A couple of weeks ago we posted a blog titled, “Future of Lending – Who Will Fill the Gap?”    In yesterday’s (February 14th) Washington Post, an article by Dina ElBoghddy and Renae Marile titled “Refinancing unavailable for many borrowers”, is a much better discussion of the problem borrowers and lenders are starting to face because of the mounting numbers of people who have suffered credit problems or home valuation problems because of the current recession and problems in the mortgage industry and consequently can’t qualify to refinance.  Refinancing unavailable for many borrowers

The challenge and/or opportunity for lenders in the coming months and years with refinancing this large group of people who cannot qualify for a refinance transaction under the current lender guidelines or because home values have declined significantly, will be an interesting situation to watch.

Over the past few years, as lenders have become very strict with underwriting guidelines and stopped lending to borrowers in situations resulting from a bad economic environment, (self employed, less than 620 credit score, BK or foreclosure in the last four years, for example).will this growing group of people ever be able to qualify for home loans again?    If the economy struggles on for another couple of years, as may well be the case, the number of people who can’t qualify for loans under the current underwriting guidelines will grow to be a very large number.   Will they all be destined to be renters for the rest of their adult lives, which is not such a bad thing, but certainly not the American dream.   Or, will lenders be able to bring back portfolio lending and start to address the merits of each loan individually?

Will underwriting standards change to address particular situations that were not the borrowers fault?   How big will the pool of people be that can’t get loans under the current guidelines?

If the number of people gets really large will the government feel obligated to get involved and force lenders to make loans to people in this large pool?

Are we on a path that will start to replicate itself as a multitude of previous home owners want to be homeowners again?   What about that person who had perfect credit until their company went out of business and they lost their job?   Can we turn back the clock and consider only their credit history prior to the job loss that wasn’t their fault?

The longer people continue to fill that bucket of unqualified borrowers, the more need there may be for creative lending in the future.   Isn’t creative lending what got us into this mess in the first place?   Does history truly repeat itself in the mortgage business?

Not only have people asked why we created RateWindow they have asked what does it do for real estate agents. In an attempt to answer those questions– 1st of all Why?

We created RateWindow because as an owner of a financial planning firm, in a former life, we were always dealing with our clients and their mortgages on purchases and refinances. As we dealt with those clients we came to the realization that the biggest purchase most people make in their lives is their home. We also realized that the three most important things about real estate ARE NOT location, location, location. The three most important items are financing, financing & financing. As we dealt with this more and more we decided to dig deeper into how mortgages were priced and how they could be structured to serve the best interests of our clients. We didn’t have to dig too deep to realize that our clients best interests were not being served by the lending community at all, but were serving the pockets of the lending institutions and their mortgage originators.

From this investigation came the idea for RateWindow, a tool for consumers to be able to see all the interest rates available from a mortgage originator and make the choice that was best for them not the originator. RateWindow reveals the rate sheet to the borrower in a simple, concise, and understandable way so they can choose what is best for them. As an example if a borrower needed some additional funds to cover closing costs then they can choose a higher interest rate and use the attached YSP (yield spread premium) to offset those costs. They can also see what the higher interest rate would do to their payment and they can see it in 30 or 15 year fixed rates or for 5/1 arms. The borrower could also choose the par rate or what it would take to buy the interest rate down. Borrowers armed with that information created a great deal of trust with a mortgage professional who worked off the platform of trust and full disclosure, including a fixed fee for the service the mortgage professional performed.

This included that all third party fees such as processing, appraisal, and other fees were passed through at cost and did NOT include any junk fees that further padded the pocket of the originator. Clients of both the real estate agents and mortgage professionals loved the transparency of the transaction so we decided it time had come to bring it to as many borrowers as we could and thus came the creation of RateWindow.

