CNC Mortgage Blog

Over the weekend I found myself trying to put a purchase by a first time home buyer in perspective. I find that sometimes I am a bad salesman because I don’t want to rush things. Here is a summary of my advise to all involved, with some changes to protect privacy. The buyers and the loan officer are in a hurry to get the appraisal done.

Hi everybody,

I had the privilege of talking to almost involved in this purchase today. I just missed Jodie.

Buying a house is a stressful experience, for everyone, with tax credit deadlines looming, it only makes it worse.

I wanted to summarize what I see now after my chats with all of you.

Jodie and David have found a house that they really like and want to buy.

The sellers have agreed to this sale, but they are underwater. They owe more on the house than the buyers are offering (maybe close to $100,000.) So this is considered a short sale which means that the bank that is holding the mortgage has to agree to receive less money than is owed on the house. In addition to the bank there is also a mortgage insurance company involved that has to agree to the short sale.

Banks are slow to look at and accept short sales, and we on the buyer’s side have very little leverage to make them speed up.

A purchase agreement has been signed by the sellers but not by the financial institutions involved.

I see two advantages to ordering the appraisal soon:

1. Appraisers at Bank of Sometown are slow these days

2. The loan application can move to manual underwriting to approve David and jodie as soon as the appraisal is received

There are 10 reasons to delay the appraisal:

1. We don’t know if the banks will approve the short sale at that price in a timely manner

2. David and Jodie cannot offer more money for the property

3. The listing agent might not allow the appraiser to go into the house until we have bank’s acceptance

4. $400 are at risk, if the appraisal is done and the banks don’t accept, the money for the appraisal will be lost

5. Another $400 will have to be spent for an appraisal on another house

6. There are many other houses on the market

7. With the April 30 deadline looming for purchase agreements to be signed, if this deal falls through there is very little time left to take advantage of the $8,000 credit.

8. There is no guarantee that the bank will sign the purchase agreement by April 30. Yes it could take that long!

9. David and Jodie should have two or three back up houses so that they can take advantage of the tax credit.

10. This house is still in the redemption period. Although it appears abandoned we are not sure of that status for the closing date.

11. We are not sure when the redemption period is over.

I am sure I will think of other reasons to add to both sides of the argument, but for now let’s take the weekend and think things over calmly.

Good luck

In our role as mortgage brokers we want to make this loan process as painless and streamlined as possible for our customers.

Although we try to get as many documents from our customers as possible at the beginning of the process in order to not bother them anymore than necessary, the banks always find that we need to provide more “stuff.”

I just groan every time I need to get more information from my customer. It can be updated bank statements, new paystubs, clearer W2 forms, a better copy of a driver’s license because the state seal covers part of the birth date. It goes on and on.

I can tell that the customers are talking to their friends about these stumbling blocks because often they tell me something to the effect “I heard that no matter how clean a customer is, the banks are being very careful.”

Yes, the banks want their files to be squeaky clean. We are delighted to have you as customers. Please be patient and bear with us.

Have a Happy New Year!!

Adjustable rate mortgages ( ARMs) got a bad name during the sub prime crisis. These mortgage products can be the right product for certain home owners.

The traditional ARMs that are attractive again are fixed for an initial period of time and then adjust by a predetermined calculation. Traditional ARMs are called 3/1, 5/1, 7/1 or 10/1 ARMS. This means that the mortgage is fixed for an initial period of one, three, five or ten years, after that time the rate will adjust once a year based on a recognized index plus a margin. The loan will be amortized over 30 years.

The index can be an indicator like the LIBOR (London Interbank overnight rate),the COFI (Cost of Funds Index), the PRIME rate or other index that the lender can offer. This month the LIBOR is close to 1.1%. If the lender is charging a margin of 2.5% and your mortgage were resetting today your rate would be fixed at 3.6% for the next year.

The changes that can occur to the ARM after the fixed period are usually that they have a maximum rate adjustment of 5% ( called a cap) over the initial rate. That can happen one time at the first adjustment or gradually over the life of the loan. The rate could also go up or down by 2% per year up to that maximum. So that maximum would be 8.875% if the initial rate were 3.875%.To reach 8.875% the LIBOR rate would have to be at 6.625%. The last time the LIBOR was over 6% was in September of 2000.

