The Mortgage Porter

A Simple Visual on the Current Mortgage Landscape

Fellow Certified Mortgage Planning Specialist, Dan Green, has created a very easy to understand explanation of what has happened in the mortgage industry.   I highly encourage you to watch this short video presentation showing a history from 2000 to our present condition and how this situation impacts all of us, including "prime" borrowers.

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The Mortgage Reports, is written in a very easy to understand style and packed with great informative content.   This is one of my must reads that I'm subscribed to...if you want to understand more about mortgages, perhaps you should too (and don't forget to subscribe The Mortgage Porter in the upper right corner of this site)!

Friday's rates will follow later this afternoon.

My Take on the Fed's Proposal to Amend Reg Z

You can read the official press release here.   This following is from the highlights.  I've added my opinions (if any) in italic.

The proposal would establish a new category of “higher-priced mortgages” that should include virtually all subprime loans. The proposal would, for these loans:

• Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers’ ability to repay the loans from sources other than the home’s value.  Fine.
• Prohibit a lender from making a loan by relying on income or assets that it does not verify.   Fine. I have never been a fan of "over" stated income when the income is not there.  I have done just a few stated income loans in my mortgage career where the income was there, but hard to document.  This will impact those borrowers.
• Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.   Fine.  I've never liked prepayment penalties.  Life happens and sometimes people don't stay in a home or mortgage as long as they originally intended.
• Require that the lender establish an escrow account for the payment of property taxes and homeowners’ insurance.  Fine.  The lender may only offer the borrower the opportunity to opt out of the escrow account after one year. All subprime (or non-prime, same thing--just sounds better these days) should have reserve accounts. 

The proposal would, for these and most other mortgages (prime aka a-paper):

• Prohibit lenders from paying mortgage brokers “yield spread premiums” that exceed the amount the consumer had agreed in advance the broker would receive.    A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.    Fine...IF...the borrower accepts and understands that the broker is going to be compensated a total of x% which includes YSP plus the origination if any.  For example, the broker would disclose upfront to the borrower that he/she is going to make 1.25% (just for example sake) to the borrower.  If the borrower is paying 1% if origination points and the lender is paying 0.30% in YSP; the loan originator will credit the borrower 0.05% of the YSP to the consumer.   However, if the reverse happens, and the YSP winds up being 0.20%, shouldn't the Loan Originator be allowed to increase their origination by 0.05% to meet the 1.25% agreed compensation?  It needs to work both ways. 
• Prohibit certain servicing practices, such as failing to credit a payment to a consumer’s account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and “pyramiding” late fees.  This must be on the servicing side (and it's fine with me).
• Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.  Fine...absolutely fine!
• Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term “fixed” to describe a rate that is not truly fixed.  It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or “teaser” rates.   Fine.  I have called 5 year ARMs, ARMs that are fixed for five years and adjust annually afterward.  I don't see that as misleading.  Consumers should know what the "worse case" payment may be on their ARM or any mortgage.
• Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.  Fine.  I do not provide rate quotes (except for those I post on Fridays with all of my disclaimers) without sending a Good Faith Estimate with the Federal Truth in Lending. 

I am not seeing a huge issue with the Fed's proposal.  In fact, as you can see, for the most part, I agree with it...it's fine! 

NOTE:  If you bought a home using over-stated income and have an ARM adjusting, you may need to find a co-signer to help you obtain your next mortgage.  There will not be many (if any) stated or no-income verified products available for you.  This is your government in action.

Who Qualifies for Bush's Mortgage Freeze?

Check out this graph from the Wall Street Journal.

Related post:  Do You Qualify for the Bush-Paulson Five Year Fix?

Do You Qualify for the Bush-Paulson Five Year Fix?

Today both President Bush and Treasury Secretary Paulson announced a very controversial plan to help home owners "avoid foreclosures that are preventable".  Who qualifies to be saved?  According to President Bush:

"We should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could not afford..." 

To me, this sounds like if you did a stated income loan and your reported income to the IRS is out of line with what you submitted and signed your name to on the loan application, you may be excluded from this program.   The allowed debt-to-income ratios for many of the sub prime mortgage programs a few years back was 55%; I wonder if this plan will consider those with a 55% DTI "reckless"?   Note: a 55% debt to income ratio is taking the borrowers monthly gross income and allowing them to have a mortgage payment up to 55% of that gross income. 

