Archive for October, 2006

Could you please just “show me the money?”

October 27, 2006

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“SHHOOOOOWWWWW MMMEEEEEEE THE CLOSING COSTS!!! . . . . . . . . . . I LOVE THE LOAN ORIGINATOR!!!”

By definition, a Good Faith Estimate (GFE) is a disclosure (required by the Real Estate Settlement Procedures Act (RESPA) to be given at the time of loan application, which lists the charges the buyer is likely to pay at settlement.

The good faith estimate is (in theory) designed to be an easy way for consumers to compare different offers from different mortgage companies. Unfortunately, there are a few problems in trying to compare good faith estimates . . . a few of which I will try to help decipher today.

problem # 1 — the prepaid expenses vary based on different factors — how the homeowner’s insurance is estimated, how the taxes are estimated, the per diem interest based on the day of closing (interest is paid from the day of closing through the end of the month) and how the escrow account is estimated. When comparing good faith estimates, you can ignore the prepaid expenses.

problem # 2 — different loan amounts means different closing costs. Some of the closing costs are a percentage of the loan amount (the origination fee, any discount points, the title insurance and, for consumer borrowing in Georgia, the Georgia intangible tax are all a percentage of the amount financed). When comparing good faith estimates, make sure the estimates are for the same loan amount.

problem # 3 — different closing dates will cause the interest rate to change. Once you have a contract on a house, you are able to ‘lock-in’ or protect your interest rate. The interest rate is dependent on the lock-in period (usually 15 days, 30 days, 45 days, 60 days, 90 days or 120 days) — the longer the lock-in period, the higher the interest rate. When comparing interest rates from different lenders, make sure that everyone is quoting the same ‘lock-in period.’ This is the reason why most of the lowest rates in the newspaper and on fakerate.com (fictitious website . . . although curiously similar in sound) will have the lowest interest rates.

problem # 4 — some loan originators (who must already know that their fees are too high) seem to hide fees in strange places on the good faith estimate. Every now and then I will have clients send me a competitors good faith estimate. This works out well — the client makes sure that we are comparing everything accurately (pineapples to pineapples), and I get to see how I measure-up to the competition, helping me make sure that I am always absolutely competitive (track back: “I can’t be beat . . .” ). Things to look for — an application fee not included in the ‘total closing costs’; the ‘total closing costs’ being only a total of lender fees (and not including settlement agent/attorney related fees); the appraisal and/or credit report fee listed as upfront fees or POC fees (paid outside of closing) and not included in total.

problem # 5 — Theoretically, you could compare the APR’s of different loan scenarios to find the ‘best deal.’ Unfortunately, the APR calculation is anything but standard and without going into all of the tedious details, just trust me, APR just isn’t an accurate tool to measure your options side-by-side.

problem # 6 — if you do not yet have a contract on a house, you can’t really lock-in on an interest rate or loan program. And because interest rates change daily (or even in the middle of the day depending on the market), estimates must be compared based on information from the same day. (As an aside, one competitor told a client of mine that it would take them a day or two to get them a good faith estimate?? . . . or that their manager had to approve the good faith estimate and that is why it took them two days to send it to them?? What!!?? These people are either too busy to help (which I would argue is probably more of an organizational problem), or they are part-time loan originators, or they are so new in the business that they can’t create a good faith estimate without proper supervision — if you encounter any of these situations . . . RUN FOR YOUR LIFE!! Ok. Maybe just, walk away . . . quickly.

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You give [my good faith estimate] a bad name.

October 20, 2006

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In an ever increasing competitive business and with increasingly cautious buyers, the Good Faith Estimate (GFE) has become much more than just an estimate. At the beginning of the loan process, the GFE is what loan-shoppers use (and should be using) to compare different offers from different lenders; and after the closing (and even at the closing table) it becomes the measuring-stick for borrowers to test whether or not they “got the deal” they were told they were getting.