Who should consider an ARM? On average people keep a mortgage loan seven years. This average has been going down. People no longer stay in the same job forever, they change jobs. Young first time home buyers usually are advised to get a 30 year fixed mortgage (I suppose by their parents who had the same). Chances are very slim that they will be in their first house for 30 years; they might change jobs, have children or simply want to move up from a “starter home.”

A family whose youngest child is in high school will probably be feeling the empty nester syndrome as that child will be graduating from college in about seven years. At that time they will probably consider moving to another house.

Of course the only reason to consider an ARM over a fixed rate is if the payments will be lower. A $200,000 30 year fixed mortgage at 4.75% would pay $1,043.29 for principal and interest. That same mortgage on a 7/1 ARM at 3.875% would pay $940.47. There would be monthly savings of $102.82, $8,636.88 during the initial 84 months of the loan. On a $300,000 loan the savings would be $12,956 in the same 84 months.

So, don’t dismiss an ARM without considering how long you will be in the house.

For example:

Efraín Perez Martinez (husband, father)

María Lopez Ruiz (wife, mother, maiden name) becomes becomes María Lopez de Perez when she marries Efrain.

Juan Perez Lopez (child)

Isabel Cristina Perez Lopez (child)

This is a good opportunity to explain how people are named in Spanish culture.

Spanish names always cause confusion with US names. Efrain, María, Juan and Isabel are the person’s first name. Isabel Cristina would be the only one in this example that has a middle name (Cristina).

For Efrain, Juan and Isabel Cristina, Perez would be considered their last name. For María, Lopez would be considered her last name.

Unless of course they are illegitimate and the father has not recognized them in which case they would only go by the mother’s last name (Lopez). If Efrain and María were not married and Efrain had not recognized the children as his, then they would be named Juan Lopez and Isabel Cristina Lopez.

Assuming that Efrain and María do get married; then María’s name becomes María Lopez de Perez, the “de Perez” translates into “of Perez.” Some married women choose not to add the “de” to their names.

Sorry to only confuse you a bit more with some culture.

Oct 29, 2009

This morning’s news about the growth in gross domestic product close to 3.5% for the US economy in the period July to September 2009 is good news. It doesn’t matter which side of party politics you are on. Growth is better than shrinking. A lot of the growth was fueled by government spending (cash for clunkers and first time home buyer credits). So???? Critics can question these results and what has been the cause for the improvement but we would all be very disappointed if growth had been negative again for a fifth consecutive quarter. But fortunately growth is estimated as positive 3.5%. We should be happy about that.

There are bills in the Senate extending the $8,000 first time home buyer tax credit beyond November 30 to April of 2010. A lot of first time homebuyers have been scrambling to get their purchase agreements done. Some first time home buyers are still waiting for the housing market to bottom out. They think that if the house goes down in value more than $8,000 they will be ahead if they are still able to buy it even if they don’t get the tax credit. They are gambling against two unknowns; will the house go down in value and will interest rates change.

Another important part of the bill in the Senate is a $6,500 tax credit for people who are not first time home buyers. This should move the middle and upper layers of the market. There is an $800,000 cap on houses for this stimulus money. In Minnesota $6,500 will cover most of the closing costs on a $360,000 mortgage loan.

The interest rate market has returned to a situation where Adjustable Rates Mortgages (ARMs) are below fixed rate mortgages. Today a conventional $200,000 5/1 or 7/1 ARM is below 4%, while the 30 year fixed is close to 5% and the 15 year fixed is near 4.375%. The drop in rates for ARMs makes refinancing an interesting option for people who plan to stay in the house less than seven years.

I asked one of the bank representatives with whom we deal a lot as to their level of activity. Her response was that they were not very busy.

It is not totally clear as to why there is so little activity because rates are back down to almost historic lows.

There might be a few reasons I can think of:

1) Appraised values of properties are too low to refinance. That is partially true.

2) Many homeowners are already at good rates.

3) Homeowners are worried about the general economy. Not a good reason not to reduce mortgage payments.

RATE OVERVIEW

30 year fixed mortgages are close to 4.625%.

15 year mortgages are available at 4.25%, often with reduced closing costs.

3/1 ARMs are at 3.625%, 5/1 ARMs are at 3.75% and 7/1 ARMs are at 3.875%. These are not the horrible ARMs sold with subprime mortgages in the past. They are capped at 5% over the initial rate and based on LIBOR plus a margin for the bank. LIBOR today is at 1.24% and the margin is 2.25%. So if the 5/1 ARM were resetting today the rate for the next year would be 3.49%.