Watch President Bush's speech from this afternoon by clicking here.

Read President Bush's call to Congress here.

In addition to FHA Secure and Hope Now, Bush and Paulson announced a 5 year freeze on mortgage interest rates for qualified subprime borrowers:

According to Bloomberg, you will need the following to qualify for the five year fix:

"The freeze may apply to mortgages issued between January 2005 and July 2007 that are scheduled to reset between January 2008 and July 2010, said a person familiar with the plan. Borrowers whose credit scores are below 660 out of a possible 850 and haven't risen by 10 percent since the loan was sold will be given priority.

Those with scores above 660 will be more closely scrutinized to determine whether they are eligible or must continue making payments under existing terms..."

This follows Paulson's plan which he unveiled earlier on Monday.   Paulson states there are four categories of subprime borrowers from Paulson's press release on December 3, 2007:

1. There are those who can afford their adjusted interest rate; these homeowners need no assistance.
2. There are also a substantial number of homeowners who haven't been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners will become renters again.
3. Homeowners who might choose to refinance their mortgage - putting them in a sustainable mortgage while keeping investors whole.
4. Those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate.

Those borrowers in Group 4 are the ones currently being focused on by the Government.   So if you are able to afford your higher monthly payment (Group 1) you will not receive any benefit.  If you've never been able to afford your mortgage (Group 2); you will not receive any benefit.  If you chose to refinance now and take your home finances into your own hands (Group 3) you will not receive help from the Government.   Under Paulson's Plan, Group 4 will receive help.

I recommend meeting with your Mortgage Professional if you have an adjustable rate mortgage that is scheduled to adjust in 24 months or sooner.  Don't wait for someone to bail you out.  Even if you feel your credit is great and you have a handle on your mortgage; an Annual Mortgage Review is more important than ever.

Much still remains to be seen on how this plan will work out.

Please Don't Neglect Your Unhealthy Mortgage

Today I received a phone call from a CPA who was trying to help her clients who have a "toxic mortgage".   She was hoping I would be able to save them...there was a time that I probably could perform a "rescue".   In fact it was just a few months ago before the current mortgage melt down.   Believe it or not, when applied correctly, subprime mortgages could mean the difference of someone being able to save their home assuming they were able to be disciplined enough to keep (or get) their finances healthy.  This family will not qualify for FHA or FHASecure (they don't have an ARM that's adjusted).   What they need is a subprime (now known as "non-prime") mortgage to buy them a little time.   Now their time is running out.

Part of their problem began with working with an unsavory loan originator who is now out of the business.   The LO brokered their loan to a subprime company I would not work with.  (Even though we're approved with around 80 lenders, give or take depending on the day, I tend to select 5 preferred prime lenders and 3-5 subprime/alt-a...this lender was not on my list of preferred). 

Shortly after closing, their lender informed them that they did not have home owners insurance...they did.  They provided documentation showing their insurance to the lender.    The lender did not respond and instead, ordered insurance for them at a hefty price...jacking up their payment beyond what they can afford.   Now they're sliding down a very slippery slope and the lender is not cooperating.   They are behind on their mortgage a couple months.  They called out for help too late.   

NOTE:  Other lenders may be more willing to cooperate with homeowners...you need to act quickly and contact your lender if you're having difficulty with your payment. 

Homeowners:  the very moment you think you may be having trouble with your mortgage or debts, please contact your Mortgage Professional right away.   If you don't have one, you can always contact your CPA or other trusted financial advisor for a referral.   Please don't wait until you have a "mortgage emergency"...get help, even if you just have the sniffles.

Trusted Advisors (Real Estate Agents, CPAs, CFPs, etc): Please keep an ear out for your clients who may have adjustable rate mortgages or are may be having difficulites with their mortgage payment.   Even if an ARM isn't scheduled to adjust for 12 months or more, the sooner someone meets to with a Mortgage Professional to make sure their credit and everything else is in line to restructure the mortgage (if needed), the better for all.

All home owners should meet with their Mortgage Professional at least annually to have a "mortgage check up" or Annual Review.   This is a service that I provide to my clients.  I'll provide more information about the Annual Mortgage Review in a separate post.   

