There is a lot of buzz in the mortgage and real estate market. Home sales are up and large corporations are talking about an end to the recession. There are some concerns, especially when the stock market is up 8.6% (over 1000 points) in the month of July, the largest gain in 20 years. Rapid increases in value can often be false security as more and more people jump onto this fast moving train. So this week we focus on concerns with the market and how to keep this train from derailing.

1. Why Ben Bernanke’s Incomplete ‘Exit Strategy’ Could Lead To A Decade-Long Downturn
   

   Break up all the big banks and create a greater number of highly localized, community-centric banks. Let community and regional bankers securitize pools of mortgages using transparent “conforming” disciplines.

2. Unemployment spreads distress in U.S. home loans
   

   Mortgages have failed the fastest in the areas with the greatest overbuilding, purchases by speculators and reliance on riskier loan products to improve affordability.

3. Why Isn’t the Gov’t Mortgage Program Working?
   

   …servicers aren’t modifying loans because it doesn’t make business sense to do so. The Post highlights a study by Federal Reserve economists making that argument. Meanwhile, a Bank of America spokesperson told the Journal that many people seem to think they’re eligible for aid when they’re not: “Given widespread public mis-expectations, a significant percentage of borrowers seeking Home Affordable modifications under the imminent-default provisions will not qualify.”

4. Would you buy a mortgage from a car salesman?
   

   He then said I was foolish for continuing to pay my mortgage at my current rate. I’d be better off not making my monthly payments, then demanding a change in terms, he said.

Raise your hand if you’ve got an ARM.  Okay, I admit it—I’ve been waiting to use that one. Especially since a colleague told me the good news about his adjustable rate mortgage.

I know, I know—adjustable rate mortgages are bad.  We’ve heard it time and time again over the last few years, right?   ARMs were key in bringing about “the crisis” (it’s kind of like Lord Voldemort: the recession/depression/slowdown/market correction which shall not be named.)

But what if I were to tell you that an adjustable rate loan could actually have an upside even in today’s market?

A friend of mine—I’ll call him Cory—chose an ARM when he purchased his home several years ago.  Now, most ARM’s have a period during which the rate remains fixed; usually anywhere from 6 months to 2 years.  After that, depending on the terms of the loan, the rate begins to adjust every 6 to 12 months.

In Cory’s case, his rate adjusts every 12 months, and he just received his new rate a few weeks ago.  Under the terms of his loan, his new interest rate is equal to 2% above the current LIBOR rate…which just happened to be at 1.75%. So that means that for the next 12 months, the interest rate on his loan is just 3.75%.

Now we have heard about all of the negatives that ARM loans bring, and news cameras are constantly showing men and women who complain that they can no longer afford their homes because of skyrocketing rates.  But if you have an adjustable interest rate I would hold off before allowing yourself to join the panic-stricken throngs.  After all, if the LIBOR, Prime Rate and bonds on which adjustable rate mortgages are tied have fallen to record lows (which they have), it’s a pretty darn good bet that your interest rate has followed or will follow suit.

But if you’re still troubled, consider taking these steps:

First of all, check the terms of your mortgage that are spelled out in your paperwork.  Verify what index your loan is tied to, how often your rate can change, and any caps that might apply.  On many loans, interest rates cannot increase above a certain amount.   Depending on when you got your loan, your interest rate may cap at a very reasonable rate—and one that you are unlikely to reach any time soon.  As such, your ARM may actually be saving you more money than you first anticipated.

If you are worried about your payment increasing too much—and if you anticipate that you’ll be staying in your home for the long haul—you may want to consider refinancing to a fixed rate.  Keep in mind that there are costs associated with refinancing, so you’ll want to balance those costs against the amount you would pay if your interest rate reached its cap.  (Note: Work with a loan officer committed to providing absolute transparency in mortgage lending to keep those costs as low as possible.)

Oh, and by the way…you can put your hand down now.

