The Veridian Blog

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Hi all -

Hopefully, this explains why our blogging has been spotty lately.  With the recent onslaught of applications, please understand that turn times have lengthened across the board and we appreciate your patience and understanding during these busy times.

Most lenders are managing rate lock expirations very well and closing in a timely manner so when we do lock a rate for you, we are very confident that the transaction will close as expected.

The best way to reach us right now is by email.  Please trust that while volume has opened the floodgates that our standard of service has not been compromised at all and we will continue to offer the same availability and sound advice that we have been offerring homeowners for decades. 

Sincerely,

Richard Wang

President / Broker

Veridian Mortgage

How many factors can you name, off the top of your head, and which are the most influential? 

The key to remember is that the mortgage rate market is like any other – it does not necessarily always make sense and is, more often than you’d like, irrational!  But over time, you will see some indicators that consistently move mortgage rates a particular direction.  The longer time frame that is analyzed, the more reliable the relationship.  I’ve categorized the factors into 4 main areas:

1. Inflation, Inflation, Inflation (it’s not about Location at all) – It’s all about INflation.  I’m going to etch that on my gravestone.  The most popular economic indicators are the Producer Price Index and the Consumer Price Index.  Extremely influential (a “9” on a 1-10 scale).

2. The health of the U.S. economy.  Generally, the worse the US economy, the lower mortgage rates will go as borrowing will be encouraged to help stimulate business.  Some classic indicators: Unemployment Rate, Productivity (output/worker), Consumer Confidence/Sentiment, Gross Domestic Product, Geopolitical Events, FOMC Meeting Minutes*, Retail Sales, New and Existing Home Sales.  Generally influential (7 out of 10, but also depends on which indicator).  More recently, bad news about the economy has really been a catalyst for lower mortgage rates.

3. Supply and Demand of Treasuries.  From a microeconomic standpoint, no matter what happens in the world or US Economy, if there is a high demand (foreign or domestic) for US Treasury Bonds, then mortgage rates will almost certainly fall.  It's an economic certainty.  Borrowing cheap from the government just lowers the cost for wholesale lenders.  Very influential (7 out of 10).

4. Supply and Demand of particular Mortgage Products.  From a super-microeconomic standpoint, no matter what happens in the world or US Economy, or the Bond Market, some lenders will simply price according to their own company’s supply and demand of some loan products.  While this used to be rare, the liquidity crisis is a glaring example of how these factors will sometimes conflict with the general market.  Three years ago, as the benchmark 10-year bond was plummeting downward, mortgage rates skyrocketed because Jumbo investors literally vanished overnight.  On the flip side, sometimes, lenders will price aggressively to simply promote a new product.  Either way, it is during these times that a good mortgage broker can really help!  Extremely influential (9 out of 10).

*Note that I did NOT list the actual Fed Funds rate that we often hear in the news.  This is not a true economic indicator as it is a tool that the Federal Reserve uses to tighten or loosen the money supply in America and in itself is based on many of the same factors listed above.

For a more in-depth explanation for any of the indicators listed above, please e-mail me.  I’d be happy to explain.

What an exciting week it was with what seemed like a new record low every day.  The downward momentum was absolutely unchallenged all week as poor economic reports, one after another, suggested that the recovery is grinding to a halt.  Mortgage rates fell the previous week due to poor home sales.  It was later learned that pending home sales for May plummeted 30.0% month-over-month in the worst decline in the nine years of available records.  Last week the trend continued with worse-than-expected Consumer confidence, Manufacturing, Jobless Claims and continually worsening equities.  The stock market dropped over 2% to a new nine-month low after market participants were hit with a flurry of disappointing reports.

Meanwhile, mortgage rates are sinking fast.  The benchmark 10-year Note dipped to 2.91% at one point and is rallying again today...

A client of ours recently refinanced to a 5.20%, 30-year fixed loan three months ago and now wants to refinance again due to the recent drop in mortgage rates.  She has no prepayment penalties so will there be any problems refinancing again?

With some exceptions, there will be some issues with the broker agreements we have entered into with our wholesale lenders.  There was a time, long ago, when savvy brokers perpetually refinanced clients on a no-cost basis, thereby lowering their interest rates and earning a commission time after time.  This process was called "churning" and albeit totally legal, lenders eventually realized that the loan was no longer profitable after paying out multiple commissions.  As a result, their attorneys began to include language in their broker agreements requiring a seasoning period before the same broker could pay off a loan on the same borrower.  Depending on the lender, that seasoning period could last anywhere from 90 to 180 days from funding date to funding date, or be based on a minimum number of payments made. 