Secondly, what does it do for the Realtor? We have designed RateWindow as a small application (widget) that will run on anyone’s website including real estate agents sites. Real estate professionals work really hard to get people to their sites so RateWindow provides their sites with additional adhesives so they will stay there. A real estate agent could say to a prospect, “Go to my site and not only can you see all the real estate for sale, you can also check out all the mortgage rates available and if needed get cash for closing costs.”

Not only can you wear the White Hat for your prospects and buyers to expose them to total transparency in the mortgage world, RateWindow also will send a “soft touch reminder” newsletter with your branding and most recent blog post to those who opt in for updates on the rates available. All of this comes from your website and doesn’t take your hard earned traffic somewhere else!

There seems to be the thought, in some circles, that the new Good Faith Estimate required on all residential lending transactions as of January 1st, has somehow infused the mortgage industry with instant integrity across the board.

Nothing could be further from the truth.

There seems to be little argument that mortgage professionals could use a bolstering of their reputation and integrity, but the new GFE is not to vehicle to accomplish the task.   As the days of December clicked by and implementation of the new GFE came closer and closer, my inbox was regularly filled with lender invitations to attend training sessions on using the new form.

These invitations contained descriptions like, “we will teach you how to keep charging YSP”, and “the new rule does not mean we can’t keep charging YSP.” Some went even further by stating, “you can still charge YSP and we will show you how to get around the new rules.”

Just as the new GFE was mistakenly concocted by those without a thorough understanding of the lending process and sensitivity to the needs of the borrower, it seemed those charged with championing the implemetation of the misdirected form were also void of borrower understanding, and what’s more, didn’t seem to care about their integrity in the arena of public opinion.   The central place where borrowering customers are found and retained.

This attitude of mortgage professionals, centered around “saving our precious YSP and the ability to control the borrower”, just reinforced the untrustworthy label conveniently stamped on the industry professionals by the bureacrats and main stream media as the lending environment has deteriorated over the past couple of years.

This has been a huge lost opportunity for loan officers and originators everywhere. What should have been a huge opportunity to bring integrity and transparency to the lending process has simply been squandered.

For decades, Realtors have been totally transparent with their fees.    Sellers understand that there is a cost associated with having someone market, show and sell your property.   Borrowers would understand if mortgage professionals transparently disclosed their fees up front as well.   No one expects others to work on their behalf for free.   Hiding broker or loan officer compensation in line 2, page 2 of the new GFE is no improvement in disclosure and certainly no feather in the cap of transparency in lending.

I applaud the FHA working in concert with the OIG (Office of Inspector General) in researching the underwriting guidelines of 15 mortgage lenders. The main thrust of the investigation is to make sure that these mortgage lenders are not issuing loans that would undermine the financial viability of the FHA. These 15 mortgage lenders had a higher than normal incidence of defaults on the loans that they issued.

With the FHA being one of the major sources of home mortgage financing it is imperative that they are protected from what we have been through recently with Fannie and Freddie loans.

David H. Stevens, Assistant Secretary of Housing for the FHA has said, “It’s important to note that FHA has been taking actions against poorly performing lenders since the day I took this job six months ago. This cooperative effort with the OIG is another indication that we will not tolerate lending practices that pose a risk to the FHA fund, and we have pledged to assist the Inspector General’s Office in any way we can. The Inspector General’s initiative will help us determine whether there is fraud at these companies and better manage risk in the long run.”

We here at RateWindow will be cheering you on!

“You don’t need to worry about the amounts in that column.  That’s being paid by the lender, not by you.”

“YSP isn’t paid by the borrower so you don’t need to worry about it.”

These are common phrases that might be heard by a borrower when asking questions about loan documents.

