Wednesday, October 11, 2006

Confessions of a Mortgage "Professional"

From BusinessWeek online
An article introducing a book (but not reviewing it)... By Douglas MacMillan

Read this with the following glasses on:
1. Somebody is trying to sell a book here
2. Media likes to trade on fear, scandal, and general salaciousness

The article is followed by a group of the most recent reader comments about the article. My comments will follow at the bottom.

The Durham (N.C.)-based nonprofit Center for Responsible Lending estimated in July, 2001, that predatory mortgage lending is currently costing Americans more than $9.1 billion each year.

Lenders will argue that each one of these dollars represents a legitimate fee stipulated by a legitimate contract, that they are only viewed as predatory by borrowers who overlooked the fine print in their mortgage.

But ask Ted Janusz, who spent an interim period of his career learning the ins and outs of mortgage brokering as a loan officer in Columbus, Ohio, and he'll admit that what is really going on here is a game of subterfuge being played at the expense of borrowers with low credit ratings.

CONFESSION TIME. The strategy of lenders, he learned, is to maintain an uneven playing field with their clients. "The average person only gets a mortgage every seven years. How can you become good at something you do every seven years, especially if you're dealing with somebody who knows all the ins and outs and is doing this several times a day?" he recently told

After a year of putting up with what he felt was the industry's lack of integrity, Janusz left the business for good. Still, he felt he was privy to information that the public rarely gets to see. He vented his frustrations—and spilled his guts—in the 2005 book Kickback: Confessions of a Mortgage Salesman (Insight).

The book details the sophisticated traps lenders set for clients they see as suckers. "If somebody came in wearing cowboy boots and ripped-up jeans, those are the people you took to the cleaners on fees. That was the unwritten rule—we were looking for people we'd see as having less-than-perfect credit."

TUNNEL VISION. Lenders who found a mark would make sure the money was ending up in their pockets mainly through back-end yield spreads, or the so-called Service Release Premium. For example, they would tell the borrowers that they could have a 9% interest rate, but when the paperwork cleared, their low credit rating would force them into an 11% rate—often without the borrower even knowing it. The resulting dividends, thousands of dollars in each case, fell into the lenders' laps.

In his book, Janusz also highlights an array of common traps lenders use all the time, such as allowing a borrower to see an attractive interest rate offer and letting him think that's the only important consideration in a mortgage negotiation. "You hear companies offer fabulous rates, but what are they paying in closing costs to get them?" Janusz says. "It would be like comparison shopping for cars only looking at the headlights."

Nickname: TD Hawk
Review: Full disclosure, I'm a Certified Mortgage Planner. I'm wondering if BusinessWeek is running out of story ideas? A few weeks ago, a cover story about "How toxic is your mortgage?", then this biased piece and, for over a year, there's been a video "Un-ARM Yourself." In regard the latter, the cost of mortgage money is falling--the lowest it's been since March--and will continue to do so into 2007. Why? The Fed is hell bent on slowing our economy and the cost of money falls when that happens. So folks following all this sage media advice will be "buying high" if they run out and lock a fixed rate. But the bottom line folks, do business with someone you know and trust based on referrals from those you know and trust. There are no deals in financial services unless you're related to the provider. Read everything and know the cost of money is what it is for everyone in the same credit profile shoes. And don't plan your finances based on anything in the media or you'll "buy high" yet again.
Date reviewed: Oct 11, 2006 11:31 AM

Nickname: Bill and Art
Review: I read comments for an hour -skipped some, read many. I was more interested in what the real estate industry people said than the consumers - I've heard many a sad tale from borrowers that ranged from complete truth to a lack of understanding of risk (it is important to pay your bills occasionally) to total I-really-thought-my-rate-was-1 percent-forever lies. While I am not a proponent of the ugly slogan "buyers are liars," I find the exposure to the experience of two or three mortgages less enlightening than the hundreds the average, seasoned (not one year) mortgage person embraces.
Date reviewed: Oct 11, 2006 2:39 AM