Does this mean that our client will be unable to refinance?  Not at all - NONE of our loans have any prepayment penalties, so they are free to refinance with ANYONE, at any time.  If the client refinances through us (we hope), then WE would be putting our commission on the line.  If we are in violation of a broker agreement, the lender can come after us for the previous commission we made on the first deal three months ago.  If the client refinances through a different broker, than we would also be technically liable for the commission earned on the first deal (the way most early payment provisions are written).  However, any client's actions are really out of our control so it would be very unlikely for the lender to seek repayment of the commission.

Some lenders will offer exceptions to the general broker seasoning requirements if the same borrower refinances with the same broker AND the same lender (they keep the loan).  Broker commission may be limited, but at least the client stays with the broker while being able to lower their rate or improve their terms.

It looked like the recent slide in rates was coming to an end last week until Friday's Unemployment report surprised everyone with a lower-than-expected reading on new payrolls added.  The Labor Department posted May's employment numbers announcing that 431,000 new jobs were added to the economy, which was well below forecasts of 500,000, indicating that the labor market was not as strong as many had thought.  But even bigger news was the fact that 411,000 of those jobs were temporary Census workers, meaning only a net of 20,000 new permanent jobs were filled last month.  This points toward weak growth in the labor market, which is certainly good news for the bond market and mortgage rates. 

We have a light week of economic reports ahead of us, with the biggest potential report coming on Friday with Retail Sales.  This morning, equities are slightly lower and the benchmark 10-year Note is at or below 3.20%...

Brian is looking to refinance his high interest mortgages but is afraid he won't be eligible because his home value ($350,000) isn't much higher than his current loan amount of $300,000.  He also has a 2nd mortgage of about $40,000.  He doesn't have the cash to pay down the loan to get to 80% and he does not want to pay PMI.  What options are left?

Throngs of homeowners are in the same boat as Brian - hanging on for dear life with your head barely above the water.  The prospect of securing historically-low interest rates is both illusory and seemingly cruel while thoughts of short-selling quickly become reality.  For a lucky few, however, there is hope.  President Obama's Stimulus Plan (the American Recovery and Reinvestment Act of 2009) included language adopting the Making Home Affordable Program which offers homeowners alternatives to short selling or foreclosing their homes.  One of those options is the very popular Home Affordability Refinance Program ("HARP")  which allows refinances of Fannie Mae or Freddie Mac owned loans up to 125% or 105%, respectively, of the value of the home, without having to pay Private Mortgage Insurance.  This is a huge advantage.  The catch here is that the loan needs to be "owned" or guaranteed by Fannie or Freddie.  This is not the same as the name of the bank homeowner's write their check to - it pertains to the "secondary market" where all conforming loans end up purchased by either Fannie Mae (FNMA - the Federal National Mortgage Association) or Freddie Mac (FHLMC Federal Home Loan Mortgage Corporation). 

To be considered eligible, your loan needs to be $417,000 or less if originated since 2004, or $729,750 or less if originated since 2008 in most Bay Area counties.  If the loan exceeds these limits, (once referred to as "Jumbo" loans), they are automatically ineligible.  After these initial thresholds, there are more compliance guidelines for property type, occupancy, credit score and debt/income ratios that may render an applicant ineligible.  One such guideline pertains to 2nd mortgages, as in Brian's case.  Brian might be able to refinance under HARP guidelines despite having a junior lien, as long as the junior lien holder agrees to subordinate to the new HARP 1st loan - which often does not happen because the loan-to-value is so high to begin with.  The other common roadblock is if the loan is owned by Freddie - which allows new HARP loans to be originated only by the same lender that is currently servicing the loan in question.  This makes it difficult for brokers to shop rates and help out a client who is being serviced by a bank that no longer operates at the wholesale level!  

Nonetheless, if Brian is able to secure a HARP loan, he will likely have access to and enjoy over time the same rates as another homeowner with the same profile plus plenty of equity in their home.  That is what makes this new program a miracle worker - the homeowner just needs to have originated the right loan amount.  For a more complete review of your client's particular situation, please call or email us!

Given the widespread disappearance of 2nd mortgage options at the wholesale level, what solutions are left for homebuyers without the standard 20% down payment?

1.      Traditional 2^nd loan piggyback – This used to be the most sought after strategy but has seen limited success in the last 3 years because of the widespread disappearance of high CLTV 2^nd mortgage programs – for both variable lines-of-credit as well as fixed 2^nd mortgages.   However, these guidelines are starting to be relaxed.

