I got a call from a young unmarried couple this week that went to school with my two sons, and whom a Realtor that I partner with referred to me. This young couple had been Pre-Qualified by one of the major Internet Lenders that advertises a lot in my area. This Realtor has been around long enough, and burned enough times by this type of Lender, that he does not trust their Pre-Qualification Letters.
The Pre-Qualification Letter from the Internet Lender was just on the female member of this relationship, because his credit scores were in the low 500’s. Her middle credit score (which is what we use) was 701, and the Pre-Qualification was for a “Stated Loan”. I don’t know about other Loan Officers, but I do not have any Stated Loan Programs for credit scores in the low 700’s.
When I got the call I did what I always do, I asked a lot of questions. I particularly ask if they know what their credit is before I run it, and what their income is. From the initial response that I got it was clear that I could not qualify them on just her income for the amount they wanted to be qualified for. So I suggested that we first look at both their credit, because sometimes we can fix someone’s credit very quickly. When I looked at the Credit Report, it was obvious that it would take a few months to correct his scores, and they wanted to purchase a Condo right away.
It was clear to me why the other Loan Officer was trying to do a Stated Loan on her only. She is a Waitress, and even though she receives a base hourly rate, a large part of her income is from tips, and she does not claim all the money that she receives in tips (a way of not paying taxes, but not good for mortgages). I asked her if she had any documents from the other Loan Officer, she said she did and would e-mail them to me.
I quickly looked at the documents as soon as I received them, and I did not like what I was seeing. Right off the bat the interest rate was one point higher than my rate, and the Closing Costs were $1,000 higher. The other Loan Officer also grossly understated the taxes and condo fees for that area. It became even clearer what was happening when I looked at the income that he was stating. He was stating both her income and his, even though she was the only one on the loan.
I called her back and went over with her what I was seeing, and then told her to read the disclosures that she had received VERY carefully. The disclosures stated that she was giving them permission to verify the income, by giving them permission to request her tax returns. It went on to say that tax returns might be pulled at time of application or by Quality Control after the loan closes. It also warned her in several place about providing false information.
This Loan Officer was encouraging them to sign documents that obviously contained false information. That is not only FRAUD on the part of the person signing the documents, but also FRAUD on the part of the Loan Officer encouraging them to sign documents that he knew contained false information.
I showed the Realtor the documents that they had received from the other Loan Officer, but he was already aware of them, because she had also forward them to him. He told me that he was not going to have anything to do with this, should this young couple decide to go forward with this Internet Lender.
He and I have advised them of the consequences if they go forward with this, as well as the games that will probably be played with them along the way. Should they do this, they will be doing it with full knowledge that this is Mortgage Fraud. I am also going to encourage them to report this Lender to the Banking Commission, should they decide not to go further with them.
So be careful out there, even though things have slowed down a little bit, and Lending Guidelines have tightened, the unscrupulous are still around, and spinning their web of corruption.
We received an Update today form our Washington, DC contact informing us that the Bush Administration and House of Representatives have apparently come to an agreement, but there is still some uncertainty of what they have agreed to because the Bill is still being drafted. However, one point is pretty much certain, the FHA and GSE limits will be increasing in the near future.
The Administration-House stimulus bill will include a provision raising the FHA limits to a 125% of median sales price with a maximum loan amount of about $729,000. This provision appears to be the House version of the FHA bill. It is believed that the House FHA bill (H.R. 1852) as drafted will also be included in the stimulus. If so the House version will raise the “floor” to 65% of the GSE limit. But our Washington contact stated that they will have to wait and see how the GSE language is written to determine whether the FHA floor will increase to 65% of the temporary limit (i.e. $625,000)
Impact on Current FHA Limits
For FHA, this change raises the current cap of 95% of median sales price to 125% and also raises the maximum from $362,790 to $725,000. For example, if 95% of the median sales price ($368,421) resulted in an FHA limit of $350,000 today, the new limit, if this provision is enacted, would be increased to approximately $460,500. Of course, in a market w/ a median sales price of $500,000 (1.25 times $500,000), the limit would increase to $625,000 and so on. Confusing, I know.