Does the lender really pay the Yield Spread Premium (YSP); or is it covered by the borrower through increased payments over the life of the loan?  Even if you get straight answers to your questions when you are sitting at the closing table, in most cases, it’s really too late.  Not many people at that point are willing to walk away from a home purchase even though they are surprised by $2,000 to $5,000 in additional cost when that is less than 1% of their purchase price; or $50 – $100 more in their monthly payment.  The lender and mortgage professional know this and are confident that very few borrowers will: stop the sale of their current home because they “didn’t understand the paper work”; or walk away from the closing table and disappoint their family by telling them that the home that they shopped 6 months for and worked the financing for the past 3 months on isn’t theirs after all; or voluntarily spend another several months in a rental after all the work they’ve done in getting to closing.

The situation is not so dissimilar to the used car deal and “car dealer math” that we make so many jokes about – the difference is that used car payments last a couple years while mortgage payments last 30 years and the cumulative $100/month difference could have purchased multiple used cars.  The need for transparency in home buying prior to arriving at the closing table is critical.  This inherently means that the buyer needs to have some idea of how the mortgage professional is paid.  The upfront stating of the price for the service being provided would be refreshing.  Instead of the taking of money behind the borrowers back with out them being aware.  With the lingering mistrust of the mortgage industry in general, transparency in the “mortgage math” could go a long way in restoring confidence to a still troubled industry.

The new mortgage disclosure form required to be used as of January 1, 2010 commonly known as a GFE (Good Faith Estimate) in my opinion doesn’t adequately accomplish Washington’s goal of complete transparency.

In a recent blog post I put on Active Rain I identified all of the fees that are charged to a borrower are lumped into one number. If all the costs that a mortgage loan originator can charge are in one number it will open up opportunities for a borrower to be confused as to what the charges amount to. Since these charges for completing a mortgage are for the most part not changeable a loan officer is going to charge as much as possible. The reason for this is, if the borrower completes the loan as quoted in the GFE it is locked in with very little variance. As an originator if the charges exceed the costs that he quoted it could cost him (the loan officer) money. Most loan originators are not going to be willing to pay to provide a mortgage for someone and have it cost him money.

Having all the charges lumped into the one line could also be confusing to the borrower. Transparancy should allow a borrower to identify all the costs in a line item format so an educated decision can be made.

With the recent Real Estate Settlement Procedures Act (RESPA) changes to the good faith estimate (GFE) effective January 1, 2010, it’s seems time for mortgage loan officers to let go of the Yield Spread Premium (YSP) dependence. For decades, real estate agents have been making their living charging a flat fee that is always disclosed up front when the real estate contract is signed by the seller. There is no mystery surrounding the fee, and the Realtor has no opportunity to manipulate or hide anything from the seller. Some loan officers have depended far too long on their ability to direct borrowers into interest rate commitments that may not have been in the optimal interest of the borrower, but certainly may have lined the pockets of the loan officer.   This is not to say that all loan officers have been lining their pockets, but the time seems to have come where full, upfront disclosure and transparency of the loan transaction details is overdue.

Loan officers can easily charge a flat fee, a fixed percentage of the loan amount, or a fee on some sliding scale based on the strength of the borrower, disclose this fee structure up front, and then allow the borrower to see the best rates the loan officer has to offer, and allow the borrower to make their own choice.   In addition, with the YSP now required to be given back to the borrower as a credit toward closing costs, if the borrower sees all interest rate alternatives side by side with the available YSP and payment information, they can make an informed and balanced choice that works best for their particular situation.   If the borrower wants a little higher interest rate that throws back a higher YSP credit to cover closing costs, let that be their decision and not left in the hands of the loan officer.   In this way, the loan officer is assured of getting paid a fair and reasonable fee for the loan, and can help the borrower make judgments that are focused away from how much the loan officer will make on the deal.

It’s seems time to release the death grip on YSP and transition to a flat fee or percentage of the loan amount fee for the loan officer that is disclosed on the front end of the transaction, not only for the benefit of the borrower, but for the reputation and credibility of the loan professional.

I never thought I’d see the day when the Washington Post and I were on the same page.  But there it was—right there on my screen—an article posted online about transparent mortgages.