2.      Gifts – Should you have less than 10% derived from your own funds, a clean-cut strategy is to procure gifted funds from Uncle Joe or Mom and Pop.  Typically, though, at least 5% of the down payment must still be sourced to the borrower’s own funds.  Gift letters and gift transactions are also examined more carefully than ever before so be sure to thoroughly paper trail everything.

3.      Private Mortgage Insurance – Not the preferred solution, but if that house is a one-of-a-kind, "must-have", then Private Mortgage Insurance (PMI) is always an option, albeit expensive.  The advantage is that only one loan is necessary and you won’t have to deal with the hassles of a 2^nd mortgage application and the much tighter LTV guidelines.  LTV maximums for even high-balance conforming loans, have recently gone up to 95% with some wholesalers.  The big downside?  PMI will run as much as a 1.5% premium per year, every year!

4.      Wait and Rent – No one likes to hear this, but if home prices aren’t skyrocketing any time soon, it might be in your best interest to sit out, continue accumulating down payment funds and hope that home prices continue to stay the same or soften.  You can also use this time to work on improving credit, if necessary. 

5.       Buy a cheaper home – An easy solution to the equation is to reduce the sales price, and hence the required loan amount and down payment.  You will still get into a home and if their objectives are long-term, then you can plan ahead for a bigger purchase in the future. 

Please call us with any questions or for a free mortgage consultation, seven days a week!

You just realized that you must travel overseas during an important phase of the purchase transaction when the loan documents are about to be ready to sign.  As close of escrow is fast approaching, you cannot afford to wait until you return – what possible solutions are there?

Ideally for all, it is best for buyers to sign the loan documents themselves.  However, situations will arise where it is difficult, or too time-consuming to ship documents 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 situations like these, it is a good idea for a buyer to execute a Limited Power of Attorney (POA) to authorize another person (usually the spouse) to sign on his or her behalf.  If there is no spouse to grant the power to, then we still recommend a trusted family member.  Beyond that circle of trust, too many complications can arise that may land you in a heap of legal mess if something goes awry.  So before leaving, be sure to execute the POA in front of a public notary and contact your lender to see if they need to review the document before docs are sent to escrow.  Some lenders will have to amend signature blocks to make sure the person granted the authority signs the documents properly.

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, his/her 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.

We have mixed results today in spite of the enormous potential from two highly influential reports today.  First, it was Retail Sales that rose 1.6% last month, much higher than what experts thought.  This means that consumers spent more last month than expected which is generally bad news for bonds and mortgage rates, especially since consumer spending makes up two-thirds of the US economy.  On the other hand, last month's Consumer Price Index came in slightly lower than most had forecasted.  The core reading showed no change when most were expecting a 0.1% increase.  This basically means that inflationary pressures were softer than expected at the consumer level of the economy.  Inflation is an ever present threat to low mortgage rates so whenever it is held in check, that is good news for borrowers.

Interest rates remain at or near all-time lows.  Gradually, wholesale lenders are releasing more products into the market, including the long-awaited Jumbo variety (for loans over $729,750 in the Bay Area), as well as very competitively priced 10/1 and 7/1 ARM loans.  We feel that in time, underwriting guidelines will begin to loosen as well after a period of cautious skepticism. 

Please call us for the latest no-cost quotes on your purchase or refinance loan.

Over the past two or three weeks, the bond market has shown a growing bias towards higher rates.  That bias only grew stronger last week after consumer and manufacturing sentiment reported higher than expected numbers.  The week ended during a shortened Good Friday session that saw the nation's unemployment rate remain unchanged at 9.7%.  More significant, jobless claims rose 162,000, but still less than many had forecasted at 184,000.  Any way we look at it, the economy is still heading in the right direction. 

This week is fairly light as far as scheduled economic reports.  Other than the FOMC meeting minutes and a couple of Treasury auctions, look for the stock markets to heavily influence bond trading and mortgage rates.  The benchmark 10-year Note has fallen out of favor and yesterday's yield hit 4.00% - the highest in over a year :-(  It might indeed  be time for me to go on vacation soon :-)

If you purchase a home with the intent of moving into it as your principal residence after some extensive remodeling, can you still apply for a principal residence loan?

Absolutely not.  Even in the “loose-lending” years, principal residence declarants were required to move into the subject property within 60 to 90 days.  Today, occupancy affidavits and lender audits (yes, they actually check to see if you live there) prevail so that if applicants apply for a principal residence loan there are no two ways about it.  In addition, the borrowers may also have to sign letters of explanation regarding the move, and change in employment, ability to work from home and commute time. 