What is Next?
Our Washington contact believes that the legislation will likely be passed by the House very quickly (in the next week). It will then go to the Senate for consideration. But the House and Senate still have to work out the existing differences in the FHA bill including the mortgage limit issue. Of course, the Administration support of the FHA mortgage limit increase will be a positive force behind the negotiation process. In addition Barney Frank has removed the housing trust fund from the FHA bill eliminating a point of controversy. Outstanding issues in the FHA bills are the mortgage limits, mortgage broker approval requirements, risk-based pricing and seller funded downpayment assistance programs.
Our Washington contact also expects this bill to be “fast-tracked” and hopeful passed by February 15th.
Even though this is a little confusing I hope it helps a little bit. Stay tuned for more as I get more Updates.
As some of you might have already heard by now, over the course of the last 30 days, both Fannie Mae and Freddie Mac have announced new Loan Level Price Adjustments as a result of an increase in delinquency rates with certain mortgage characteristics. This change has resulted in an increase of borrower points on certain loans. These changes are global and will affect all lenders and brokers. These new point adjustments do NOT apply to Easy First or Expanded Approvals Level I & II, or Government Loans like FHA, but will apply to all other CONVENTIONAL CONFORMING fixed rate products. These Loan Level Price Adjustments formally took affect Friday December 7, and will have a significant impact on future Closing Costs for many Borrowers. The Loan Level Price Adjustments are as follows.
We all knew that the present turmoil in the Lending Industry was going to bring about change to Lending Guidelines in an effort to correct the present situation.
However, I disagree that the way to do it is through the pricing side of Lending, but rather it should come from the Debt-To-Income side. Presently I can approve a Borrower with marginal Credit Scores for a Conventional Loan with up to a 65% Back Ratio. That means that 65% of their GROSS INCOME is going towards their mortgage and other revolving monthly debt (car payments, credit cards, student loans, etc.). Once Uncle Sam takes his cut, they are lucky if they have 15% of their income to purchase food, cloths, pay for utilities, and buy gas at over $3.00 per gallon. Guess what 15% is not going to cut it, and as a result foreclosure is probably in their future.
So the answer in my opinion is not in making houses less affordable by increasing Closing Costs, but rather by lowering the Ratio’s to where they make sense. Until that is done, people will continue to over extend themselves to purchase houses that they cannot afford, and Lenders do not have any choice but to grant them the mortgage as long as they get an Approved/Eligible through Automated Underwriting.
Pricing will not stop foreclosures or produce better qualified Borrowers, but reducing the percentage of income that can be used to purchase a house will have a major impact in reducing bad loans. Change is needed, but it needs to be change that brings about positive results, and not change that is only going to further the problem.
Connecticut Governor Jodi Rell announced November 8th a new subsidized Mortgage Refinance Program called CHFA CONNECTICUT FAMILIES PROGRAM. This new refinance program will be administered through CHFA who up to now has only done purchase loans.
The purpose of this new refinance program is to enable low to moderate homebuyers that purchased their first home using a 2/28 subprime ARM that is delinquent or face steep payment increases due to the reset of the ARM. “Under the new program, borrowers with a subprime mortgage who cannot make their mortgage payment and currently reside in their home may apply to CHFA for refinancing. The new CT FAMLIES program will assist low and moderate income borrowers who took out a subprime loan to purchase their first home by refinancing them into 30-year, fixed rate amortizing loans.”
Some of the highlights on this program are:
Other States may also be establishing similar local programs to help Subprime Borrowers in their State. I would suggest that those in areas outside of Connecticut check with their local Government to see if similar programs are in the process of being developed.
More details of this program will be issued as we approach the December 10th commencement date, and I will Post them as they become known.