Nickname: K-Dubb
Review: There are charlatans in every industry, work sector, business, for- and not-for-profit, etc. I've been a loan originator for five-plus years and I'm astounded how many times I've conducted Mortgage 101 lessons for clients - homeowners mindful of only their rate and payment. Many are unaware that even when their quoted rate and final (funding) rate are the same, their qualifying rate may have been lower. The difference went into the lender's and/or loan officer's pocket. In purchases - not just "sales" - everything is negotiable. You have to know your options, what you qualify for (not just "your rate"), the total expenses (not just "closing costs"), and to review or have assistance reviewing the loan papers before you sign. Failure to conduct due diligence is plain ignorance - the government, which many want to reduce in size and scope, can't be your financial babysitter.
Date reviewed: Oct 11, 2006 2:14 AM

Nickname: Geezer
Review: It's hype, hype, hype designed to frighten the public, sell commercials, newspapers, and expose books. Not all lenders are bad (most aren't) and not all loan officers are bad (some are). And not all police, firemen, lawyers, politicians, in-laws, athletes and movie stars are good either. If you fall for the hype, the ads, the news, you'll get burned.
Date reviewed: Oct 11, 2006 1:59 AM

Nickname: Art
Review: People need to be responsible for their own behavior. All of Madison Avenue is trying to get your money. Lenders are no better nor any worse. We eat fast food we know is killing us. We smoke cigarettes that destroy our health then praise the tobacco companies for offering rehab programs. Lenders just got in it a little later: 1 percent loans?! Zero closing costs?! 50-year mortgages?! Come on. Grow up. It's hype. Live on less than you earn - save your money - and no one can scam you. If you don't gamble you won't meet a leg-breaker one night. Pay your bills and you won't deal with the lending liars. Daddy always said, "Don't believe everything you hear." That's pretty good advice.
Date reviewed: Oct 11, 2006 1:51 AM

Nickname: Ranchexit
Review: In all fairness here, Mr. Janusz is trying to sell a book. The "expose" is his tickler and fits in well with our overhyped media-driven world. While there is truth in what he says, such shabby and deceptive treatment of consumers is limited to a few greedy lenders (I could guess his employer's name fairly easily) and opportunists. There are to be found both conscientious lenders and the louts. Sadly, the self-serving mentality of the latter is found in other industries: Enron execs bilked life savings out of thousands and eyebrows were raised, but little justice meted out. Yet if we pay an extra point in closing costs (even if our credit stinks)-we get torqued because it's us. I am opposed to usury. I am also opposed to people overspending, living on (declining) credit, and our instant gratification mentalities. Let's all teach our kids about credit, starting at home and continuing in school. It's hard to get scammed when you have perfect credit and can get your loan anywhere.
Date reviewed: Oct 11, 2006 1:37 AM

Nickname: yogamom
Review: Are you kidding here? The purchase of real estate is by far the most important financial decision most people will make. Those who serve in the real estate profession as agents mortgage brokers and appraisers sound unscrupulous. Someone must stand up to these individuals. Be a smart consumer and walk away from any person participating in these practices. Money is money whether the person has less than perfect credit or not they still deserve the best deal and the best service. Do not call yourself a professional if you behave otherwise toward consumers.
Date reviewed: Oct 11, 2006 12:01 AM

Nickname: experience counts
Review: Seeing the comment from "Seen it all," dated Oct. 2, I have this to say: For someone who has supposedly been in the "industry" for 20 years, you must be either a) an idiot, or b) you buried your head in the sand a long time ago. Do you still use a typewriter to process applications?
Date reviewed: Oct 9, 2006 5:25 PM

Nickname: Matt
Review: My suggestions to anyone who is going for a home loan and it's either your first time or you haven't done it enough to be confident about it, talk to someone you know who has either moved a lot or is a real estate investor. I have done both. I'm to the point where I've applied for a home loan at least once per year for the last seven years (in some years, it was actually twice). I know the mortgage loan process better than some of the mortgage processors I've dealt with now. Overall, mortgage loan folks are not that experienced, and it's a fairly high turnover business. You'll see that the more experienced you become at it, you'll wind up doing the thinking for your mortgage loan processer. That's both good and bad, but I think you'll agree, you're better off when you know more than them! In short, talk to someone who's been through the loan process a lot. It will pay big dividends when you go for your own loan!
Date reviewed: Oct 8, 2006 2:43 PM