As an alternative strategy, it may be possible to characterize the subject property as a second home, thereby receiving the same rate sheet benefits as do principal residence subject properties, but the subject property will most likely have to be located in a vacation or resort area. 

If not, then the only other occupancy choice is non-owner occupied (investment) property which yields an interest rate 0.25% to1.00% higher.  That may be the only solution at least until they ultimately decide to actually move into the subject property – at which time they can explore options to refinance their principal residence.  There is no time or seasoning requirement typical of a principal residence occupancy characterization.

Many clients and realtors ask me about dropping their rate after locking in – is this possible?

Traditionally, wholesale lenders officially prohibit dropping a rate after it has been locked.  Otherwise, everyone would lock as soon as possible only to re-lock if the rate subsequently dropped.  There would be no point to rate locking and lenders would find themselves on the short end of the stick. 

However, most lenders currently offer a re-lock and rate drop, or renegotiation for a fee – anywhere from 0.25% to 0.50% of the loan amount.  What this means is that rate drops are possible but only in a scenario where the general level of interest rates drop significantly enough to warrant (broker or borrower) the additional fee.  This situation seldom occurs in an average market environment because the significant drop has to happen in a short period of time – usually 30 days or less.  Also, it almost never makes sense for brokers to switch to another lender because we almost always choose the lender with the best rate to begin with. 

An alternative for borrowers is to let a current rate lock expire and wait 30 days before becoming eligible to re-lock at the then-current market price without an additional fee.  That would be a monumental gamble, however, as anything can happen in those 30 days.  This option is somewhat outdated because lenders soon realized that all their files disappeared when borrowers flocked to other lenders who didn’t impose such restrictions.  Hence, lenders created their own renegotiation policies.  For more detail, (a lot of this is easier to explain by phone) please ring us!

Clients Jimmy and Joanne are looking to purchase a house by putting 20% down.  In order to benefit from the lower, traditional conforming interest rate, Joanne’s father Ed wishes to lend them an additional 20% so that they only have to borrow $417,000.   Ed intends to execute a promissory note and record a proper Deed of Trust in the same escrow transaction.  What problems will Jimmy and Joanne face from the mortgage lender?

Wholesale lenders, for the most part, will not lend in front of a private party mortgage holder.  Jimmy and Joanne are much better off receiving the extra money as a gift.  All Ed would have to produce is a gift letter and possibly document the source of funds.  If Ed isn’t feeling that altruistic however, he may want to opt for a different strategy that offers him more protection.  For the extremely savvy and cunning buyers, they can structure the extra funds as a gift and still execute a promissory note (without recording a Deed of Trust) outside of close of escrow to support reported income and interest deductions for the respective parties.  However, that’s an IRS issue I’ll stay away from right now.

If the buyers can qualify without the parental funds, they may want to alternatively consider qualifying without it first, then executing the Note and Deed of Trust after close of escrow.  That strategy doesn’t take much extra time at all, and more importantly eliminates lender involvement and doesn’t jeopardize the purchase transaction.  All the buyers need to do after they own the house is sign the promissory note and Deed of Trust, and send the DOT with a PCOR to the applicable county with a small fee for recordation.

For more insights on this particular scenario, please email me!

Here are some programs, recently risen from the ashes, that may be suitable to a borrower's unique situation.  We've always been strong advocates of the 10/1 ARM, in particular, versus the 30-year fixed. 

Traditional Conforming Loans ($417,000 or less)

10 year fixed

20 year fixed

High-Balance Conforming Loans (Up to $729,750)

7/1 ARM

10/1 ARM

Email us for more info and for your customized rate quote!

Ron is looking to purchase a house from a seller who bought the property only a month ago through a foreclosure sale.  The foreclosure price was $250,000 and the seller is now listing the property for sale at $575,000.  What problems may Ron face with finding adequate financing?

Wholesale lenders today make every effort to completely disassociate themselves from anything having to do with the subprime world of yesteryear.  One example is a situation like Ron’s where a foreclosure results in an immediate and substantial gain to an opportunistic "flipper".  There’s nothing wrong or illegal with it, in theory, the issue that lenders have to deal with in the secondary market is having to explain such large increases in sales price over such short time frames.  Even if they could, they won’t because on its face, it can’t be explained - it is anything but an arm’s length transaction due to the sheer increase in price.  As a result, lenders have developed “anti-flipping” policies to curb such practices by implementing seasoning requirements lasting from 90 days to 6 months.