Stated Income Loan Programs are very popular Loan Program for Self Employed and Commission Income Borrowers. However, with all the change that have occurred in the Lending Industry, these loans have become more difficult to do. So you may ask, if these loans are more difficult to do these day, why am I doing a post about them? The answer is simple, it is to give a warning to anyone who took out one of these loans, and finds themselves in default today. But main reason for this Post is to advise those who might take out one of these loans in the future.
For those who have one of these loans, you should check to see if one of the disclosures in your loan packet is a 4506 Request For Copy Of Income Tax Return Form. For those who might do one of these loans in the future, you need to understand what a 4506 is, and what you are exposing yourself to when you sign one.
Let me explain, Stated Income Loans are for people who have great credit and make enough income to purchase the house of their choice, but either do not want to, or might have a hard time producing documentation to verify their income. These Borrowers find themselves in a tough situation, because they know they can afford the house that they want to purchase, but producing the documentation to prove it might be a big hassle. Lenders recognizing this dilemma, and developed Stated Income produces to fulfill this need. These Stated Loan Programs require the Borrower to have higher Credit Scores than would be needed for a Full Documented Loan, but in many cases will have a higher Interest Rate. These Stated Loan Programs require the Borrower to state their income on the Loan Application, and sign the Loan Application stating that the information that they have provided is true. So far no problem as long as what was stated was the truth. But a problem could arise if the Lender requires the Borrower to sign a 4506 Request For Copy Of Income Tax Return Form giving the Lender permission to pull the Borrowers tax returns if they should feel the need to. That could be a major problem if the Lender either before or after the loan closes, pulls the Tax Returns, and the Tax Returns do not verify the income that the Borrower stated. This would be fraud, and the Lender could choose to pursue criminal charges against those that they feel provided fraudulent information. Not all Stated Income Loans require a Borrower to sign a 4506, but those that do the Borrower needs to know what they are signing and the consequences if they cannot prove the income that they are stating on the Loan Application. I do not do Stated Income Loans that require a Borrower to sign a 4506, because I will not put myself or my Borrower in a position that could be considered fraudulent in the future.
There are solutions for this problem. Borrowers who truly have the income to purchase the house that they want to buy, but for what ever reason cannot verify it, have a couple of Loan Programs available to them. These loan programs are know as No Ratio, and No Income Loans. These loan programs do not require a Borrower to sign a 4506, because with these Programs a Borrower does not state any income. In the case of a No Ratio Loan the Borrower does not state income, but does state place of employment. A No Income Loan does not require the Borrower to state income or employment, those areas are left blank on the Loan Application.
Both of these Loan Programs usually have a higher Interest Rate than a State Income Loan Programs, because they carry a higher risk. This is because the Lender is taking the Borrower at his/her word, because the Borrower’s Credit Scores and history demonstrate that the Borrower manages his/her finances extremely well, and for a higher cost the Lender is willing to take the Borrower at his/her word. Even though the Interest Rate on these Loans are higher than they are on Stated Income Loans, they are not much higher. And for the slightly higher Interest Rate both the Borrower and the Loan Officer have the peace of mine that they are not signing some thing that later could be considered fraudulent.
Now all of these Loan Programs are for the Borrowers that have the necessary Credit Scores to qualify and who truly have the necessary income to purchase the house. THEY ARE NOT for the people who have the necessary Credit Scores, but do not have the necessary income to purchase the house, and will do anything possible to purchase it, including lying on a Loan Applications. I place a large amount of the blame for this on Loan Officers who have questionable ethics, who many times will suggest these Loan Programs to Borrowers who have no business being in them, and then later find themselves in foreclosure. Foreclosure is one of the times that the Lender will definitely pull the Borrowers Tax Returns. This is a danger especially for Subprime Borrowers. Subprime Lenders allowed for Stated Income Loans with much lower Credit Scores than the Borrower needed for Conventional or Alt A Stated Income Loans. Many of these Borrowers may find themselves unable to make their Mortgage Payment once these loans begin to adjust, and if they go into foreclosure they may have a bigger problem then just losing their house.