One of the biggest concerns we had as brokers with the new Home Valuation Code of Conduct (HVCC) has come to haunt us. In the last weeks several lenders have announced that they will not accept appraisals done for other banks to be used with their system. The main implication is that if a borrower has paid for and appraisal and is denied a loan at one bank or might benefit at another bank, that appraisal that cost them close to $400 cannot be used at another bank.

The new government regulations put into effect this year have been designed to put distance between mortgage brokers and appraisers. The banks have several Appraisal Management Companies (AMCs) who in turn have several appraisers. The bank randomly assigns the appraisal to an AMC who in turn randomly assigns an appraisal to an appraiser.

Before the HVCC the appraisal was made for the mortgage broker who could reassign the appraisal to any of the banks we worked with. Now the banks order the appraisal but many banks won’t accept the appraisal if it is transferred from another bank; even if it is certified to conform with HVCC rules.

So, the customer has to spend another $400??

I sent this note to a possible customer who has a high interest on his mortgages and could save money with a 5/1 ARM.

August 11, 2009

RE: REFINANCING INTO A 5/1 ARM

I don’t want to convince you to refinance into an Adjustable Rate Mortgage (ARM). I just want to present you with the conditions for that loan so that you can decide what is best for your situation.

The ARM will save you money over the next five years.

FACTS that I have or can infer

First mortgage $77,000 at 7% with a monthly payment of $512.28 principle and interest (PI)

Second mortgage of $619,000 at 6.75% with a monthly payment of $4,014.82 principle and interest

Total principle and interest now $4,527.10 with a blended interest rate of 6.777%.

NEW MORTGAGE

To pay off the two mortgages and add closing costs of $11,658 and prepaid interest of $1,053 you would need a new mortgage of $709,000. The bank’s rate on the jumbo 5/1 ARM today is at 5.35% without mortgage insurance. The maximum loan to value ratio accepted is 90% so we would need your home to appraise at least $788,000. If the home does not appraise at that value you would need to bring money to the closing to be at the 90% value.

BENEFITS

Your monthly payment on $709,000 at 5.35% would be $3,959.15 for principle and interest saving you $567.95 per month, $34,077 over the next 60 months. In terms of pure interest you now pay 6.777% and would be paying 5.35%. On $709,000 that is a yearly savings of $10,067 in interest, $50,339 over five years. To be fair you would have to subtract the $11,658 in closing costs to determine your benefit.

This bank lets us choose the appraiser still, so we could get a verbal estimate before you spend money on the appraisal.

The rate is fixed for five years.

This bank does not force you to escrow taxes and insurance with them and does not charge a fee for not escrowing.

This would be the rate for a jumbo loan over $417,000 with no additional rates.

THINGS TO WORRY ABOUT

The appraised value of your property will be very important.

The rate could change in month 61. When the rate starts to change it can change once a year. The change would be the value of the One year London Inter-bank Offered Rate ( LIBOR) plus the margin charged by the bank which is 2.65%. Today the LIBOR is at 1.48%, if you add the margin of 2.65% your rate would be 4.13% and if your loan were adjusting today your PI on $709,000 would be $3,438.28 per month, $1,088.87 less than you are paying now.

However the rate could adjust 5% over the initial rate in month 61 and a maximum of 6% over the initial rate as a maximum over the life of the loan. So in month 61 your rate could go to 10.35% with a payment of $6,406.13 for PI and if it reaches the maximum rate of 11.35% your payment would be $6,940.14 for PI per month.

To reach those rates the LIBOR would have to be at 7.7% and 8.7% respectively. If you look at the attached chart for LIBOR since 1999 the highest rate for LIBOR was 7.453% in May of 2000. After that the highest LIBOR was 5.766% in June of 2006.

You now have a blended rate of 6.777%. To have that rate on the ARM after it adjusts, LIBOR would have to be above 4.127%.Since January of 1999, LIBOR has been above 4.127% 60 months and below that rate 68 months. During the next year it appears that the rate will remain low. I have no idea how to predict the rate in 2014.

To get the best rates your credit score needs to be over 720 and your debt to income ratio below 45%.