New home sales outpaced analyst predictions in June.  No, you read it right—although you’re welcome to read it again and just let it sink in.   According to the Commerce Department, new home sales rose 11% last month, a feat that Bloomberg.com reported was the biggest one-month jump in 8 years.  And at the same time, the number of new homes on the market declined—as did new home prices.

As I see it, this is not only great news for the real estate market, but also for you if you’ve been thinking about buying a home.

You see, just like retailers reduce the price of their merchandise at the end of each season to move it off the shelf, it seems that builders have been reducing the prices of their spec homes in order to reduce debt and get to a more liquid position.    That means that you can get a beautiful, brand-new home with all the upgrades you’ve been wanting for thousands of dollars less than you would have paid even a year ago.

Combine a brand new home with a rate as low as 4.875%, and you’ve got a deal that is in my mind altogether too good to pass up.   Especially if you’re buying the home you will plan on being in for years to come, because you’ll have a virtually unsurpassed opportunity to earn valuable equity when the market recovers.

Now keep in mind that new homes aren’t the only way to go.  Recent reports from the National Association of Realtors reflected that sales of existing homes rose in June for the third consecutive month as well.   That means that people with a long-range perspective—folks just like you—are beginning to take advantage of lower-priced real estate in all of its forms.   And it also means that, if trends continue, we’ll start to see a reduction in the amount of available properties on the market.  And home prices—and values—are sure to follow.

The best way to get started on owning one of these properties?   Work with a loan officer to get pre-qualified.  Make sure he/she is committed to mortgage transparency.  That way when you do go to talk to a real estate agent, you know exactly how much home you can afford—and have the power to make a much stronger offer.

Questions?  Comments?  I’m always glad to hear them.

Are you a renter who’s been considering buying a home of your own?  You might want to start “considering” a lot harder.   Why?  Because as home prices have declined over the last two years in many areas, the gap between the amount you pay to rent and the amount that you’d pay for a mortgage payment is narrowing.

In fact, according to a recent AP story, “the gap between the monthly mortgage payment on a median-priced home and the median rent has shrunk from $777 a month to just $221 in the past three years.”

And in some areas—especially communities that were hard-hit by the recent downturn—that gap is even smaller.  As little as $100 in places like Atlanta, St. Louis or Indianapolis.

So here’s what I mean.  You live in a nice area—nothing too fancy—and pay $650 a month for a decent two bedroom apartment.  For a 3 bedroom, two-bath starter home in the same area, your monthly mortgage payment could be as little as $900—a difference of $250.   Plus, you could have all of the benefits of home ownership, including tax benefits, the opportunity to earn equity and more.   And until November, you can also take advantage of the federal homebuyer credit that will cover up to $8000 of your home purchase price.

Now I admit it, I’m in the lending industry (hence, my writing of this blog) so I happen to believe that homeownership is a good thing.  But I also know that it doesn’t make sense for everyone, all the time.   So here are a few things that you’re going to want to look at before you grab the keys to your first home:

1. Homeowners, unlike renters, have the chance to make changes to their living environment.  They can paint, upgrade countertops and appliances, install new flooring and pretty much do what they want.  At the same time, homeowners must pay taxes, perform regular maintenance and upkeep (unless you want your neighbors to despise you) and foot the bill when things like water heaters break.
2. If you’re planning on moving in the next year or two, or if your job is unstable, renting generally provides more flexibility when or if you need to move.   But if you’re happy with your job and your neighborhood, and you don’t anticipate moving in the next 5 years or more, homeownership provides you the stability of knowing how much your payment will be (except for taxes—no one can guess that one) month after month.  You don’t have to worry about rent increases or having your complex go condo.
3. If you haven’t really thought about homeownership until now, have a hard time making payments or don’t understand the process, you may want to take a step back and learn more about how to prepare for homeownership.   On the other hand, if you’ve been preparing for homeownership over the last several years by paying down your debt, keeping your credit clean and saving money for a down payment, there are a lot of bargains out there to be had.  Moving now, when the market is just starting its recovery cycle, may give you an unprecedented opportunity to earn equity.