There are Stated Income Loans that are truly Stated Loans, and do not require a 4506, but more often than not one will be require. So as I stated in the beginning of this Post, be careful what you sign and know why you are signing it. If you see the numbers 4506 at the top of a form make sure that you understand the ramifications in signing it, and if you can not prove the income that you are stating on the Loan Application, then DON’T SIGN IT.
The hot mortgage topic these days is the American Homeownership Act of 2007 Bill: H.R. 1852 and the anticipated changes that it is expected to bring to lending guidelines for FHA Mortgages. The entire Bill can be found at H.R. 1852 for those of you who would like to see all the details of the Bill. However, Rick Grand did an excellent job on summarizing some of the highlights of the Bill in his blog tilted H.R. 1852 Passes the House for those of you that are not up to reading the whole Bill.
The House passed this Bill on September 18th and the Senate Banking Committee passed their version of the Bill on September 19th. HOWEVER, the bills don’t match therefore it goes to conference to resolve the differences. Once this is occurs it Bill will go to the Senate for a vote. We in the Real Estate Industry can also play a major part in the passage of the this, by contacting our Senators and asking them to support it when it comes up for a vote. This can be done in a couple of ways. First you can call your two Senators and voice your support or you can go onto the website for Realtor Action Center.com and be a part of the Call To Action that they will put out at that time. We at McCue Mortgage will be staying on top of this and I will put out another blog making you aware that this Call for Action is now up.
The steps for being part of this effort are very simple and I am including them at the end of this Post, and will Post them again when the time comes for us to take action on this. What Realtor Action Center.com does is provided a letter that you can send to you Senator directly from their site, asking your Senator to support this Bill when it comes up for a vote. You can either use their letter as provide or you can edit it. In the mean time you might want to go on this site and register ahead of time. You can also check out their other "Call For Actions" that might impact you. The steps that you need to take are as follows:
We are all aware of the Medias hunger to sell newspapers, and unquenchable thirst to get people to listen to their news station, even if it means coloring the truth to satisfy this desire. For the Media to behave in this manor is bad enough, but when people from the industry that is being misrepresented are willing parties to this for the sake of a little free publicity, even if it will negatively affect their industry, it is even worst.
So is the case with a FRONT PAGE article in the Friday edition of the Hartford Courant by Staff writers Robin Stansbury and Kenneth R. Gosselin “Death Of Zero-Down”. The article as the title implies is about the “Death Of Zero-Down Loans”. This as in the case of the mistakenly reported “Death” of Mark Twain has “been greatly exaggerated”
Yes, Subprime has discontinued their 100% Loan Programs, and SOME piggy back loans (80/20, 80/15/5, & 80/10/10) have also been discontinued. But My Community loans that receive an Approved/Eligible and EA-I/ Eligible approvals from Fannie Mae, as well as other 100% Loan Programs like Flex 100, EA-I, Ea-II, and EA-III, and State specific Loan Programs like Connecticut Housing Finance Authority (CHFA) are still very much alive and well.
But apparently some Mortgage Brokers who find themselves unable to do 100% Loan Programs have found it necessary to jump in bed with the Doomsday Media to be the prophets of doom and gloom of a market that is still very much alive. In the article Michael Menatian, president of Sanborn Mortgage Corp. in West Hartford, CT., stated that "If someone walks in today with an A-plus credit history and a $200,000 salary but no money for a down payment, I can't help them anymore," Well maybe he can’t but there are still many Lenders like the one I work for, McCue Mortgage that can. I am still getting approvals on 100% Loan Programs without any problems. I placed one yesterday, and have three more ready to go as soon as the Borrower’s offers are accepted. One of these is an EA-I on a Borrower that needs Seller Paid Costs, has only one months reserves, and has a 636 middle Credit Score. Another is an EA-III with a 578 middle Credit Score, three months reserves, and needs Seller Paid Costs.