I look forward to working with you and answering any doubts you might have

Best regards,

Carlos Gutierrez

On August 1, 2009 some more changes will take place in the mortgage industry. Banks, lenders and mortgage brokers will no longer be allowed to collect fees upfront for any purpose except to obtain credit reports. In the past many institutions required the applicant to pay ahead of time for an appraisal or maybe an application fee. Appraisals were costing around $325 and a credit report around $25 so it was normal to ask the customer to pay $350 at the beginning of the loan process. No additional fees can be collected until the lender has sent out disclosures that include the Truth in Lending (TIL) with a final Annual Percentage Rate (APR) calculation.

Once the borrower has received the disclosures the appraisal can be ordered. There would be two ways to pay for the appraisal. One would be for the customer to send a check to the broker after receiving the disclosures and the broker or lender could pay for the appraisal; another option would be for the borrower to pay for the appraisal with a credit card and the lender could have the credit card information to pay for the appraisal. This credit card information could be left with the lender at the time of the initial application.

On May 1, 2009 almost all banks adhered to the Home Valuation Code of Conduct (HVCC). There were some important changes that took place in the appraisal process.

Appraisals need to be ordered through the banks Appraisal Management Companies (AMC) who in turn will order appraisals from their group of registered and licensed appraisers.

Loan officers and lenders will no longer have direct contact with appraisers. Nor can the expected value be communicated to the appraiser. There is a feeling that the new appraisal process will be holding down housing prices. The Minneapolis Startribune on July 26, 2009 ran an article on this in the business section titled “New Rules Hamper Home Sales.”

One situation I could foresee would be a purchase where for example the sellers were asking $300,000 for a house, there were multiple offers at that price but the appraiser could only find comparable sales at $280,000. The bank then would only lend on a value of $280,000 eliminating many buyers who could not make up the difference if they needed a mortgage.

I have seen one case where this benefitted the borrower. A condo was negotiated and appraised for $125,000. Wells Fargo ordered an appraisal review and the reviewer came back with a value of $117,000. This was a foreclosed property that was owned by Fannie Mae. The appraisal review was shown to Fannie Mae and they accepted the sales price of $117,000. The buyer saved $8,000on his purchase.

Not all banks are adhering to the HVCC. Those banks that do not sell loan to Fannie Mae and Freddie Mac and keep their loans in their portfolio are not obligated to use the HVCC for appraisers and can either order appraisals directly or allow brokers to order the appraisals.

The National Realtors Association is asking congress for an 18 month moratorium on the implementation of the HVCC.

Adjustable rate mortgages (ARMs) got a bad name during the heyday of the subprime loans. Many were designed to trick unwary borrowers into unaffordable mortgages once the loans reset to their variable period.

During most of 2007, 2008 and the beginning of 2009 ARMs were at the same levels as 30 year fixed loans so it didn’t make sense to consider them as an option when planning to get a mortgage for your home.

After mid 2009 conditions in the market have changed and ARMs are again worth considering, especially if you need a jumbo mortgage, more than $417,000.

This week rates on a 30 year fixed mortgage were very close to 5.0%, the 3/1 ARM was at 3.85% and the 5/1 ARM at 4.25%. The best 30 year fixed jumbo mortgage was at 6.35%. The 5/1 ARM up to $900,000 was at 5.05% and up to $2,000,000 at 5.35%.

ARMs are known as 1/1, 3/1, 5/1, 7/1 and 10/1 ARMs where the first number indicates the number of years that the loan is fixed, the second indicates the frequency that the loan will vary in years. So a 5/1 ARM is fixed for the first five years and will be variable for the following 25 years changing once a year according to a preset index.

The adjustable part of these loans is based off a margin and an index. Margins are set by the banks when they lend you the money. An index is the rate at which US Treasury bonds are traded or banks charge on the LIBOR (London Interbank Overnight Rate) market. Margins set by the banks are usually between 2% and 3%. The rate for one year US Treasury bond this week was at 0.53%, One year LIBOR was at 1.53%. So if a bank had offered a 5/1 ARM that was resetting now the rate for the next year could be the margin ( 2.5%) plus the index ( 0.53%) and the person would have a rate of 3.03% for the next year.

When you are thinking about a mortgage, an important consideration is the length of time you plan on living in the house or keeping that mortgage. An ARM could go up as much as 6% over the initial interest rate. If you plan to keep your house longer than the fixed period of your ARM, you might not want an ARM. But if there is a possibility that you might change the house due to employment, family size or some other circumstance, and an ARM might be good for you.