Ron thus has to wait it out and hope someone else doesn’t plop down the $575,000 in cash, or find a B-paper lender (a whole other story) if he is really desperate to buy the property.

As far as we know, there is no minimum amount that would constitute a “flip”, but any increase over a period of a month will certainly be scrutinized.  They would expect some improvements to be done to the property to support the increased value.

Theodore is in the middle of a purchase escrow when he decides that he wants to put down more money and borrow less.  In regard to the new GFE disclosures, what steps will the broker/lender have to make? 

Under the new 2010 RESPA disclosure rules, in general, fees from the lender or broker cannot change unless there is a “Changed Circumstance” in which case a revised GFE must be provided within three business days after receipt of the information regarding the Changed Circumstance.  Only fees directly impacted by the Changed Circumstance can be added and/or increased and re-disclosed.  This excludes the broker compensation which can never increase.  Once actual fees are eventually determined, there is a maximum 10% tolerance level between actual figures and estimated figures disclosed in the GFE. 

Examples of a Changed Circumstance presently includes:

·         Act of God, war, disaster, or other emergency

·         Inaccurate information provided by borrower

·         Changed information such as loan amount or property value

·         Transactional circumstances – interest rate changes until rate lock, or expiration of GFE

When Theodore reduces his loan amount, it will trigger re-disclosure requirements and possibly additional disclosures depending on who the lender is.  Luckily, he is reducing the loan amount which won’t require another underwriting.  If the opposite were true, then the loan would almost certainly be delayed having to be re-underwritten due to the higher payment.  These are additional rules that brokers and borrowers have to be acutely aware of during the loan process, as the consequences of delay can be very significant.

Q: “If I can afford to keep both mortgages at the same time and rent out my current home, what problems may arise during the loan process for the new home?”

A: In no particular order, here are some possible issues that an underwriter may condition to be satisfied prior to signing in escrow:

1.      Down payment:  Because most people must sell their home before purchasing another, the source of your down payment on the new home will be highly scrutinized.  In addition, you will still need to come up with a minimum of 20% -  a tough task in the Bay Area when you decide to keep both homes.

2.      Rental Income: The underwriter will require substantiation via rental agreement and Schedule E from the 1040 tax return and probably also a copy of the cancelled check for the security deposit or first month’s rent.  Fannie Mae also requires a minimum of 30% equity in order to factor in rental income into the debt/income qualification ratio.

3.      Note and DOT for existing mortgages: Nowadays more than ever, lenders will condition for the Note on existing mortgages to ascertain the exact terms of the loan, negative amortization language, prepayment penalties and acceleration clauses. 

4.      VOM or payment history, or cancelled checks for newer mortgages.

5.      For borderline situations, underwriters may require higher qualification standards on lines-of-credit.  Because they are based on a variable rate that can fluctuate at any time, a conservative, higher qualification rate will be used in calculating income qualification and that will increase the debt-to-income ratio.

This additional paperwork is required after income is first established to qualify for both mortgages.  If you don’t have the required income to begin with, then this analysis is moot.

A: I am well-qualified to borrow the money required to purchase this new house but how long should my financing contingency be, if any?

Q: In most instances we will defer to the realtor who is familiar with the subject property, neighborhood market, dealings with the listing agent and the their negotiation history.  What we offer is advice based on our confidence level with the buyer’s ability to obtain financing.  Only in rare seller’s markets will we recommend a financing contingency waiver – which was not at all uncommon during the so distant housing boom of the early 2000’s.  Aside from that, we usually require 3 to 5 days, but more recently 7 to 10 days because of the mine-riddled new RESPA disclosure laws.  The good news is that in today’s mortgage market, it doesn’t take long to get an answer given all the automated underwriting that wholesalers have finally implemented into their online submission paths.  If there are red flags or issues we are concerned with, we will recommend a longer contingency period – to allow time for the file to be reviewed by the underwriter for official approval.  That way, we will be able to see the approval conditions and ascertain the likelihood of funding with much greater clarity. 

If you are well-qualified in terms of Debt-to-Income ratio, Loan-to-Value and FICO scores, then we probably wouldn’t hesitate to recommend a 3 to 5  day contingency period – even with the market’s tightened lending standards.

Q: I have an offer on the table for another, higher paying job.  Should I accept it now, or wait until close of escrow before changing positions?