Not every thing in the article is incorrect or exaggerated. For example it is true that “Two of the country's biggest home lenders - American Home Mortgage Investment Corp., which employed about 220 people in Connecticut, and New Century Financial Corp. - have filed for bankruptcy. Earlier this year, Middletown-based Mortgage Lenders Network also filed for bankruptcy and folded, costing 1,800 workers their jobs - 950 of them in Connecticut. Stocks of many surviving lenders are at multiyear lows, and it is common to find shares in the industry that have lost 90 percent of their value in the past six months, or even weeks.”
But it is not true that "Our industry is changing by the hour," as Dan Rosenfeld, vice president of Landmark Financial Group stated. He also went on to say in the same article that his "screen flashes all day long, `No longer available.' Lenders are really tightening their standards." Talk about getting carried away and over exaggerating. If this was true we would be all out of work with no loan product to sell. I don’t know who he is placing loans with, but he needs to find some new Lenders if he is even experiencing a small example of this.
I would venture to guess that the reason why the Mortgage Brokers in this article are no longer able to write 100% Loans, is because they might still be trying to place loans that do not meet Fannie Mae, Freddie Mac, or FHA guidelines. Those of us who write loans according to these guidelines are still very much alive, and the “Report Of Our Death Is Greatly Exaggerated” Those that have gone on to their demise, are the ones that wrote loans that did not conform to Fannie Mae, Freddie Mac, or FHA, and could not get rid of them when they went bad.
If your Broker or Lender tells you that they can not do 100% financing, then pick up the phone and call someone like me. We are more than happy to do them for you, as long as they conform to the underwriting guidelines of Fannie Mae, Freddie Mac, or FHA., which in my opinion are still very liberal.
Be very careful of what you read in the newspapers, or hear on the radio and TV these days. Hype sells, and they are more than happy to provide it as long as it puts them on the FRONT PAGE, or the LEAD STORY to a broadcast. And SHAME on those in our industry that are helping them deceive the public like this.
I have been trying to write a Post all week, to announce the latest change in the Lending Industry, but this has been one of those crazy weeks that time just did not allow. But I guess it is better late than never, and hopefully this will help you to understand why some area’s of the country might start to see a tightening on 100% financing in their area.
As of last Monday July 22nd, Fannie Mae began to incorporate a new message in their Automated Underwriting (DU) version 5.7 feedback related to declining property values. Starting on July 22nd Fannie Mae will require a reduction in the maximum Loan-To-Value (LTV) of 5%, if the property is termed “Declining Market” on the appraisal section of the “Fannie Mae Underwriting Findings”
Fannie Mae states that “if a property is located in a market in which Real Estate Values are declining, the lender should offer financing at Loan-To-Value ratios (LTV, CLTV, and HCLTV) that are 5% below the maximum allowable ratios. However, if the refinance transaction relates to an existing Fannie Mae-owned of Fannie Mae-securitized mortgage, the lender may offer financing at the stated maximum Loan-To-Value ratio (provided that there is no subordinate financing including a home equity line of credit).”
What does all this mean? What it means to me is that if an appraisal states that a property is located in a market that is deemed to be in a “Declining Market”, then the maximum Fannie Mae backed loan that can be done is 95% LTV (5% downpayment). This has the potential of having a major impact on "First Time Homebuyers" since they are the ones that are most likely to require 100% finance. To the best of my knowledge this will not affect Connecticut very much, but in Florida this could be huge.
My advice is to talk to your Appraisers to find out what areas of your State might be affected by this change, so that you do not get caught off guard. I will try to continue to keep the members of AR aware of changes as they are made know.
I continue to hear Realtors talk about their Buyers getting to the Closing Table and their Interest Rate is different from what they were originally told. In a day where information is available at a click of a mouse button this should never happen. Buyers need to take the time to educate themselves before they make the most expensive purchase that they have ever made in their lives. If they do, or we who are helping them make that purchase provide them with the necessary advice, an Interest Rate change without their prior knowledge would never happen. Let me explain why this should never happen.