Nickname: helpingmyparents
Review: My parents are senior citizens and on a fixed income. What they both bring in together every month is probably what some make on one paycheck. They were doing fine with their mortgage until they went to refinance. Normally I'm always there overseeing their financial matters. This time my father did it alone trusting what he was told. In the end, his mortgage payment went up $200 a month with a promise that after two years he could refinance to bring it back down. Completely impossible because the gentleman assisting him combined two loans that he co-signed on for two of his children a total of $15,000 bringing his loan amount to $75,000. My question is how on earth did this gentleman refinance my dad for a mortgage for this amount with such little income? I'm thinking it's a case of predatory lending, but not sure. Dad's kids continued making their monthly payments to him to offset the difference in his mortgage payment but they are now being paid off. Anything I can do to help him?
Date reviewed: Oct 8, 2006 1:09 PM

Here's the bottom line: there are people out there who don't take responsibility to learn what they need to know about this, the most important of decisions. They may also not even know what questions to ask. So many homebuyers these days have hired the moving company, moved out of the old place, are living in a trailer somewhere, have no money whatsoever, want 100% financing, have pawned the dog to buy a truck, and are waiting on the driveway of the new hoouse before they have closed the loan. Are these people REALLY concerned to go over each line item and understand the real cost of money. The answer is no. They are so horny to get the new place that at some point in the past, they stopped caring what it was going to cost them, either in the long run or the short one.

The lending industry is also full of people who will take advantage of anyone available. There are also those who understand the concept of Karma, repsect, and being able to sleep well at night. Some don't care.

A while back I discussed how mortgage lending works: as far as a broker is concerned, there are two main income producers: Origination points, and Yield Spread Premiums. Both are income - the first is an "up-front" cost, paid through a line item on the settlement statement. The second is a fee paid to the broker by the lender. This fee is based on the "spread" between the "base/par rate" and the rate that the loan is actually closed with. This total income amount is used to not only pay the loan officer, but is also used to pay the other office staff, brokerage fees, utilities, phones, rent, paper, long distance, etc. The loan officer will typically see a percentage of this total amount as actual income to him/her.

On the settlement statement, the second amount, yield spread premium, is noted but not included in the "cost" of the loan, or the cost of money, if you will. It is noted outside of the standard tabulation of costs. It is easy to miss, and one easily would think that since it is not in the tabulation of costs accrued, that it really isn't a cost at all. But this is wrong. If there is a yield spread premium noted on the sheet (anywhere) it means that you are paying more in RATE on your loan than you otherwise might, had you been educated to this, and given the choice about it.

I have also noted that I seek to educate my borrowers, both well-heeled and not, to the ways I make my income. I tell EVERYONE that my services cost ALL BORROWERS, regardless of credit or life situation, about 3% of the purchase price of the home. This is common, and it is what I think my services are worth. You don't work for free, and neither do I. My job is difficult, arduous, and incredibly stressful and time-consuming. I will educate you as to what you qualify for, what is reasonable for you, and what I think you should do. I also give you the choice as to how you plan to pay that 3%. I explain that you can get a slightly lower rate if you choose to pay your fees to me in origination rather than YSP. This is easy for almost ANYONE to grasp, and I rarely have a problem with people on this issue. They value my service, and, most of the time, refer other trusted friends and family to me as well. They obviously like what I did for them. Almost everyone chooses to split the difference and pay some origination and some YSP.

You should note as well that the relationship between your rate and YSP is NOT a 1:1 ratio. That is to say that it will not cost you 1% in your rate in order to pay me 1% in YSP. Usually the ratio is 2:1 or 3:1 - that is to say that it costs a half a point in rate to pay me 1 point in YSP. Some lenders are even more generous and offer a .365 (3/8ths) rate bump for one point in YSP. I tell people this, they do the math, and make the choice.

Now all this is not to say that there isn't room for improvement in the industry, either through some sort of ethics standards, or industry oversight... for example, NO end lenders out there require the broker to disclose YSP in dollars and cents on the good faith estimate provided to the borrower at the time of initial application. I think this should be changed. Lenders now only require that a generic notation be made that the broker "May receive between 1-3% in YSP, not paid from the proceeds of the loan." This SOUNDS like it isn't a cost, but it is.

So, after all this, ask yourself one question: If you want to quibble with an upright, ethical mortgage broker about paying 3% in fees for securing an appropriate mortgage for you, what value are you getting from paying a real estate agent? Think about that. They are making a MINIMUM of 3%, sometimes up to 6% on the transaction. Your ire is missplaced, friend.