Certainly there exists a small percentage of idiots, crooks and criminals — those who lack any moral-compass whatsoever — in the business who will intentionally quote a customer one thing and deliver another. And, hopefully, through the process of bad-business and self-elimination, they will continue to weed themselves out of the business — only to be forced back into their old jobs as used-car salespeople and vinyl-siding salesmen (sorry car-guys; no apology for the siding-guys). If you have taken my advice in how to do your shopping, I would hope this will not be an issue. If you feel like you have been told one-thing and sold another, you should (until you are satisfied with the answer) take it up with the loan originator first, then with his or her manager, then to the next management level up, and on to the state regulatory division for mortgage companies (in Georgia, it is the Georgia Banking and Finance Department).

For this post, let’s assume that you are working with a decently-well-meaning mortgage professional. Is it possible, or reasonable, to be quoted one thing at the time of loan application (and good faith estimate) and then be delivered something different at the closing table?? Yes, it is. And here is why . . .

On a good faith estimate there are a few categories of fees.

1 — lender/mortgage company fees — these fees include things like the origination fee, processing fee, underwriting fee, tax service fee, etc. These fees should NOT vary when compared to the original good faith estimate, unless the loan amount has changed; origination and discount points are a percentage of the loan amount. (As an aside: please don’t be fooled by the “$0 in lender-fees” or the “only $799 in lender-fees” advertisements; they are a variation of the whole 1% origination vs. 0% origination discussion).

2 — third-party fees — these fees are set-fees charged by other parties related to the processing of the loan. Examples include the credit report fee, the appraisal fee, and the flood certification fee. These are ‘generally-set-fee’ services. Most should be identical to the good faith estimate, but there are a few small exceptions. For example, I quote $250 for an appraisal fee, but in a few outlying counties or in the North Georgia mountains, where data is harder to come-by, the appraisers I use charge a little bit more — like $300. Or, in the case of new construction, if the property is not 100% complete at the time the appraiser goes to the house, the appraiser has to go back out for a final inspection and there is a small fee associated with that work (usually $50 to $100). In the instance of generally-set fees, I have a responsibility to manage those relationships to help my clients get the best service at the best prices.

3 — state related fees — these fees vary from state to state. In Georgia, borrowers pay a tax on the amount of money borrowed, at a price of $3.00 per $1,000 of the loan amount called the Georgia intangible tax, as well as a $6.50 fee paid to the state for every loan.

4 — prepaid expenses — per diem interest, one-year pre-paid insurance and funds to set up the escrow account. These figures are totally estimated on the good faith estimate and will vary based on a number of factors: the calendar day of closing, the actual insurance premium for the policy you choose, and the actual amount of the property taxes. At closing, these costs will be the same regardless of who you have chosen to use for your mortgage financing.

5 — attorney, title and closing related fees — these fees are associated with the title work and closing of your loan (and are the main focus for this post, although I realize it has taken me a while to get here). Certainly, attorney-related fees are also third-party fees, but I put them in their own category for good reason. The attorney controls the prices of many of the costs at closing — the attorney’s fee, the title search fee, the lender’s title insurance premium and the owner’s title insurance premium, recording-type fees and any other ancillary fees associated with the closing — all determined by the closing attorney. So, who determines the closing attorney??

The attorney’s role (or title company in some states) is to represent the lender in the transaction. In the past, the closing attorney for the transaction was usually selected by the lender (or mortgage company). This allowed mortgage professionals to manage those third-party relationships, helping clients (or at least being responsible to helping their clients) get the best service at a competitive price. With the recent epidemic of joint-venture title companies (where a Real Estate company will form a title company in partnership with a closing attorney) more and more transactions are being closed at attorney’s offices chosen by the Realtor. This is not necessarily a bad thing, but it has the potential to be.