So, if you still think that now may be the time for you to enter the world of homeownership, start the process by talking with an ethical and transparent loan officer and getting pre-qualified.    I cannot recommend strongly enough the importance of working with one who is committed to absolute transparency in lending;  in other words, one who has no problem showing you exactly what he or she is earning on the loan—including precisely how the yield spread premium is being used.

It’s Friday, so that can only mean one thing… WTMNWU…  better known as the Weekly Transparent Mortgage News Wrap-Up.  Lately, the news and the blogosphere have been abuzz about transparent mortgage services. Since this is the first, of many weekly reports, I’ve included a a couple of older blog posts. From this point forward all posts included in the WTMNWU will be no more than a week old.

• What Should Mortgage Finance Look Like? (Arnold Kling)
  

  We believe their sheer complexity is the core problem and that only increased transparency will unleash the market mechanisms needed to clean them up.

  …It is striking that no one in the regulatory community seems to think in such terms. Instead, the aim of financial reform seems to be to get us back to the financial system of 2005, but with better oversight.

• Zillow Adds Mortgage Cost Comparison Feature
  

  “Truly shopping for a loan and comparing terms and costs on an apples-to-apples basis is excruciatingly difficult for the average consumer to do. This is why so many consumers find themselves in loans they don’t understand,” said Lloyd Frink, Zillow president.

  Great… if it can be done.  At the heart of Zillow is their home evaluation.  But many real estate agents have noted it to be very inaccurate. I just did a zestimate on my home and it was $200K off the correct value.  Unfortunately the value zestimate reported was $200K less than what it should be.  How do I know? I had my home officially appraised by a licensed appraiser just a few days ago.

• New Disclosure Rules Coming for Mortgage Lenders
  

  Starting on July 30, mortgage lenders have new disclosure rules to be concerned about. Mortgage lenders will have to be more transparent about the total costs of a home mortgage loan, providing consumers with more information to make better-informed decisions.

  As with everything else in real estate, another disclosure will always help… NOT. I just put an offer in on a rental property. It’s been a few years since I put an offer on a property, and sure enough there were about 5 more disclosures I had to sign. I think real estate and mortgage contracts are growing by 2-3 pages every year.

• Transparent Brokerage Fees Are An Elephant Slayer (Yes, this is over a month old, but since this is the first WTMNWU, we thought we would add it)
  

  Transparency in mortgage brokerage is a concept that is well underway. Mortgage brokers have always been required to disclose both borrower-paid and lender-paid compensation, on the good-faith-estimate and HUD-1 settlement statement, but rarely used disclosure as a selling feature to customers.

• New Facebook Fan Page for The Transparent Mortgage NetworkWe have started a fan page for the transparent mortgage movement. Instead of waiting for Washington to reform our system in a few years (if ever), let’s inform the consumer that there are transparent services out there NOW. It’s not revolutionary, it’s actually quite simple.
  Please join the fan page and help support our movement, everyone will benefit!

Over the weekend I read another article about the steps the government is taking to reform mortgage services. I just shook my head thinking about all the tax dollars that are being spent on committees and research. You know how fast government works, right? Halfway through the article, it states that they are still years away from any type of reform. In my opinion, not only is the government again messing with the free economy, but they are taking power and the voice away from the consumer. When I say voice, I mean that most consumers think the government will make everything better and they should not demand transparent mortgage services NOW.

So I say, let’s derail this slow moving, tax funded, train!

…along with all of the reforms, really — could possibly cost consumers more for their mortgage, perhaps adding as much as a half a percentage point to their mortgage rates, said Cameron Findlay, chief economist for LendingTree.com. In addition, lenders who can’t afford to make the procedural changes might be forced out of business, which could effectively decrease competition, he added…

But, Findlay said, any extra costs would be worth it to restore faith in the system and protection for consumers. Also, it’s a drop in the bucket compared with what it’s costing to clean up the havoc created in the mortgage market and the entire economy when mortgage money was easy to get.
Source: MarketWatch

I say we can, and are, doing it now, for free and still maintaining the free economy.