Tuesday, October 10, 2006

New Mortgage Regulations said to accelerate home price deflation

An interesting article here that has to do with the "exotic Option Arm Mortgages" we talked about a few days ago... one of the things I didn't mention in that explanation is a feature called the "teaser rate" - most of the mortgage loans in this category offer a "teaser rate" in the range of 1-1.75% for a period of time at the beginning of the loan. (As always, unpaid interest accrues to the end of the loan - onto the principle amount - leading to more negative amortization - owing more than the home is eventually worth.) This is the source of the myriad spam offers you and I get in our email talking about how you can get a $500,000 loan with a payment of $800 per month. This is what they are offering, and the devil is in the details, obviously.

When you apply for a mortgage, your ability to pay is evaluated on a "Qualifying Rate". In the past few years, this qualifying rate has been the TEASER RATE, instead of the actual APR percentage rate. By this alone, it is obvious to see the lending frenzy that has led many people to the place we are now.

If you wanted to buy that $500,000 home, but only had the real financial resources to be able to cough up $800 per month, the lender WOULD STILL LEND YOU THE MONEY FOR THAT HOUSE, regardless of the obvious fact that there was NO WAY ON EARTH that you were going to be able to make the "real" payments six months from now.

Which leads us to the next question: Who really is to blame for all these people who are in trouble with their loans? Is it the lender who lends, or the borrower who borrows?

I often have trouble with that question, because I am a broker. I am the middle man - I connect the lender to the borrower. I do my very best to educate, inform, and disclose all the pertinent information to my clients. Sometimes there are those who are simply utterly insistent in the face of the glaring facts. Some we turn away, and about others we say, "we just met with a foreclosure waiting to happen."

Without ado, the article:

From the LA Times - (Registration Required). Federal regulators are casting a disapproving eye on mortgages that give borrowers low introductory rates but let them pile up more debt over the long run, a loan feature favored by hundreds of thousands of Californians.

Starting this month, federally chartered lenders are being discouraged from qualifying buyers based on the low starter rates, when only the interest or a portion of the interest is due. Instead, they are being urged to evaluate the borrower's ability to pay for the loan at the full rate.

Regulators are trying "to add some discipline to the lending process," said Richard Wohl, president of Pasadena-based Indymac Bank. "Whenever you do that, you're going to have some [borrowers] that won"t have the product available to them."

The regulators say they will "carefully scrutinize" lenders to see whether they are following the new rules. Those who fail to do so, the guidance summary warns, "will be asked to take remedial action."

The guidance applies only to federally chartered lenders, including Indymac, Countrywide Financial Corp., Washington Mutual Inc. and other behemoths. State-chartered banks, which are smaller but more numerous than federal banks, are not affected.

Indymac's option ARM business is shrinking anyway, Wohl said, as interest rates fall and customers move to the certainty of fixed-rate loans. Even so, interest-only and option ARM loans accounted for more than half of first-time mortgages and refinancings in the state in July, according to First American LoanPerformance.

Kathy Dick, deputy U.S. comptroller for credit and market risk, said interest-only loans and option ARMs originally were for a minority of savvy, well-off people whose income was variable, the self-employed and those who worked on commission or were paid intermittently.

"Now they're used to getting someone into a home without a real analysis of their ability to pay," Dick said. "Lenders are qualifying people for homes they can't afford. We felt that wasn't consistent with prudent lending principles."

"Just as the loosening of credit standards made the housing bubble go higher and last longer, the tightening of standards is going to make it deflate further and faster," said Michael Calhoun, president of the Center for Responsible Lending. As borrowers find they qualify only for smaller loans, Calhoun predicted, sellers will have to cut their prices.

"There's some pain coming," he said, noting that California "is at ground zero on this."

"There will be fewer leveraged loans of this kind, and it will depress some home prices," said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.

Thursday, October 05, 2006

Kiplinger's: Getting it Mostly Wrong on Down Payment

Kiplinger's: Getting it Mostly Wrong on Down Payment

Let's start by saying Kiplinger's Personal Finance is a solid personal finance publication which, most of the time, gives sound advice.