A: The general rule of thumb is that if the close of escrow date is at least 30 days away, and the borrower is moving from a salaried position to another salaried position in the same industry, then there should not be a problem in qualifying with the same or better income.  So you should be okay.  In situations where one or more of those factors are not present, however, then you will probably have problems qualifying.  The central issue is employment stability.  Underwriters look at how long borrowers have been at their current job, how similar the position (title) and industry are, the location of the new job, and whether income is staying the same or increasing.  Any decrease in income, or a demotion, or a move to a different industry will certainly raise red flags.  Also, if a borrower is moving to a self-employed, hourly or contracting position, they will not be able to use the earned income because a 2-year history would be required.  This is true even if the position is the same, or even within the same company!  Guidelines regarding employment used to be more lenient in regard to self-employment income, but nowadays, the 2-year rule is pretty strict.

As such, it is critical that your new position be salaried.  By close of escrow, most lenders simply require a copy of the first paystub for loan approval, although we are starting to see that guideline expand to paystubs to cover the first 30 days.  If the borrower can be flexible, it may sometimes be easier (and less stressful) to postpone the new employment until after close of escrow.

Q: I have plenty of funds to put down about 40%, but it is spread out amongst a half-dozen different brokerage, checking, savings and CD accounts.   If I have to consolidate it all into one account, can I do it at the last minute to maximize interest income?”

A: You are free to do what you want.  However, the lender will be concerned that any large recent transfers might be undisclosed debt obligations or gifted funds.  In addition, transferring from account to account can be very burdensome for you because you will be required to paper trail everything – deposits and receipts - and establish 60-day seasoning for the stated funds.  To make things even more difficult, some lenders still do not accept internet printouts unless they state the borrower's name, address and account number (which banks today rarely do because of identity protection).  So with some financial institutions, you may have to call to have a proper statement mailed or faxed.  All this takes time, and in a purchase transaction, time is a premium. 

Towards the end of escrow, I recommend wiring funds directly from one account into escrow.  That is the easiest way to establish and prove a paper trail of money.  And more importantly, it is the fastest way to transfer when time is of the essence. 

Happy New Year Everyone!

The U.S. Department of Housing and Urban Development (HUD) issued new regulations under the Real Estate Settlement Procedures Act (RESPA) Regulation X, last year that are set to go into effect on January 1, 2010.  These important regulatory changes will place new requirements on lenders to ensure borrowers are better positioned to understand their mortgage transaction and terms of their loan. 

Key changes will include:

1.      Good Faith Estimate – now, the “new RESPA Reform Good Faith Estimate” (GFE), this can no longer be issued for pre-approvals as a property address is now required for the application to be complete.  The GFE must be issued no later than three business days after the loan originator receives an application.

2.      List of Service Providers – Borrowers must receive a list of service providers in the local area for any required settlement service for which the borrower can shop.  Not sure whether this will include appraisers at this point.

3.      Fee Changes – GFE must contain a total of the Adjusted Origination Charge and charges for all settlement services.  This is one amount that includes all lender and broker fees/credits involved in the transaction.  All lender and broker fees/compensation will be listed under one all-inclusive Origination Charge.  Settlement charges disclosed on the GFE must be accurate (within tolerances), both initially and throughout the application process. 

4.      Fee Tolerances – These have been established for variances between the GFE and HUD.  Unless there is a valid Changed Circumstance, lenders and brokers are prohibited from exceeding certain fee tolerances ranging from 0 to 10%.

5.      Changed Circumstances – A GFE may only be re-issued under this scenario, which does not include loan origination changes by lender/broker or transfer taxes.  More info on this to be developed in the future.

6.      Re-Disclosed GFE – Re-disclosure to the borrower must occur within three days of the event that led to the change.  For example, changes in credit, loan amount, property value or loan program.

Lending is not going to get any easier in 2010.  Based on the last few years, all of this is subject to revision and further changes.  Please contact us if you have any questions with the new laws.

Indices are used for Adjustable Rate Mortgages as a method of computing the variable interest rate that the borrower pays on outstanding balances.  In nearly all ARM loans, the variable rate is computed periodically as the sum of the current index value plus a fixed margin.  For example, Borrower John’s LIBOR-based ARM rate would be today’s 1-year LIBOR index of 0.9644 plus a fixed margin of 2.25% (as determined when the loan was originated), for a total fully-indexed rate of 3.2144%.  This sounds great, as it is a historic low, but remember that indices are variable and hence can, and will, go up at some point in the future.  This rate will adjust automatically on a yearly, semi-annual or monthly basis so the borrower’s monthly payment will also change automatically.

