Monthly Archive for July, 2008

If you are 62 or over, have a lot of equity in your home, and need money, you are in luck--even if you have bad credit. Reverse mortgages, also called Home Equity Conversion Mortgages (HECMs) are the only mortgages where people with bad credit pay the same rates as prime borrowers. That's because you don't pay this loan; it pays you.

Reverse mortgages were designed to help older homeowners stay in their homes even if their income is low. They allow borrowers to cash out their equity without worrying about making payments or selling. When you take out a reverse mortgage, the lender uses a complex formula and calculates how much you can borrow based on your age and the amount of equity in the home. You can take this money as a monthly payment, a lump sum, or a combination of the two. You are responsible for keeping up your home and paying the property taxes and insurance, but there are no mortgage payments--that's why it doesn't matter if you have bad credit.

The mortgage doesn't have to be repaid until you move, sell the home, or die. The loan is repaid and any remaining proceeds from selling the home go to you or your heirs. No matter what the balance of the loan is, you never owe more than the value of the property. HECMs are administered by HUD and have some limitations, primarily the amount that can be borrowed against the property. Other private companies offer reverse mortgages in jumbo amounts and with differing eligibility requirements.

At first glance Fannie Mae's "Keys to Recovery" plan seams too good to be true. It is. One provision touts itself as a rescue effort designed to help borrowers underwater on their mortgages--with loans up to 120% of the current value of the home in fact. But wait, there's more. The existing loan has to already be a Fannie Mae loan. Well, how many people with prime, conventional financing can do better by refinancing now? Not many. Those who could really improve their positions, meaning people in non-traditional ARMs with negative amortization, for example, or subprime rates, can't get a Fannie Mae rescue. Because Fannie is a private company, responsible to its shareholders. And it would be irresponsible to refinance loans up to 120% of the value of the home.

So "Keys" amounts to little more than a publicity stunt. Very few will be helped by this effort. Stay tuned.

If you've been following the news about mortgage reform, you might have come across the term YSP, or Yield Spread Premium. YSP is simply a rebate paid by a wholesale lender to a mortgage broker for originating a loan. While some (usually well-meaning but ignorant) folks rant about how lenders use the Yield Spread Premium to steal from poor dumb consumers, the truth is that consumers are pretty sharp when it comes to shopping, YSPs save many people money, and most people who get loans from brokers (85% in fact) choose to make use of them.

Here is how YSP works: When a mortgage broker brings in a loan, he or she saves the wholesale lender time and money. The lender doesn't have to market or advertise, network in the community, maintain a local office, meet with the borrower, analyze the income, assets, and debts as well as future financial and lifestyle changes, help the borrower choose the best loan, complete the paperwork, and document the financial package. The broker who does all this doesn't work for free but is not an employee of the lender either. So brokers get paid one of two ways: they either collect fees from the borrower (that's you and me!), for example origination and application fees, or they get them from the lender in the form of a rebate. Borrowers can choose to pay the fees to the broker out-of-pocket or they can opt for a slightly higher rate and the lender will cover the broker fees for them. And 85% of borrowers opt to have the lender pay the broker fees. It's their choice.

But this is hard to visualize. So here's an example:

Bob Borrower wants a $200,000 loan with a 30 year fixed rate. His broker shops around and offers him the chance to get a 5.75% rate while paying 1 point ($2,000) plus about $1700 in other fees. Or, Bob can choose a 6% rate and pay NO fees. Bob finds an online mortgage calculator and puts these figures in. The 5.75% loan carries an APR of 5.92%. The payment is $1,167. The 6% loan, costing $0, has an APR of 6% and a payment of $1,199, a $32 per month difference. So Bob can choose between paying $3700 upfront or paying $32 a month more. While the 5.75% loan has the lower APR, it takes almost ten years before Bob makes up the $3700 by saving $32 a month. So you can see why most people choose the so-called "no-cost" loan.

