Mister VA's Mortgage News

Barn Door Open? Check. Horses Gone? Check.

In typical fashion, Congress and Regulatory Agencies are beating a path to close the barn door, nail it shut, and prevent any more horses [though they are all long gone] from escaping.  So, when the farm hands try to get in to feed any other remaining animals, there is no way to gain entry and the other animals [consumers] suffer for it.  Does this mean that the government should not be doing something?  Does it mean that a lot of the new laws will not help?  Does it mean that the proposals will not make things better?

Let's take a look at some of the problems that caused the meltdown in the first place.  Poor loan types.  Both Fannie Mae & Freddie Mac rolled out some 100% financing programs.  Initially, a FICO of 660 was needed to qualify.  A sound competitor to the subprime loans that offered 100% and VA loans which offered 100% and USDA loans which offered 100%.  And for awhile, these two programs helped many folks buy homes.  660 was considered good credit at the time.  People going for higher rate subprime loans who did not qualify for VA or USDA were able to take advantage of these new programs. 

Then, the two agencies felt the market share was too small.  So, the 660 credit score was tossed out the window. And then came the Expanded Approvals.  "Sorry, but your credit package does not qualify for the loan.  But, good news, you do qualify at a higher rate with higher PMI."  Both agencies offered those loans and PMI companies rushed to the forefront to collect the higher insurance premiums.  How much sense does THAT make?  Without new regulations, My Community & Home Possible and the higher priced variants are gone.  Loan level price adjustments have taken their place.  That's the ticket.  Make the rates and payments higher.  THAT should help people with credit or debt ratio issues.

Option ARMS were another program that offered teaser rates and resulted in negative amortization.  Largely to help folks buy homes over the conforming limits.  How about not buying homes that cannot provide affordable payments?  This program has turned into a disaster for lenders and consumers alike.  It, like Fannie & Freddie's programs above, is gone.  Without being banned.

Subprime loans?  Pre-payment penalties on the same?  Stated income?  Low credit scores qualifying for no down payment loans?  GONE!  ALL GONE! Without being banned.  It should be noted that many of the lenders are gone, too.  And many of the loan originators are gone from the industry who lived on these loan types.

So, now Congress wants to further hogtie the consumer [anyone gotten any bad news from credit card issuers lately?] by eliminating choices such as smaller closing cost loans.  YSP or Yield Spread Premium paid to brokers or loan officers in lieu of points or broker fees paid by the consumer may be banned if some in Congress get their way.  For the most part, it is the good guys who remain in the industry.  Enforcement of existing laws and going after the bad guys even if they no longer are originating or UNDERWRITING or appraising, would be mcuh more effective and would be less costly to the consumer.

Otherwise, bad laws like HVCC, proposed banning of YSP [see my earlier post on the subject within the past month], putting the whole onus of loan performance on the originator [who neither approves the loan nor appraises the property], etc. will harm the very consumer that they intend to protect.  National Licensing of Loan Originators is a great idea.  All originators should be licensed no matter who their employer.  The same with processors and underwriters.  That is the way to make sure the industry remains clean.  The alternative is that credit will get tighter and tighter and the economic recovery will remain in the distance.  Let's give the changes that HAVE been made a chance to work.  And write your Congressmen & Senators regarding the rest.

FHA Streamline 203k: Use When Buying Foreclosures

Often, when a home is foreclosed, damage is left behind.  It could be deferred maintenance.  It could be the former homeowner exacting a measure of revenge through frustration.  It could be the delay between foreclosure and the time the property becomes available on the market.  The owners [lenders] already are likely losing money.  So, they almost always will sell 'as is' unless there are safety issues or permit issues that would prevent them from selling the property.

And since nobody wants to put money into a home they do not own, and financing damaged properties is not easy, one of the ways around this dilemma for primary residences is the use of the FHA 203k loan.  The 203k is the section of the Housing Act.  FHA is under the auspices of HUD.  And references to this program can be found when looking at the government foreclosure website.  The streamline program is the one discussed here.

From $5,000 to $35,000 can have the same financing terms as the sale price--96.5% of the repairs can be financed.  No structural items like new garages, moving supporting walls, additions, etc. can be included.  Firm bids are obtained from licensed contractors along with copies of licenses and sometimes references for the work to be done.  Up to 50% of the total [not to exceed the materials portion of the estimate] can be disbursed at closing.  The balance upon completion of the work.  60 days from closing is the time limit.

When buying a HUD foreclosure, detailed property information reports are provided.  You shuld still have an inspection done. But some good bargains can be had out there.  If you can look past the work that needs to be done.

