closing costs? no closing costs at all?

In most purchase situations, it makes the most sense to pay the 1% origination fee in order to get the lowest interest rate. Here is some simple math to help show the difference between two options based on a $200,000 loan amount.

Option # 1: 1% origination fee at 6.0% interest rate.

Option # 2: 0% origination fee at 6.375% interest rate.

The difference between the two options would be $48 a month in payment and $2,000 in closing costs. $2,000 divided by $48 per month = 41.6 months, or about 3.5 years. In other words, if you are going to keep the loan for more than 3.5 years, the better decision is to pay the 1% origination fee and take advantage of the lower interest rate.

For the over-analyzing-microsoft-exel-a-nator, (made-up word) you could probably build a spreadsheet (and drive yourself moderately insane) by running out the scenario by taking what would have been the $2,000 in origination fee and calculating the “what-if” for putting that money in a 4.0% money market account for 3.5 years (where the gain would be taxable); and then add in the fact that at the higher interest rate, you are going to pay a slight bit more tax-deductible interest, where the $48 per month difference really works out to be closer to a net of $38 per month difference . . . and the $2,000 in closing costs would have grown to $2,290 (or so) over 3.5 years, but after taxes would be more like $2,240. And NOW (whew), do the math . . . $2,240 divided by $38 per month = 59 months . . . or just shy of 5 years. And, like I mentioned before, in a purchase transaction, this would make sense (the average time for a person to live in a home is around 6 to 7 years).

The same type of math works with a “no-cost” option — where the interest rate is moved up in order lender-pay all of the closing costs. This type of set-up (higher rate, no closing costs) usually works best on a refinance for people who are looking for a fixed-rate mortgage and who are only planning on being in the house for another 2 to 3 years.

So, before you jump at the idea and accept a 0% or 0.5% origination fee, make sure you are doing a fair comparison of closing costs, points and interest rate. The “deal” of a 0.5% origination — combined with a higher than market interest rate for the life of the loan — could be no deal at all.

It’s just a little-white-lie, right? wrong.

September 14, 2006

Call it a “little-white-lie”, call it an “omission-of-facts”, leaving out the details, call it a “gray area”, call it a “it depends on how you define __ (blank).”  No matter how you try to justify it, the truth of the matter is this — if it’s not true, it’s a lie.

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In my nine-year career in the mortgage business, I have come across a small-handful of people trying to “stretch-the-truth” (over-stating their income, trying to hide child-support payments, trying to purchase an investment property and call it a 2nd home, etc.) — thankfully, through the loan process of verifying employment, of reviewing bank statements or going through paycheck-stubs, etc. these “petty” liars are usually easy to spot.  The most brazen (and I suspect fraudulent) would-be-borrowers usually hang-up mid-conversation, disappear after too many questions from (me) a seasoned mortgage professional, realizing they might have better luck elsewhere.

The instance that happens (I think) much too often is the little-white-lie.  These come in all forms and fashions — none more laughable than what occurred at the closing of my own house last year.

As you might expect, Hillside Lending did the loan for my new house, and (as you should expect) everything was on schedule for the closing.  The closing package was delivered to the closing attorney the morning before the closing, numbers were in order and the funds for the loan were wired to the closing attorney.  I arrived at the closing attorney’s office a few minutes before our scheduled appointment time and was enjoying some down-time in the nicely decorated waiting room — I was content and relaxed.  I read an article or two in “Newsweek” magazine, checked some emails on my Blackberry and ate some of the ever-present closing-attorney chocolate (a staple at all metro-Atlanta closings).

The closing attorney walked out to greet me about 15 minutes past our scheduled appointment (no big deal), asked me if I wanted anything to drink and apologized for the short-delay in getting started.  “Not a problem,” I remarked . . . being in the business I knew that things sometimes get backed-up at attorney’s offices, no worries.  And then as we sat down at the big conference room table, it happened . . .

“Yes . . . ,” she said, “sorry again for the late start . . . we got the closing package a little late from the lender, so we were running a little bit behind.”

I probably should have played-it-cool and asked a few follow-up questions to watch her dig deeper as she stumbled through excuses, but, unfortunately, I don’t hide my emotions that well and I don’t have a poker-face to speak-of.  Later in the day I would think of all kinds of great things to say . . . but all that would come out at the time was, “Wha? Um. (sigh) Really?? . . . That’s weird, because I AM the lender . . . and I sent the closing package over yesterday morning.”  I think her response was, “Wha? Um. Oh. At least that is what I was told.”