Okay, so I admit it—the article isn’t ACTUALLY about transparent mortgages, per se.   It’s about how to reduce the amount of closing costs that homebuyers have to pay.   But one of those suggestions?  To shop and negotiate all of a loan’s terms, not just the rate.

Finally!  Folks are starting to get it!  There is more to a mortgage loan than just an interest rate…a lot more.  And if there’s one thing that the past few years has taught us, it’s important to take a look at all of the details before making a decision as big as the one to buy a home.

Here’s an example that’s pretty close to home for me.   A friend of mine—we’ll call her Janice—was looking at buying her first home.   Now, in the interest of full disclosure, I have to tell you that Janice has worked in my office for about 10 years or so, so she was pretty familiar with the mortgage process.  But this time it was different, because it was her name on the mortgage.

Now, she was bound and determined to get absolutely the lowest rate she could possibly find.  Weeks went by as she considered loan option after loan option, debated whether to lock her rate or let it float—to tell you the truth, she was making us all a smidge nuts.  (Sorry Janice.)  But one day, when she was going through everything that she would have to bring to the closing table, she took a closer look at the rate sheet.   And what did she realize?  That by taking a rate that was just 0.5% of a point higher, she would receive a credit of almost $2,000 that she could use toward her closing costs.   That made a huge difference in her budget.  But the difference in her monthly payment?  $9 a month.

Now there are those folks who would start protesting and saying how when you multiply that $9 a month over the term of the loan, you’d pay thousands more than the credit you received.  Yeah.  So again in the interests of full disclosure, I should tell you that after Janice has paid on the loan for 217 months—almost 18 years—she will indeed be “upside down” on that $9 a month payment.  It is also likely that by then she’ll be making more money than she is now—at least more than $9 a month more—or that she will have long since sold the house.

Listen, the point is that everyone who is buying or refinancing a home needs to look at all of the loan terms—including asking to see the back-end (transparent) pricing that the loan officer sees—before making a decision that will impact their budgets now and in the future.   And yes, requiring lenders to be as competitive as possible in every aspect of the loan programs they’re promoting.

Congratulations, Washington Post.  You got this one very, very right.

A lot of information has been in the news recently about folks buying and selling (or trying to sell) their homes.  Less focus has been paid, however, to why right now is a great time to refinance.  And the folks who should really be paying attention?  Those heading into retirement in the next decade or so.

In a report titled “Should You Carry a Mortgage Into Retirement”, Anthony Webb, a research economist at the Center for Retirement Research at Boston College finds that retired households are better off repaying their mortgage, as they are unlikely to find a return on investments that make more than they’re paying in interest every year—even when taking tax deductions into account.

Having been in the financial services industry for over 30 years, I was actually surprised to learn in Webb’s report that as recently as 2007, 41% of folks in their 60’s had a mortgage—and more than half of them actually had money that they could use to pay off their house in entirety.   But I understand why.

You see, while everyone would love to head into “their golden years” with no debt and plenty of cash in the bank, most people have to take a realistic, balanced approach based on where they are now and what they’ll need in the future.  If your home is paid in full, but your cash reserves are limited or non-existent, retirement won’t be a piece of cake.  After all, as I like to say, you can’t eat sheetrock.  On the other hand, if your savings and investments are being drained because of monthly mortgage payments, that also limits the time and resources you have to enjoy a well-earned retirement.

That’s why for those who are thinking about retirement within the next 15 years or so—especially those who have lived in their home and have a positive equity position—now is a great time to refinance to a lower rate.  And, depending on how long you have until your retirement and your ability to build long-term wealth, it can also be an excellent time to reduce the term of your loan.  By doing so, more of each monthly payment goes towards paying down principal and getting you closer to being a homeowner in the truest sense of the word—without putting you at risk of being house-poor either in the short term or longer one.

So should you carry a mortgage into retirement?  Only you can answer that one.  But whether the answer is yes or no–just remember that now is still an excellent time to make the most of every dollar by reducing your interest rate or loan term.