My point is, the more time you allow yourself to fix a "sick" mortgage situation, the better your odds are of finding a cure.

Foreclosures slightly up in King County

While we continue to fair better than the rest of the country, with many ARMs (adjustable rate mortgages) getting ready to re-set out of their introductory rates, this trend may continue.   

This is why it's critical that all home owners with adjustable rate or balloon mortgages contact their Mortgage Professional as soon as two years before their mortgage rate is set to adjust.   This (ARMs adjusting) is not limited to those with subprime mortgages.   

The more time you allow yourself to get your credit in check and possibly avoid having home values depreciate, the better off you'll be should you need to refinance.   Sadly, I've been contacted by a couple of home owners in other parts of the country who are not only facing higher payments from their adjusted ARM payments, mortgage balances that exceed their home values and plumeting credit scores.   FHA Secure won't help them since they're beyond the 97% loan to value.   It's too late.

Please don't put off contacting a Mortgage Professional.   Take action before you're in trouble.   

Here's a great article by Sandy Kaduce: Avoid Losing Your Home.

How Low Can You Go...Depends on Your Down Payment

Here are some credit score/loan-to-value figures I just received from a subprime lender for "full doc" mortgages:

• 90% - 580 Mid Score
• 85% - 540 Mid Score
• 80% - 520 Mid Score

The rates were not provided but I can assure they would not be attractive.  We're probably talking double digits for a 3 year balloon with a prepayment penalty.   I strongly recommend using FHA over this type of financing.  (FHA is not credit score driven; you do need to have a good credit history over the past year). 

If you cannot qualify for FHA, then I encourage you to work with a Mortgage Professional to develop a plan to get on track for buying a home or refinancing.

Ashamed of having a subprime mortgage? Don't be.

The other day, FOX news contacted me after reading one of my post wanting to interview some of my successful borrowers who once had a subprime mortgage.  You wouldn't know this from watching the news: a majority of subprime mortgages are performing well.   It's a minority that are not.   

I was eager to help tell this story and sent an email out to a handful of my clients who once had subprime mortgages letting them know about this opportunity.   No one responded.   It made me wonder if they are embarrassed they once used "subprime financing"?   With how it's getting a big black eye, I guess I could understand how they feel.    It's too bad that more of the "good news" about this type of financing is not making the headlines.

The fact is, most of my clients who had subprime/alt-a mortgages are doing very well.   They did what you're suppose to do if you have a subprime mortgage:

1. Work on improving what ever situation caused them not to have a "prime" mortgage (employment, credit, assets, etc.).
2. Prepared themselves for when their fixed period and prepayment penalty is over so they can refinance into a "prime" mortgage.  They had an "exit strategy".

Here are a few examples:

Single mom who's self employed for one year but coming from the same line of work for five years with excellent credit.   She had a track record of solid income however, conforming guidelines require two years of tax returns (for full doc) or two years of business licenses (stated/NIV).   We provided a 30 year fixed mortgage using 6 months bank statements to document her income.   She recently sold that home and is now in her next home which we were able to go "conforming" using the proceeds from her first home for the down payment.

Wife marries a "project" husband (her loving terms, not mine) where his past credit is a mess.  Her credit is fine but he's the primary wage earner.   They were actually my first subprime loans.   At that time, if you had a mid credit score of 600 or better, you could do zero down.   They barely squeaked in.  However, they did what subprime buyers are suppose to do:  they worked on cleaning up their credit over the two year time of their mortgage had a fixed rate.  They changed their spending habits and were responsible home owners.    They since refinanced after their two year prepayment penalty was up.    Having a mortgage has improved their credit score (as well as working on their credit) and they have benefited from the appreciation that the Pacific Northwest has offered them.

Young couple with three children living with the in-laws.  Money was a little tight as far as the down payment was concerned.  They had decent income and credit that was not quite established yet.   They believed in not having credit cards.   They were able to purchase their first home and move out of the folks house (a good move for everyone, I'm sure!) and later refinanced with higher credit scores and equity they gained by the time their purchase money mortgage was about to adjust.

Home buyers who used subprime mortgages to purchase their home, who had good advice from a qualified Mortgage Professional and who followed that advice, should not be ashamed to be associated with a subprime or alt-a mortgage loan.   They did what you're suppose to do, use it as band-aid financing.