For hybrid-ARM loans that offer an initial fixed period, the terms will specify limits, or CAPS for how much the variable rate can  move once the loan converts, from period-to-period, and during its lifetime.  This is typically defined in three numbers: an initial cap, a period cap and a lifetime cap.  Borrower John’s caps are likely going to be “5/2/5”, which indicates an initial cap of 5% over the starting rate, 2% maximum increase from year-to-year, and a 5% cap over the starting rate at any time during the life of the loan.

The most common ARM indices used in the United States are:

1.      CMT – this is also known as the “1-year Treasury” or “1-year T-Bill”, it is the most widely used index.  Roughly half of all ARMs are based on the CMT with annual rate adjustments. 

2.      LIBOR – the London Inter Bank Offering Rate is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London.   It is an international index which follows the world economic condition and is generally more volatile than the CMT and the COFI.

3.      COFI – the 11^th District Cost of Funds index reflects a weighted average interest rate paid by the 11^th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB and other sources of funds.  COFI is the slowest moving and most stable of all ARM indices.

4.      Prime Rate – is the rate charged by nation’s largest banks for short-term loans to their most creditworthy customers.  Many home-equity loans and lines of credit, credit cards and auto loans are tied to the Prime Rate as published in the Wall Street Journal – which factors in at least 75% of the 30 largest U.S. banks.

5.      National Average Contract Mortgage Rate – formerly a popular index in the 1980’s, this represents the weighted average of initial mortgage interest rates paid by home buyers reported by a sample of mortgage lenders for loans closed for the last 5 working days of the month. 

6.      COSI – the Cost of Savings Index – is based on interest rates that a particular bank pays to individuals on certificates of deposits.  Since the merger of World Savings and Wachovia, only two indexes published by Wachovia and Wells Fargo are used consistently.

Lenders will usually offer lower rates on ARM programs because they are shifting the interest rate risk to the borrower.  For more information on ARMS and the different indices, email us or see: http://www.armindexes.com/index-types.html

The 5/1 ARM, tarnished for years by bad news press as one of the “exotic” loan programs blamed for the foreclosure crisis, is in our opinion an important loan program that can be extremely advantageous to the financially-savvy borrower.  Because of the unfair label, most moderately conservative borrowers these days opt for the traditional 30-year fixed program.  Part of the reason also is that we feel the 5/1 ARM is not properly or adequately explained to clients as it should be. 

The 5/1 ARM is a hybrid of long-term fixed programs and shorter term adjustable rate mortgages (ARMs).  The program offers a fixed rate and payment during the first 60 monthly payments, or 5 years of the term.  After the initial fixed period, the loan then automatically converts to an ARM which means the interest rate becomes variable for the remainder of the term.  I most cases, the rate will change every 12 months, or one year, based on the sum of a fixed margin and a given index - usually the 12-month T-Bill or the 1-year Libor.  This is the uncertainty that drives most people away – despite the initial low “teaser” rates as well as lifetime and period caps on rate increases.

We generally recommend the 5/1 ARM if the borrower intends on owning the house 8 years or less because that is our estimated “break-even” point after including many factors that most by-the-book lenders don’t: likely increase in income in 5 years (thus absorbing any payment shock), likelihood of refinancing or moving within 5 years (most people move sooner than they plan to), likelihood of paying down principal in 5 years, likelihood of rates going up and staying up in 5+ years (if rates skyrocket after 5 years, remember that the borrower has still built a 5-year cushion of savings).  In other words, it would take a combination of unfortunate occurrences for the decision to apply for the 5/1 ARM to be a financially incorrect one. 

Another factor to consider – the emotional component.  We realize that some borrowers, no matter what sort of analysis is offered, cannot sleep well at night if they do not know what payment is expected for the next 30 years.  And we understand that.  There’s no sense in trying to play the odds if you’re going to accelerate the aging process!

For even more detailed analysis of hybrid-ARMs, indexes and caps, let us know!

Even though last week was shortened by the Thanksgiving holiday, there were signs that the bond markets and hence mortgage rates are appearing jumpy and may be poised for a nosedive sometime this week.  Global equity markets were hit hard while we took time out to prepare our sumptuous feasts and Friday was indicative of a reactionary sell-off in stocks.  Trading was light, however, so it remains to be seen this week how markets will follow through.  Many mortgage products continue to flirt or have surpassed all time lows – it is nearly comical how low these rates are falling as the benchmark 10-year note hit 3.20% last week.  This upcoming week will culminate in November’s Employment report.  Current forecasts call for no change in the unemployment rate of 10.2% with payrolls down 114,000.