The issue becomes a problem when the fees charged by the attorney are drastically different than the fees quoted on the good faith estimate. I make it a point to tell all of my clients that if I am able to choose the closing attorney, then I can absolutely guarantee all of the costs on my good faith estimate; however, if the closing attorney is chosen by anyone else, then the costs could and most-likely will, vary. Thankfully, the firm that I use (when given the choice) has 40+ offices in Georgia and is the largest real estate closing firm in the southeast — I have a great working relationship with them and the fees I quote are the fees they charge my clients.

Bottom-line: Before you agree to use a closing attorney chosen by someone other than your lender, ask your loan officer to check-out how that decision is going to affect your bottom-line at closing. It may seem like a decision that is small, harmless and somewhat meaningless . . . but, at first-look, so do the phrases ‘tax search fee = $10’, ‘courier fee = $50’, ‘binder fee = $75’, ‘document handling fee = $40’, ‘post-closing fee = $50′, ’email fee = $15′ (idiotic, but true). Add those costs to an extra $50 on the attorney fee, an extra $25 on the title search, an extra $50 on the lender’s title insurance and an extra $50 on the owner’s title insurance premium . . . and you just spent an extra $400 at the closing table . . . and with that, there goes your new self-gifted housewarming-present 80 gig video iPod . . . loaded up with your favorite 80’s rock-n-roll.

Hence the tribute . . .

(sing) ” Your post-closing-fees got a hold on me . . . more fees on the HUD, and you’re to blame. You give my good-faith a bad name. I quoted my fees, not knowing your name, you give my good-faith a bad name. Yeah, you give my good-faith a bad name.”

the problem with being “Ok”

October 13, 2006

Have you ever had a waiter or waitress ask you if your meal is “okay?”  Isn’t that a strange question, “Is everything with your meal ok?”  It’s like saying, “Is everything with your meal average?”  Wouldn’t the better question be, “Is everything with your meal excellent?”  Or better yet, “Is everything with your meal finding your great satisfaction!?”

What has happened to going above and beyond what people expect? 

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For instance, if you were a waitress at Chotchkies and you were required to display a certain number of pieces of “flair” (pins, buttons, etc.), wouldn’t it be better to go above and beyond what was required?  beyond what was expected?  Or is being “ok” really okay?

There are a lot of mortgage people out there.  And by a lot, I mean gazillions.  You could go to your bank; you could go to your credit union; you could go with the guy (or gal) that your realtor recommends; you could go with the guy (or gal) that your builder “recommends” (and by recommends, I mean “forces you to use“); you could go with the guy on the radio; you could go with the gal on the TV; you could go with an internet-lender; or you could go with  a mega-internet-lender-referrer like lending-arbor.com); you could call a 1-800 number; you could even use your mother’s cousin’s brother-in-law who can’t really do your loan but is willing to help out (I have no idea what that means, but I have heard something similar on more than one occasion). 

Here is my advice to you . . . when shopping for a mortgage and when interviewing a mortgage consultant, ask tough questions to make sure you are working with a professional, ask for testimonials from past clients and realtors to make sure that you are working with someone who provides fantastic customer service, and ask what he or she is going to do to make your experience more than just “ok.”

If you need more specific advice, then simply ask this question, “Mr./Mrs. Loan Officer, how are you going to ensure that at the end of this process, after everything is signed and done, and closed, how are you going to make sure that I am a thrilled and happy customer?  So thrilled that when I think about getting a mortgage, I am going to think about you?  So thrilled that when I hear of someone else thinking about getting a mortgage, I am going to tell them about you?” 