The remainder of the closing moved smoothly forward as expected, but what had been an insignificant fifteen minute delay had turned in to a blood-pressure-raising ordeal (one, that apparently I am not completely over – ha!).

an MTA loan, (sing) “More than meets the eye.”

September 8, 2006

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What if I told you could get a $200,000 mortgage at a 1% interest rate, with a minimum monthly payment of $643 per month!? And your payment would only adjust by about $50 per year no matter what the market does! Sound familiar? Too good to be true? (recall mother’s advice: “If it sounds too good to be true . . . it probably is.”)

If you have heard or read this before, most likely they are talking about an MTA loan. Here is why this loan is anything but “Optimus” for your home financing. The loan and monthly payments start out well-and-good but quickly ‘transform’ into something very different. Kind of reminds me of that time when Megatron was leading the Decepticons in their villainous plight to take over . . . (sorry, I have taken the Transformers analogy MUCH too far!! nerd alert!! nerd alert!!)

MTA stands for Monthly Treasury Index. This type of loan (generally named an MTA loan, a Pay-Flex loan or a Pay-Select loan) is a one month adjustable rate mortgage based on the MTA index. The MTA index is an index calculated based on the twelve month average of annual yields on actively traded US Treasury Securities — the Monthly Treasury Average Index. Because this index is an average of the previous twelve months, it is a much slower moving index than all other adjustable rate mortgage indices. For more information on adjustable rate mortgages (ARMs) and how they adjust, check out my previous post.

This loan does in fact have a rate of 1% . . . a “start-rate” of 1%. Based on the example above, the first month’s payment (of principle and interest) would be $643 per month. However, after the introduction period (usually a 1 month or 3 month period), the interest rate adjusts to the “real” interest rate = the MTA index plus a margin. The margin on this type of loan can vary between programs, but for the sake of this post, I’ll use 2.75%. With the MTA index currently sitting at 4.664 (as of September 9th), the “real” or fully-indexed rate would be 7.414%. Ouch! And to make matters worse, unlike most ARMs, this loan usually does not have a cap on adjustment (although it may have a life-time cap of 10% or so). Ouch again!

So what about the payment only going up $50 per year?

Here is where the loan gets even more confusing. The loan is called a “Pay-Flex” loan because it is sold to consumers with the idea that you have the flexibility to make one of four payments. You can make the minimum payment, an interest-only payment, a 30 year amortization payment or a 15 year amortization payment (the last two options are laughable at best). The consumer can select (hence the name “Pay-Select loan”) which option they want to pay. What a friendly loan!?? Just make whichever payment you like, no problem . . . not a problem if you like paying more interest of course.

In the example above, the payment (the minimum payment) will only increase by 7.5% per year. So if the first year’s payment (minimum payment) is $643 per month, the second year’s payment (minimum payment) will be $691. However, because the interest rate has adjusted up, the difference between the minimum monthly payment and the interest for the month . . . read carefully . . . will be added to the loan balance. So, for a $200,000 mortgage balance, now at a rate of 7.414%, the interest for one month would equate to $1,253. The minimum payment would be $592 TOO LOW even to cover the interest on the loan and that amount would be added to the loan balance (called negative amortization). Next month’s interest payment would be calculated on a new loan balance of $200,592. This cycle of adding to the loan balance would continue until the loan value had maxed-out at 115% of the original appraised value.

Bottom line, compared to an intermediate adjustable rate mortgage (a loan that is fixed for a set number of months or years like 3, 5, 7 or 10, and then converting to a 1 year ARM with caps on adjustment), now available — and extremely popular — with an interest-only payment, the usefulness of an MTA loan is pretty slim.

There may be one small argument that would say that because this loan adjusts as the market adjusts, a consumer will reap the benefit of falling interest rates (and a falling MTA index) automatically without the hassle and expense of refinancing, but it would be a pretty tough argument to make. If you looked at the average of the MTA index over the past 10 years (3.973 — which would equal a mortgage rate of 6.73%) and over the past 5 years (2.503, which would equal a mortgage rate of 5.25%), someone might make a mildly convincing argument.

But, if somone made the argument so compelling to you (especially at the beginning of 2004 when the MTA index was at it’s lowest point and the adjusted rate was 3.975%) now that things have transformed for the worse and the rate has gone up to 7.375%, and your interest-payment has gone from $662 per month to $1,229 per month, you might just wish you had a 30 year fixed rate loan at 5.25%.