Below are three points from the article that can be address now

1. Requiring transparency. Consumers would receive a simple, integrated federal mortgage disclosure that is “reasonable, clearly written and concise,” and be adequately presented with the risks and benefits of a mortgage product.
   
   First of all, we have this now, it’s called the good faith estimate. It sounds like they want to add more documents to it, that probably won’t be read by the consumer because they will be given in the already large folder-o-docs that you get with any mortgage. You can make it as simple to read as possible, but when accompanied by dozens of other documents it just become another “skim over” item.Doesn’t better, more trustworthy, business win… Instead of waiting for the government to give the people the “thumbs up” and say it is now safe to borrow and trust mortgage brokers again, the consumer should be educated and shown that there are transparent mortgage services out there. Consumer demand outweighs government intervention any day!
2. Promoting simplicity. Borrowers would first be offered “plain vanilla” mortgages with terms that are straightforward. They can obtain more complex mortgages, but those vanilla loans will be presented as a first choice.
   
   I think what they are talking about here is when a consumer cannot afford a mortgage of any type, so the mortgage broker gets creative, skips the 30 year fixed products and goes right to the adjustable mortgages. Again, it comes down to transparency of mortgage broker, and many Realtors, that often separate themselves from the mortgage side of things, need to stand up and protect their clients too. Real estate transparency is an umbrella, covering all aspects of the transaction.
   
   
3. Demanding fairness. Mortgage brokers would be required to determine whether the mortgage they’re selling to a borrower is affordable, and prepayment penalties would be banned or restricted. Hidden fees that compensate a broker for selling a higher cost loan would be banned.
   
   This is where it starts to play with our free economy. Is that gas you’re buying affordable? Is that dentist bill affordable? is your paycheck big enough… This is a slippery slope when the government starts making vendors question whether the product they sell is affordable. Maybe the government should just jump in like health care and create a government mortgage loan service and compete with the big mortgage companies? That would solve everything!

If you think that we can change the mortgage industry before the government can, please become a fan of the Transparent Mortgage Network on Facebook. Let’s build a voice and create a better mortgage system.

I love summertime.  It’s not just the whole birds-chirping and flowers blooming thing—it’s also when home sales are traditionally churning merrily.

Okay, so I might sound a little too Mary Poppins-ish there.  Blame my wife and her penchant for Julie Andrews musicals.  But the fact is, historical data shows that home sales traditionally began to heat up in early spring, and deals are still being made in June and July.   And this year, despite a relatively weak economy in many areas, looks to follow that trend, with applications for home purchases continuing to climb according to the Mortgage Bankers Association.

What is changing, however, is the type of loans that folks are choosing.  In fact, if you’re looking to buy a home, odds are that you’re considering a government-insured FHA and VA loan.  In fact, Bloomberg reports that more than one-third of prospective homebuyers are selecting government insured mortgages—the highest number since the early 1990’s.

Why would you, as a prospective homebuyer, choose a government-insured loan over a conventional one?  Well, there are a number of reasons.  First, these government programs usually have lower down payment requirements than their conventional counterpart.  If your home’s purchase price is $250,000, FHA guidelines require you to have a down payment of $8,750.00 (3.5%) while a conventional loan would require a down payment of $12,500.00 (5%).    Credit and debt-to-income standards are also generally more lenient with government insured loans than conventional loan programs.

Now, there are some downsides to government-insured loans, like you are required to carry private mortgage insurance (PMI) along with paying an upfront fee of 1.75% (this is normally financed into the loan amount), and currently the rates on FHA loans are running .125%  higher than conventional loans.  You’ll want to make sure that you talk to your loan officer about all of the pros and cons of several types of loan programs before making your decision.

