The Veridian Blog

The August non-farm payrolls report showed losses of 216,000, pushing the US unemployment rate up to 9.7%, it's highest level since 1983.  Worldwide markets initially improved on the news but have since struggled to find a clear direction.  The mystery in all this is that although the unemployment rate increased, it increased at a slower rate so people, namely investors, may think that layoffs are slowing down even if companies are nowhere near a position to hire again.

Mortgage rates have stayed pat or improved slightly this morning, although most rate sheets are still not out.  The 5/1 in particular has dropped this whole week to levels near the 4.0% mark - even for the high-balance loan variety.  The spread between the 5/1 and 30-year fixed is now at least a full percentage point, a difference we haven't seen in about 5 years.  Call us for details!

The most significant and radical change pertaining to the Truth in Lending form (“TIL”) was recently put into effect via the Housing and Economic Recovery Act (“HERA”).  It has little to do with the form itself, rather, the timing and enforcement of TIL disclosure is now a big concern amongst lenders and borrowers.  Since July 30, 2009, these changes in the lending process are now strictly enforced:

1.      Upfront fees cannot be charged until the borrower receives the initial TIL from the lender with the lone exception being a credit report fee.  The big issue here is the appraisal.  If it takes a week before the borrower is allowed to foot the appraisal bill, then who ends up paying in order to avoid lengthy delays in the process?  Yup, so far it’s been the broker.

2.      An initial TIL is now required on all purchases and refinances of primary residences and second homes.  That just leaves disclosures for investment properties as the only exception.

3.      An initial TIL must be provided at least seven days before the close/sign date.  Not a huge impact, since who closes loans in 7 days anymore?

4.      An increase in Annual Percentage Rate by more than 0.125% requires re-disclosure of the TIL at least 3 business days before closing.  If mailed, the TIL is considered “received” 3 business days after mailing.  This is the most potentially damaging rule.  Any change in APR resulting from new/revised fees or changes in loan amounts and/or interest rate will trigger another APR review.  If the difference is more than 1/8^th of the initial disclosure rate, then a mandatory 3-day review period must pass prior to closing or signing.  APR must be followed diligently or else it may cause an aggravating and costly delay.

The reasons behind HERA aren’t anything new to what brokers have heard since the mortgage implosion began, including the push to create a more transparent, informative and fair regulation, to prevent deceptive and abusive lending practices and to protect borrowers against such practices.  The TIL form has always been a confusing document that more often than not hurts more than helps to make the borrowing process more efficient.

A cash-out loan, more than ever, is a red-flag risk that demands higher returns for lenders and their investors.  Thus, mortgage rates are usually higher and/or more expensive for cash-out loans. 

A loan is characterized as cash-out whenever the borrower receives more than 2% or $2000 (whichever is lower) from the loan transaction.  This may not always spell disaster in the form of higher rates for the borrower, however.  As long as the LTV is under 80%, there is usually no additional add-on in fees or rates for conforming cash-out loans of $417,000 or less.  When you start to borrow beyond $417,000, then loan-to-value (LTV) ratio and credit FICO scores determine what the add-on is, if any.  The guidelines become most severe when the loan amounts increase to the Jumbo category beyond $729,750.  Not only could there be an add-on, but you may be completely precluded from taking cash out under high LTV or low FICO profiles.  LTV Is so critical these days and this is just one aspect of the importance of having significant equity.  In any scenario, the lender may also impose cash out limits of anywhere from $200,000 to $500,000.  During the refi boom, that number was probably even higher. 

A loan may also be characterized as cash-out when consolidating a 1^st and 2^nd mortgage.  In order to avoid the determination, the 2^nd mortgage must almost always be purchase money (ie. It was originated during the purchase transaction), or the 2^nd mortgage must be seasoned for a minimum of 12 months.  Seasoning simply means the borrower has been in good standing for 12 months and that for equity lines, there has been no draws during the same period.

The cash-out “trap” is something that all prospective home buyers should be aware of.  For example: a buyer puts down a 50% down payment.  One week after close of escrow, he decides he wants to proceed with a home improvement project by refinancing and taking cash out.  Even though the money was his 7 days ago, suddenly the loan terms will necessarily change for the worse because it is now a cash-out loan.  Therefore, it is vitally important to put the correct down payment amount that takes into consideration account maintenance of reserves and potential home improvement projects.   If unknown, we tend to recommend putting the least down payment that will yield the best interest rate.

Similarly, when refinancing, we advise all clients to refrain from making large principal payments late in the refinancing process.  To do so means you will be borrowing more than you owe - enough to trigger the cash-out characterization and worsen your loan terms in the blink of an eye.  If you are fortunate to have a cash windfall, simply wait until close of escrow of the new loan and then make the principal reduction.

For more cash-out scenarios and recommendations, please contact us!

Hope everyone enjoyed a great Labor Day.  Last week we saw both the 5/1 conforming, 5/1 high-balance conforming and 5/1 True-Jumbo loan programs plummet to levels we haven't seen since the last refi boom, ending in 2004.  The low rates continue to hold steady post-holiday weekend despite Friday's stock market rally amidst a lower-than-expected number of jobless claims filed. 

We now also have excellent rates for conforming loan amounts at $417,000 or less with an interest-only option.  The true-Jumbo market - up to $2.0 million - has also recently revitalized itself to more reasonable levels, although most of the eye-opening rates are still reserved for those with superb equity and credit.

Call us for more details - these rates won't last forever - they may not even last the rest of the week! 

Ideally for all, it is best for buyers and borrowers to sign the loan documents themselves. In this day and age, however, we are sometimes busy travelling and cannot be physically present when loan documents are ready to sign.  These situations will arise where it is difficult, or too time-consuming to ship documents out of town or overseas, find a notary or comparable signing authority that will satisfy international laws as well as the lender’s guidelines. Too often, a common error or a missed notary stamp can unhinge the entire fire drill and land you back at square one.

In such situations, it is a good idea for a borrower to execute a Limited Power of Attorney (POA) to authorize another person (usually the spouse) to sign on his or her behalf. If your client does not have a spouse to grant the power to, then I would still recommend a trusted family member. Beyond that, too many complications can arise that may land your client (and you) in a heap of legal mess if something goes awry.  The document grants limited authority to transact matters pertaining to the subject property on behalf of the signor.  Before your client leaves, have him or her execute the POA in front of a licensed notary and contact the lender to see if they need to review the document before docs are sent to escrow to prevent delays.

Once the documents are ready, the person holding the POA will sign every initial and signature block as “Name of Client, by Name of Person, as his attorney in fact”.  Sure, this is a lot of writing and hand cramps are likely, but it is certainly worth the headache of shipping documents back and forth with no guarantee that things will go smoothly.