Home Sales data and the GDP report will headline this holiday-shortened week but there are also potential market moving reports due out during the first three days.  Volatility will be high but we do not expect rates to budge much from the new lows they hit last week. 

This morning, a better-than-average auction of 2-year Treasuries has helped the bond market to recover earlier losses sustained as a result of strength in stocks and higher-than-expected Existing Home Sales for October.  The benchmark 10-year note currently stands at 3.40%.

Mortgage rates continue to match or set new record lows.  The traditional conforming 5/1 ARM is at an eye-popping rate of 3.50% for zero points (with fees) or 3.75% for no point or fees!  Other restrictions apply.  Call us for more details!

The American Recovery and Reinvestment Act of 2009 increased the maximum allowable amount of conventional loans that are salable to Fannie Mae to $729,750 in the Bay Area.  This increased the limit from $625,500 placed into effect in the first part of 2009 via the Housing Recovery Act of 2008 and from $417,000 which is the maximum “traditional” conforming limit. 

On October 30^th, the House and Senate moved quickly to pass an extension of the $729,750 GSE (Government Sponsored Entities – Fannie Mae and Freddie Mac) loan limit, hoping to avoid any potential disruption in the mortgage market.  Both chambers cleared the loan limit extension as part of a continuing funding resolution.  President Obama is expected to sign the continuing resolution shortly.  The maximum $729,750 loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration loans in high cost areas were set to expire on December 31, 2009.  Without the new law, the high-cost loan limit would have fallen back to $625,500.  The continuing resolution extends the higher loan limits through December 31, 2010.  The new law also extends the nationwide $625,500 loan limit for FHA-insured reverse mortgages through December 2010.

"Given the lack of a private secondary mortgage market, FHA, Fannie Mae and Freddie Mac are pretty much the only game in town," said Robert Story, chairman of the Mortgage Bankers Association.  "Extending the current loan limits, along with other initiatives will help restore stability to the housing and mortgage markets."  VA loans were not included in the extension.  The Department of Veterans Affairs already has the authority to guarantee single-family loans with a maximum loan balance of $729,750 through December 31, 2011.

The new legislation, albeit late in the year, does not come as a total surprise.  Given the weakened state of the housing market and overall economic climate, we feel that the expiration of these limits would have certainly placed unwelcome drag on economic recovery.  It would have been an opportunity taken away from many homeowners trying to take advantage of historically low mortgage rates.

Many clients of ours have recently discovered the harsh truth that their homes may not be valued as high as they once thought.  When borrowers are in the middle of a refinance transaction and they suddenly discover that their Loan-to-Value (LTV) ratio is above the standard 80% maximum allowable for loans, what options do they have?

This scenario is all too common these days as appraiser independence is as pure as ever due to the newly effective Home Valuation Code of Conduct (HVCC).  Appraisers have no incentive to keep lenders and borrowers happy and are instead ultra-conservative in hopes of avoiding underwriting scrutiny.  As a result, home values are now often surprisingly lower than what the borrower expects putting them in a position to make uncomfortable choices.  Here’s what they can opt to do:

1.      Pay down the balance

A tough pill to swallow in the current “cash-is-king” economy.  The amount of cash needed and the interest rate savings are the primary factors in selecting this choice.

2.      Dispute the appraised value 

Since inception of the HVCC, we’ve tried a handful of times but to no avail.  It requires more resources to find and submit supporting comps for a higher value and possibly a second appraisal report.  Even with reports laden with errors, we have yet to successfully change an initial value.  Appraisers apparently see no reason to budge.

3.      Find a “Refi Plus” program

The initial qualifying factor is that the borrower's existing loan must be owned by Fannie Mae.  If so, then they are definitely in luck because as long as the Loan-to-Value ratio is still less than 90%, then their rate will likely be the same as if were under 80%!  No time in the history of mortgage programs has this been possible!  Some conditions apply, but for garden-variety owner-occupied loans, this has been quite the savior program for many homeowners.

4.      Continue and pay PMI

Borrowers really need to have a compelling reason to continue with the loan and pay PMI.  The cost of the insurance is exorbitant and recurring.  Also note that PMI is not even allowed on high-balance conforming loans. 

5.      Wait

If none of the first four choices are likely, then borrowers must wait until they accumulate funds for the pay down, for favorable legislation to pass, or for home values to rise.  During this time, they will have to hope that rates stay low.

Most refinance candidates these days are choosing to pay down if they cannot qualify for Refi Plus.  The main reason is that mortgage rates are absolutely sizzling right now and it’s not easy for homeowners to pass on these great interest rates.