Keep in mind as well that loan type will have an impact on how much your loan will cost you.  That’s why it’s extraordinarily important that you work with a loan officer you can trust—one committed to absolute transparency in mortgage lending.   Make sure that you know, from the first time you discuss your mortgage loan, exactly the type of fees that he or she will charge and how much those fees are going to be.  And ask—point-blank– for full disclosure of the yield spread premium on the loan you’re considering.  Transparency is crucial to getting the best deal for you, and should quickly be added to your list of favorite things.    Like raindrops on roses and whiskers on kittens.

Raindrops on—where on earth did that come from?  Oh wait.

Honey?!  How many times do I need to ask you not to put that DVD in when I’m working….?

I really hate posting about mortgage violations. There are hundreds of thousands of mortgage brokers making an honest living not only providing home buyers with good mortgages, but also teaching them the in’s and out’s of the mortgage process. With that being said, I don’t want this post to sound like I’m saying “Here you go, I told you so”, but I want to bring to your attention some of the violations that you see and how we at RateWindow are trying to fix them.

I found that the 5 most common mortgage violations at RISMedia was indicative of why we definitely need the real estate community to jump on the “Transparency Movement” bandwagon.  Transparent mortgage regulation is coming whether we like it or not. I believe the powerful real estate community demanding transparent mortgages would be much more effective than regulation. Below is a great example of a violation. I bring this violation up because it is so typical. Simply, it is a bait and switch.

Bad “good-faith” estimates. Good faith estimates are supposed to be documentation of mortgages and costs for buyers to compare and contrast one mortgage offer to another. However, some brokers write low-ball good faith estimates as a “bait and switch” by showing homeowners they’ll offer lower costs and mortgage terms, then later inserting higher interest rates, higher closing costs or mortgages that some homeowners can’t afford. CMAC sees 21 percent of this violation in its mortgage reviews.

Who needs to drive the transparent mortgage bandwagon?

The real estate agent directs a significant amount of the purchase mortgage business in this country which creates a tremendous opportunity to get in front of what is sure to become a highly regulated industry. Washington obviously feels a need to make sure we don’t have a similar meltdown in the future and they have the momentum to push that agenda forward. Equally powerful in my mind as Washington’s laws is for the real estate community to demand their mortgage professionals be totally transparent. Once the consumers hear the transparent voice of their real estate agents the consumers will then demand it. Once the consumers demand it, the mortgage professional better deliver or figure out another profession to try.

Again, don’t get mortgage violations, mixed up with all brokers are bad. That is hardly the case, and when you see the type of transparency that the consumer wants and needs, it should make sense. We are not trying to change the world. We just want the consumer to get an honest, trustworthy mortgage broker. It’s a start, tell me what you think.

I’m not a mortgage broker or real estate agent. I’m a programmer and like most people not in the business, I have no idea what happens behind the scenes when buying a home, getting a mortgage, going into escrow, or any other real estate transaction process. So when I was hired to develop RateWindow.com I was told about how transparency will help the typical mortgage borrower, but still didn’t truly understand it. So, I went into my personal records and found a closing statement from a condo I bought a few years ago. What I found made everything clear!

I’m pretty sure you don’t know what Yield Spread Premium (YSP) is. It is  hidden in most mortgage transactions until the closing statement is presented and home buyers are ready to close escrow and complete the home buying process. Below is an actual scan of a closing statement is which you can see the YSP among all the other fees that are associated with a home purchase.

In this case the YSP was over $3,800, a hefty chunk of change.

I didn’t even see it, until I re-read the statement 3 years later. It was probably mentioned during the 30 day escrow but at that time your head is spinning with all the docs you have to sign and things to do. Worse thing is, I was really good friends with the mortgage broker, and now that I understand YSP better, I will never look at them the same way.

Why is the YSP not even in a debit column?

because, it is not a direct payment. It is carried into the life of the loan, so not only is it a large amount, but it will be compounded by interest over the next 30 years. That alone will triple the amount.