Don’t let the not-so-fancy (and often over-used) slogans like, “giving 110%”, “raising the bar”, “exceeding your expectations”, “your lender for life” (unless of course they are trying to sell you a 40 or 50 year mortgage – ha!!), “going the extra-mile” and the-like, be the basis for your decision.  Ask a hard question — “What are you going to do to ___________ (insert slogan-phrase here: exceed my expectations, raise the bar, etc.)?”  The answer may surprise you . . . and the silence on the other end of the phone may be deafening. 

the “secret recipe” for getting a mortgage

October 5, 2006

Everybody loves exclusive and privileged information — special deals, invitation-only events, inside-secrets (not to be confused with insider secrets, ala Martha Stewart), and secret recipes.  In the mortgage business there are some people who are so convincing about their “special deals” it is almost too hard to pass up.  I was driving home from the gym yesterday morning when I heard a guy on the radio say that he had “secured $10 million dollars of money at an interest rate so low that he had to agree not to advertise it on the radio”. . . to which he followed with the statement, “if you are paying more than 3% on your mortgage” you need to call him at misleading-mortgage-company.com (I changed the name to protect the not-so-innocent).  And if I remember correctly, you needed to call before this Friday or else you could miss out!?!  So, likely, by the time you read this post, you will have missed-out.  Sorry.

Could it be?  A secret, exclusive source of money?  So incredibly low that if you are paying more than 3% on your mortgage that you NEED to call??  Think of the savings!!  Think of what you could do with all that extra money!!  Really??  No, not really.

Let me tell you a story about “secret recipes” . . .

When I was growing up, I always looked forward to Saturday mornings.  Partly because I was a weird kid who liked to wake up at 6:00 AM to eat peanut-butter toast and watch the Woody Woodpecker and Tom and Jerry, but mainly because every now and then (on what we considered to be special occasions) my dad would set up shop in the kitchen with the griddle and spatula to make his “famous secret-recipe pancakes.”  (sing/bright light: “aaaaahhhhhhhhhhhh” )

I remember eating “secret-recipe pancakes” by the stack-load . . . 10, 12, 15 pancakes.  Sometimes they were in special shapes (maybe a Mickey Mouse pancake every now and then), sometimes they had M&Ms in them, but that’s not what made them special.  Sure, I was a growing and hungry boy, but most of the excitement (and appetite) came from seeing my dad so happy that his culinary-creation was being devoured.  “Ahh.  Twelve pancakes!  Jeffrey-boy!  Wow!” 

I hoped that one day the recipe would be passed on to me that I might be able to share the same Saturday morning-thrill with my children. 

The tradition of “secret recipe pancakes” followed me well into my 20’s and thankfully two of my four children were able to partake in a Saturday morning “Grandpa-Bill” pancake extravaganza.  But on one day-after-Thanksgiving morning at my parents’ house while Dad was warming up the griddle and getting his tools-of-the-trade ready for action, someone pointed out something quite unsettling . . . sitting next to the mixing bowl and spatual on the kitchen counter, right near the sink (gasp!)

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You guessed it.  Just-add-water Aunt Jemima Pancakes.  Could it be??  

After a thorough family-investigation and questioning, Dad claimed that the secret made-from-scratch recipe had at some point been replaced by the much easier, and quicker (and curiously-similar tasting) Aunt Jemimas pancakes.  Nonetheless, the legend of secret-recipies lives on even beyond my father’s untimely passing away in 2003 and the memory of my father (and his famous pancakes) continues to manifest itself in other places:

Aunt Meredith’s secret stain remover:

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many-a-mother’s secret cookie-recipe:

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all people from Louisiana’s secret cooking ingredient:

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So, back to the subject at hand.  Should you really call the guy on the radio if you are paying more than 3% on your mortgage (which, by the way, 99% of you are; the other 1% of you are in the very first month of a loan that has an introductory teaser-rate)?? 

radio guy’s secret recipe to a mortgage under 3%:  likely an MTA loan — a monthly adjustable-rate mortgage with a start-rate of 1.0%, to adjust soon after closer to an interest rate of 7.25% (by my math and by today’s MTA index). 

Check out my previous post for more information about this type of loan and to find out why you don’t need to call the guy on the radio . . . not before this Friday, not before his “special” $10 million dollars runs out . . . not ever.