We have read many articles and blogs about how important it is for a Borrower to always get a Good Faith Estimate and Truth In Lending Statement. Well equally important, if not even more important than the two disclosures mentioned is a third disclosure, a “Rate & Point Lock Letter”.
A Rate & Point Lock Letter should contain and disclose the following information. It should state whether or not their taxes and homeowners insurance are being Escrowed or whether they are waiving it. It should state whether their Interest Rate has been Locked or whether they are Floating the Rate. The Borrower needs to make sure the Interest Locked box is checked if this is the Interest Rate that they expect to receive. The Rate and Point Lock Letter should also state what points are being charged on top of the Interest Rate that they have selected.
Now even though all these things are disclosed on the Rate & Point Lock Letter, this alone does not prevent a Lender from changing the Interest Rate and or Loan Program at the last minute. In order to prevent a Lender from changing the Interest Rate and or Loan Program a Borrower needs to make sure that one more section has been filled in on the Rate & Point Lock Letter. On my Rate & Point Lock Letter that section is at the very bottom, and it is titled “Alternative Mortgage Programs” and it contains the following:
Now here is what the Borrower needs to make sure is checked off:
I always advice my Borrowers to check off I DO NOT, because if I have to turn to a different loan program, I feel that it should be their decision if they want to do that or not. And if they choose to go with the new loan program, then they need to get a new Good Faith Estimate, Truth and Lending Statement, and Rate & Point Lock Letter.
The Rate & Point Lock Letter also needs to be signed by all the Borrowers AND the Loan Officer. If all this is done a Lender/Bank CAN NOT surprise a Borrower at the Closing Table with a different Interest Rate or Loan Program. If they do it is fraud, and they are open to litigation.
Help protect your Buyers from last minute Interest Rate and Loan Program changes, by making sure that they have a signed and properly filled out Rate & Point Lock Letter. Otherwise they are open to last minute surprises at the Closing Table.
Fannie Mae has just announced two program changes to the My Community Loan Program which will have significant impact on future My Community Loans.
The first change is that effective immediately Fannie Mae is requiring that 1 point be charged on all My Community Loans. Fannie Mae is calling to this cost a “Risk Adjustment”. This additional cost is across the board for ALL Lenders, they are not making any exceptions. This 1 point risk adjustment can be included in the Seller Paid Costs that Fannie Mae allows on My Community Programs, but no matter how you look at it, it is an additional cost.
This change could have a very negative impact on Buyers who might have had enough money for closing costs prior to this change, but now are not able to come up the additional money. My Community is a 100% Loan Program, so Borrowers who apply for this loan usually have very little money, this means any additional cost can have a tremendous impact, much less a full point added on to the closing costs.
The second program change that Fannie Mae recently announced was on the Expand Approval Level 2 Loans (EA-II). Effective July 22, 2007 EA-II Loans will no longer be eligible for the My Community Program. Also any Automated Underwriting (DU) approvals prior to this date must close by August 24, 2007 in order to take advantage of the prior approval.
This change will have a significant impact on the Borrowers monthly payment, because of the additional PMI costs. The PMI multiplier for a My Community Loan is .59 as opposed to a regular EA-II which has a 1.42 PMI multiplier. What this means is that a My Community Loan has a $49.17 PMI payment per every $100,000 borrowed, as opposed to an EA-II Loan which will have a $118.33 PMI payment per every $100,000 borrowed. That is a huge difference, and could be the difference between a Borrower qualifying for a loan or not.
These are the first changes that I have received to 100% Loan Programs, but we have all been expecting changes to happen. Hopefully there will not be many more, but it is very likely that others will follow in not only the 100% Loan Programs, but also in other Loan Programs. As I learn about more of these changes I will pass them on, so stay tune.
McCue Mortgage is a Connecticut based Mortgage Co., that specializes in first time homebuyers. However, we are equipped to service all homebuyer with many loan programs.
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