That said, I wanted to take just a moment to flush out the silly mythology and flawed logic behind their recent "case study" advising aspiring homeowners to not buy a house with no money down. The media generally gets the "risks" of not putting money down precisely backwards - characterizing low or no money down loans as risky to the homeowner in the extreme. I disagree. Here are Kiplinger's reasons not to buy a home with no money down taken (apart) one at a time:

1. With a zero-down-payment loan, "you aren't building any equity in the early years," says [CPA and Financial Advisor Michael Eisenberg.] "If you're forced to sell, you could lose money."

Newsflash: Regardless of whether or not you have equity if you are forced to sell, you could lose money. One has nothing to do with the other. Money lost is money lost. This is also reason 278 not to follow someone's advice just because they have a title like CPA or financial adviser. Equity growth has nothing to do with downpayment - your equity doesn't GROW faster with the "fertilizer" of purchased equity at the beginning. Property appreciation is BY FAR the biggest contributor to an equity position. And the ONLY other contributor to "increased equity" is the repayment of principle borrowed. Downpayment money is equity "purchased". You already HAD the money, now you've tied it up. However, understand that down payment money IS useful for securing a better mortgage rate. But it has NOTHING to do with equity.

2. Equity in your home also gives you a source of cash in an emergency.

Unless of course that emergency happens to be a job loss, or illness that forces you to stop working. Then the only way to get at your equity will be to sell the home. Equity is not very liquid, and tends to be very hard to get when you need it most.

3. With less than 20% equity in a home, you'll generally have to buy private mortgage insurance, which costs up to 1% of the loan amount.

Or, you can use a second mortgage (with tax deductible interest) to avoid mortgage insurance altogether. As well, MANY lenders today offer single loans at higher than 80% loan-to-value, WITHOUT mortgage insurance.

4. And the bigger the down payment, the lower your monthly payments.

Really - could Kiplingers logic BE more wrong?

This is true, but a little misleading. With rates at current levels, each $1,000 put down will save a homeowner between $6.00 - $7.00 per month. That means a $10,000 down payment, saves 60 dollars per month. It takes a very large down payment to impact affordability in a meaningful way.

I am not sure how much more clear I can be here: A zero down payment loan (provided of course you can afford the payments in the first place) is NOT "risky" for the borrower/owner. The only party taking on more risk is the bank. So tell me, would you rather risk your own money in a deflating housing market, or the bank's?

Utah RE Market Data

Here are some recent figures regarding Utah's Real Estate marketplace. the chart below shows price range, number of homes on the market, and average days on the market.

Listings: 1 Residential Market Summary Date: 09/12/2006 05:30 PM

State:UT Status:1

Active Listings
$0 - $9,999 25 114
$10,000 - $19,999 38 120
$20,000 - $29,999 47 73
$30,000 - $39,999 49 94
$40,000 - $49,999 60 73
$50,000 - $59,999 72 94
$60,000 - $69,999 100 90
$70,000 - $79,999 124 83
$80,000 - $89,999 156 87
$90,000 - $99,999 161 65
$100,000 - $119,999 332 59
$120,000 - $139,999 493 51
$140,000 - $159,999 481 46
$160,000 - $179,999 578 45
$180,000 - $199,999 622 49
$200,000 - $249,999 1,338 51
$250,000 - $299,999 1,279 56
$300,000 - $349,999 1,028 55
$350,000 - $399,999 824 58
$400,000 - $449,999 570 58
$450,000 - $499,999 537 58
$500,000 - $599,999 663 63
$600,000 - $699,999 449 64
$700,000 - $799,999 287 65
$800,000 - $899,999 186 69
$900,000 - $999,999 125 66
$1,000,000 - $1,249,999 123 85
$1,250,000 - $1,499,999 112 79
$1,500,000 - $1,749,999 64 119
$1,750,000 - $1,999,999 74 121
$2,000,000 - $2,499,999 49 131
$2,500,000 - $2,999,999 48 116
$3,000,000 - $3,999,999 36 129
$4,000,000 - $4,999,999 14 113
$5,000,000 - and over 21 147

The average listed home along the Wasatch Front (including all price ranges, HUD homes, short sales, and bank-owned homes) has been on the market for 60 days.

Wednesday, October 04, 2006

What is an Exotic Hybrid Mortgage?

I subscribe to a couple of mortgage finance/real estate blogs via RSS. It has been interesting to see the traffic there recently, say, over the last six months.

