CNC Mortgage Blog

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.