Apples to Apples: Rate Comparisons

Often a consumer is doing the best possible job in trying to get the best mortgage for the money.  Procrastination is not the consumer's best friend in making comparisons, however.  A rate & program that was quoted last week, or in some cases, even hours ago, may no longer be valid.  When mortgage rates are not stable, and it has been several weeks since they WERE stable, everything told to you by Loan Officer A is probably very different once you have spoken to Loan Officer B, Loan Officer C, and so forth.  So, it is very important to get pricing quotes for the same time frame--30 days out pricing, for example--from each loan officer.  But, more important than that, it is important to interview your loan officer.

By asking about the loan officer's experience and approaches to an applicant, you may find that 'cheapest' is not 'best'.  This is not to say that the most expensive is the best, either, but don't be so focused on the rate that you do not see the big picture.  One eighth lower on the rate for a loan of $150,000 when you look at 5.5 versus 5.375 as a note rate is about 39 cents a day on a 30 year loan.  Peace of mind and confidence in your loan officer's abilities is surely worth that.  Especially if the competition is someone who you will never meet.

One of the best way to discover how well your choice may depend on your circumstances is to get references or ask if people you know have had experience with a lender.  If you hear bad things, then you may want to pay attention.  Remember that there are many people around who will tell you what you want to hear--they over promise and under deliver.  And once you have made that decision, it is harder to pull away.  Especially, if an appraisal has been ordered and paid for by you.  Would you rather someone quote high and deliver low or the other way around?  That is why it important to compare apples to apples and that doesn't just mean mortgage rates.

Float or Lock: Know the Difference

In times of turbulence, being seatbelted can help.  Making assumptions that you are seatbelted when you are not is unwise.  As a consumer, you place a lot of faith and trust in your loan officer.  Especially, when it comes to rates and payments.  In recent weeks, interest rates have fluctuated wildly.  And the trend has been toward increasing rates.  These changes occur in a small space of time and your loan officer may or may not be at the ready to lock your rate in time.  But, it is YOUR loan, and YOU are the one who makes the decision on when to lock your rate.

Underwriting times have increased dramatically in the past few months, and that means a rate lock period may not be sufficient to protect your rate all the way to closing.  Once you lock a rate, then you are guaranteed that rate as long as you close within the lock period.  If closing is delayed beyond the lock date, you will have 'worst case pricing'.  That means if rates are lower, you get the original rate.  If rates are higher, you get the current rate.  The house always wins.

You get better pricing with a shorter rate lock period, but you are gambling that between time of application and time of rate lock, that rates will improve.  In times of rate volatility, that may not always be the case.  If you are 'FLOATING' the rate during processing, you have no guaranty that the rate will not change by the time you lock the rate.  If you lock the rate, you will sign a rate lock disclosure outlining the length of time the rate is guaranteed and the terms of that rate lock.  You may or may not be required to pay a deposit on that rate.  If you ask the rate to be locked and do not have a signed disclosure by both you an the lender, then your rate is not locked until that occurs.

Some loan officers, though not a large percentage, will use a 'quote and float' strategy that is designed to make them more money.  By locking for a shorter time frame, the loan officer hopes that rates will improve, deliver you the promised rate, and have a higher commission check at closing.  If rates go the wrong way, the 'quote and float' loan officer will probably be very evasive until things improve on the rate scene.  Your signed rate lock disclosure is your protection.  A verbal request to lock means nothing without it.  And a direct question that demands a 'yes' or 'no' answer, such as "Is my rate locked at x%?" will tell you what you need to know.

Be advised, however, that rates can change at any time, and they can change from the time of your request until the time the rate lock is requested of the lender or lock desk.  Even if that time lapse is only a few minutes.  The underlying responsibiity to lock the rate is yours.  And until you are locked, your loan application processing rate is not guaranteed.

Return of the 5/1 ARM [and the 3/1]

For the past several years the hybrid adjustable rate mortgage [ARM] was window dressing. NOBODY took them out.  The difference in pricing was negligible.  Something funny is going on in the midst of the mortgage rate panic of the past 10 days.  THESE RATES LOOK GREAT.  Even the FHA ARM is making a comeback with its 1.75% margin and 1/5 caps.  Why go for a fixed rate if you can go with a hybrid and save a lot of money in monthly payments and not have any rate adjustments for 3 or 5 years. A  5/1 ARM could save well over 1% in the note rate.  So it would take 6 years to even reach the fixed rate levels we see now.  And a lot can happen in 6 years.

Conventional loans can adjust at higher margins and 2% in any given year with the initial cap being 5%, so there is more inherent risk there.  But there is also a 5 year period to watch fixed rates and to refinance if those rates go back down.  There seems to be more appetite for these loans right now on the part of lenders due to shared risk perceptions and averse feelings toward a portfolio of fixed rates in the 4s.  So, you may want to consider this as an alternative to the nerves of ever climbing fixed rates.