How can Bob KNOW that he's not being taken advantage of? Simple, when it's easy to compare rates and programs online. Bob checks online and finds another lender who wants 6.125% for a no-cost loan -- he knows he's getting a fair deal. It doesn't matter what the wholesale price is; by comparing offers and taking the best one you get a good deal -- no different than shopping for clothes or tires (aka threads and treads).

There are plenty of things to watch for when shopping for a loan -- the APR, the fees, terms like prepayment penalties, teaser rates, amortization -- but YSP doesn't mean "You're Swindling People" and yield spread premium isn't anything to worry about.

Today's big mortgage news is from Florida (what else is new!?). The Miami Herald discovered that not only are the majority of the state's mortgage professionals unlicensed, but over 5,000 of them were convicted felons! Even worse, this practice is perfectly legal. How can this be?

The devil is in the details, and while it's illegal in Florida and most other states for mortgage brokers to have a criminal record, their subordinates (generally referred to as loan officers, loan originators, account executives, or mortgage finance officers) are allowed to. The idea is that the broker is held responsible for the ethics and practices of his / her employees. Unfortunately, this provides a nice little loophole for those who were stripped of broker's licenses because of their shady lending practices. They just become loan originators and work for another broker. And there are brokers out there who don't check the backgrounds of their employees and don't police their lending sufficiently.

So, how does a borrower make sure a lender is reputable? First, know that the odds of getting a fair deal are in your favor. Real estate expert Robert Bruss, in an article about mortgage lending practices, acknowledges that "most mortgage lenders are honest." So does Realty Times, stating that while there are a few "bad apples" the "vast majority" of lenders are honest.

Second, learn what your state's requirements are. Some are quite stringent, requiring background checks, education minimums, and passing exams before a loan officer can be licensed. Other states have no requirements at all. Here is a link to state requirements for loan officers.

Third, check your lender's status in your state. Here is a link for states which have lender databases online. You can generally find out if its licensing requirements are in order and if there are pending actions or investigations.

Fourth, check out several lenders before committing to one. Especially for subprime or bad credit borrowers, getting quotes from several mortgage loan companies is the best way to make sure you are being offered a fair deal.

Finally, really read your disclosures and remember that whatever is in writing trumps anything you are told by a loan officer or broker. The most often reported abuse of borrowers occurs when the terms disclosed upfront are changed at closing. If the interest rate, fees, or terms such as the addition of a prepayment penalty have changed at closing and weren't discussed with you beforehand, don't sign the documents until the misunderstanding is cleared up and you either receive a satisfactory explanation or get the loan you expected.

When you refinance your primary residence, you have three days to rescind or back out of the loan--use that time to make sure your loan is what you expected. When purchasing property, insist on getting copies of your documents a day or two before closing. That way you can really go through them and resolve any questions in a less pressure-filled atmosphere.

A lender you trust and work well with is as priceless as a good mechanic or hair stylist. And the amount of money involved makes it serious business. A little legwork (or mouse-work) upfront can save you money, smooth out the mortgage financing process, and ease your mind.

Okay, I was promised information from Fannie Mae about using their 120% refi program to get a spouse off an underwater loan. But I have NOT heard back and I'm still rattling cages. So stay tuned, we'll go on to other credit issues until I get an answer from Fannie and friends. Next week we can explore short sales and why those with bad credit mortgages may actually have an advantage in this arena.

Couples who wish to divorce but can't sell or refinance the family home have a special obstacle to dissolving their relationship. Normally you would just sell the property or the party keeping the home would refinance the mortgage and release their ex from the obligation. But when you owe more than you could sell the ...

Okay, we've heard about couples who stayed together "because of the children" for years before finally divorcing. But kids aren't the problem for many of today's would-be divorcees. Couples in soft real estate markets can't separate because of.........the house? That's right, the house. Normally, divorcing couples sell their home, split the profit from the sale, and ...