Lots of talk (even at the FED/Bernanke level) about "exotic hybrid mortgages" and such. I thought I'd spend a moment here and talk about what they are talking about when they use that term.

In the FED language, an "Exotic Hybrid Mortgage" is one where the rate is tied to a financial index, and adjusts every month. Or, should I say, a PORTION of the rate adjusts every month. I'll explain index-based mortgages in general in a future post. Specifically, these mortgages have four payment options on the payment coupon/statement every month.

First option: "minimum payment" - the cheapest option
Second option: "Interest-only payment" calculated on the note rate for that month
Third option: "30 year fully amortized payment"
Fourth option: "15 year fully amortized payment" - the most expensive option of the four

If you have one of these loans, you can choose, every month, which option to take. If you feel like it, you can choose the cheapest option, or next month you can choose another option... doesn't matter.

There are people (uneducated) who think this "Exotic Hybrid Mortgage" has only recently been created. The loan is properly called an "Option ARM" loan, and it has been around for a long time. This loan has been available to people for many years, actually. The lenders who have offered it for a long time will cite the following borrower characteristics to whom this loan was originally offered:

Property investors who didn't intend to take the loan to its fully amortized period
Home buyers who had at least 20% of the purchase price as a down payment
Home buyers who are self- or otherwise-employed in a seasonal field
Home buyers with EXCELLENT credit

If you were fitting any or all of those characteristics, you could qualify for this type of loan.

Now, before I go further, let me explain the terms of this loan more fully, so you can see its pitfalls and impacts:

Fact: All loans have two components to the payment: Principle, and Interest.

When a home owner elects to pay the "minimum payment" on their loan that month, the payment amount IS NOT EVEN COVERING ALL THE INTEREST THAT IS DUE, LET ALONE ANY PRINCIPLE. Sometimes that minimum payment is as little as $100. You are basically paying the lender to keep your loan account open. If you're astute, you will ask, "since we know interest doesn't take a day off, where does it go then?" It gets tacked on to the principle balance of your loan. We call this Negative Amortization.

When one elects to pay the "Interest-only payment", there is no principle in your payment, only interest. That one is pretty self-evident. Note though, that if one owes $200,000 as principle at the beginning of the month, and one makes an interest-only payment, you STILL owe $200,000 at the end of the month. It's like only paying the finance charges on your credit cards, never paying down the actual amount owed.

The other two payments are easy - traditional loan types there.

If you're a person who qualified for this loan, using the criteria above, you are inherently:

Good at managing your money
Financially astute
Financially solvent and stable
Living within your means
Not trying to accomplish something that is outside your means to accomplish

But here's the thing, see.

Most big lenders are public companies, and they are in the business of selling money. That's what *I* do for a living as well, I don't sell real estate, I sell money. Anyway, those public companies have numbers to hit.

And in the last run-up/frenzy in home appreciation, making "paper millionaires" out of hundreds of thousands of homeowners in California and other places, the lenders saw the opportunity/need to try and attract those borrowers into THEIR boat. Gotta make those numbers.

How to do that. Well, among other things, they made loans available to more people, by doing the following two things:

Lower the personal credit requirements to get a home
Offer to lend more of the purchase price (as in 100% of the purchase price)

These two things led to the availability of the Option Arm to almost anyone who asked for one. The recent statistics show that at least 70% of the time right now, those who have this type of loan choose the minimum payment. What does that mean? It means that 70% of the time, borrowers are going further upside down on their residence. They owe more than it's worth, because their BEGINNING loan balance was 100% of the purchase price/value. That also means that if they have/choose to sell the place, they owe more than it's worth - they would have to PAY to get out of the mortgage... that's not fun. Rather than do this (because they have no money) people are simply choosing to walk away from their mortgage, ruining their otherwise okay credit history, and jeopardizing their future ability to qualify for a mortgage of any type, ever.

So now we have a VERY LARGE GROUP of people who DON'T know how to manage themselves, but took advantage of lax credit requirements to buy more home than they should have, and now, they are swallowing the bitter pill of financial ruin.

Bernanke has offered up some "guidance" on these types of loans, and when the FED offers Guidance, it's not just advice, it's the law. He has put some things out there that lenders need to do to better qualify people for these loans.