Home owners who have a subprime mortgage and did not change their habits are probably going to be hurt in this market.   If you currently have a subprime mortgage with an ARM or prepayment penalty adjusting within the next 18 months, please contact your Mortgage Professional as soon as possible so you can start working on your credit.

If you're part of the first group, be proud!  You improved your credit, manage your debts and spending patterns and became a responsible home owner.   

There's No Love for the Subprime Borrower

I hope you'll enjoy reading an earlier post of mine that I featured at Rain City Guide.  This article was originally written by me on February 13, 2007.   Recently FOX News contacted me about it wanting to speak with some of my successful clients who were once considered "subprime".   It's too bad I had a real short notice and could not help them out.   The "successful subprime" borrowers outweigh the others by far.  Without further ado...

There's No Love for the Subprime Borrower

It’s all over the news, we’re hearing about major subprime lenders having to restate their losses and every day, lenders are coming into my office to inform us of changes to their guidelines.   This is all good, right?    It will be tougher to provide loans for home buyers who maybe should be spending more time to learn about budgeting and using their credit cards.    What about the people who are all ready in these programs?

First, allow me to explain the basic dynamics of these loans.  Many of these mortgages are zero down, 80/20s (80% of the loan to value for the first mortgage/20% of the value for the second mortgage).   The first mortgage is typically offers a fixed rate for 2-3 years with a prepayment penalty (the standard is six months interest) that matches the fixed rate period.   In addition, the mortgages may be interest only or amortized at 30, 40 or 50 years.    The rates on these mortgages are completely dependent on credit score.

When I meet with Mr. and Mrs. Subprime, I advise them of their options of buying now using this type of subprime mortgage or that they can work on their credit, job history, etc. and buy later with a better mortgage program.   Because there are no guarantee of what rates will be (or maybe because they know there’s not guaranteed they’ll clean up their act) and because they want to buy a house now, they often opt for the subprime mortgage.   Once this happens, I heavily stress (or Jillayne would say, I lecture —which I’m sure I do) to Mr. and Mrs. Subprime that they have 2-3 years to change their spending habits because once their fixed period rate is over, their mortgage is going to adjust and do so big time.    I let them know that I want them to be in the best position for a refinance into permanent financing (or to have a better mortgage should they decide to sell the home assuming they have any equity) and that the subprime mortgage they are using to obtain their home is temporary financing. 

Many of my clients in these mortgages have done very well and I’m proud of them.   They have taken the responsibility of owning a home and having a mortgage to heart.  I’m able to restructure the original mortgage and improve their situation greatly.   The concern is for Mr. and Mrs. Subprime who just didn’t get the hang of it.   They continued to charge up their credit cards, they bought or leased a new car to go in their new driveway and maybe a new TV, too.   They’ve been sliding ever since the holidays and are now having a tough time paying their mortgages on time.   Maybe they just have one mortgage late.   Their credit is rough at best.   Their fixed period (and prepayment penalty) is over and now they really need to refinance fast because their mortgage has adjusted for the first time—their rate is now 2% higher.  Their situation has gone from bad to worse.    With all the tightening in the subprime market, even if their credit scores and scenarios are the same as when they bought, there may not be a program for them to refinance out of now.   They will be forced to sell (hopefully they have enough equity to pay commissions and other closing costs) or to somehow manage to choke down their increased payments.

I guess this post is a plea of sorts.  If you currently have a subprime loan (especially the type I described) please contact your Mortgage Planner to have your credit reviewed to make sure you’re on the right track to be able to refinance (or have a better loan for when you sell) when the time is due.   Do not assume there will be a program for you if you have not made significant changes to your spending and use of credit cards.   If you’re a real estate agent or loan originator, check in on your subprime clients to let them know of the changes in the industry…see if they need guidance to stay or get on track so they don’t wind up stuck with a higher mortgage payment, being forced to sell or foreclosure.

What's going on in the mortgage industry? A must see graph spells it out.

This graph from the New York Times paints a picture that I can't call pretty.   

"So what's gone wrong in the last few months?  An unfortunate combination:  more loans in default (many borrowers were never in a position to pay them off), risky bets worth billions made by some investors (deals now gone sour), and the reversal of the housing boom."

A big hat tip to Behind The Mortgage.