If you are unfamiliar with YSP, you can do some research on it at the YSP wiki

An inherent problem with the Yield spread premium is that it’s anti-capitalistic. Typically, the borrower has no idea or does not completely understand how the broker is potentially compensated on the back end and therefore can’t truly price out the service being provided to the borrower. The definition of capitalism is a willing buyer, knowing all the facts and circumstances surrounding a service the buyer is considering purchasing (including how much the service provider is being compensated) makes a choice to use the service provider. Since the borrower typically has no idea or does not understand that the broker could potentially get paid on the back end, they can’t compare terms between brokers.

Back to RateWindow.com. Now that I understood YSP better, mind you I’m still a developer, and still don’t understand all the mortgage talk, I was ready to fully jump on board. I’m very proud to be part of the transparent movement now and know that I was the first to develop a web application that turned that $3,800 FEE into a rebate to the consumer.I can only hope for the future an in 5, 10, 15 years I smile when I think of all the rebates people will get with the services I helped make. I think the savings will be in the millions!

Click to check out RateWindow, even if you’re not in the market for a loan, I think you’ll see that it is a much needed service, especially with the current economic conditions of the nation.

In the eyes of a typical homebuyer, what is the lending process like? I'll talk about this in my next blog post.

Subscribe to my feed to get notified of my answer

In April, the New York Times published an article entitled “When to Use a Mortgage Broker”.   And despite the fact that I wouldn’t generally call myself a huge fan of the Gray Lady, and despite that the articles makes sometimes (frequently?) unflattering suggestions about the industry in which I have worked for the last several decades, I urge everyone to read it.  Why?  Because it absolutely underscores the need for transparency in mortgage lending.

Here’s the truth:  for years many mortgage brokers took advantage of uninformed and anxious-to-buy homebuyers.  Some built a career (albeit relatively short-lived) on encouraging folks who could not realistically afford to own a home to buy one anyway.  And they manipulated yield spread premiums—originally created to benefit the consumer—to line their own pockets

Now on the first count, there is some shared guilt.  To coin a phrase from one of my favorite movies, there are some brokers out there that could sell ketchup Popsicles to women in white gloves.  But let’s be honest–most people should be able to realize that if they only make $30,000 a year, paying for a $250,000 house is way out of their reach.   But what’s done is done, so let’s look at the next problem: the yield spread premium.

Let’s roll back the hands of time a bit, to when interest rates were hovering around 7 percent.  And let’s suppose you were looking for a $200,000 mortgage to purchase your own little slice of the American dream.   A friend of a friend of a friend recommended that you go see their cousin Earl, a mortgage broker who could “make things happen”.  So you sat down with Earl over an overpriced latte and man, did he cut you a deal!  You could get a 7 percent interest rate without paying a single cent in discount points OR—get this–you could you get a 6.75% for just half a discount point—only $1,000.  And, he says, you’ll save over 15 times that over the course of your loan.  Well Earl, where do I sign?

Here’s what Earl didn’t tell you.  The big mortgage banks that he worked with gave him a pricing sheet that morning that told him that he could offer 6.75% on a $200,000 loan without the borrower—meaning you—having to pay one single cent.  In fact, if you were to choose that rate, you could actually get a full point BACK.  $2,000 right in your pocket.

So when good ol’ Earl closed your loan, he not only made, say, a 1 percent origination fee ($2,000), he also got that $1,000 he charged you in discount fees AND $2,000 back from the lender.   That’s right—three grand goes in to his pocket in addition to the origination fee

And here’s where it really hurts.  If you were to have taken that same $3,000, you could have had a mortgage with a 6% interest rate.  And that, my friend, would have saved you $45,000 over the life of your loan.

So I get why the NYT suggests that people be cautious in working with mortgage brokers—in fact, I wholeheartedly agree with them.  And it’s why I absolutely believe that there needs to be transparency in mortgage lending across the board.  Give people all of the information they need, and they’ll usually make the right decision for themselves and their families.