Ramifications Persist – Thanks In Part To Unscrupulous Brokers

Subsequent to the Housing Crisis, the 2010 Dodd-Frank Wall Street Reform Act imposed many new rules. This was a response, in part, to some unscrupulous mortgage lenders and brokers charging excessive fees to consumers.

Mortgage lenders and brokers cannot charge origination fees to borrowers that represent more than 3.0% of the loan amount (the “Points & Fees Cap”). As reasonable as this fee cap concept sounds, it is fraught with restrictions that are unfair to the people it was meant to protect.

Let’s take an example of a consumer wishing to borrow $120,000 to buy a home:

$2,700.00 - Mortgage Broker Fee (2.25%* of Loan Amount)
     975.00 - Lender Administration (Standard Average Flat Fee)
$3,675.00 - Total Origination Fees

* Average Florida mortgage broker fees range between 2.0% to 2.75% (based on the interest rate selected, the borrower is eligible to receive a credit at closing to fully cover this fee for most conventional loans).

On the surface, the loan fails the 3.0% Cap (i.e., $3,675 of fees represents 3.1% of the loan). This renders the loan a “Non-Qualified Mortgage”, in which case Fannie Mae could elect not to purchase the loan from the mortgage lender. The lender might stamp “decline”, given their potential inability to monetize the loan.

And, if the lender imposes customary “risk adjustment fees” to compensate for a higher loan-to-value or lower credit score (or if the borrower pays a reasonable fee to “buy-down” the rate), these “Discount Points” must also be added into the calculation – making it impossible for the borrower to obtain a Qualified Mortgage. Fortunately, the regulators have acknowledged that some “bonafide” fees may be excluded from the cap calculation, allowing most mortgages to qualify after time-consuming compliance checks.

Here’s the Point: Regulators imposed a “Points & Fees Cap” to ensure that mortgage lender and broker fees are reasonable, but the resulting time-intensive compliance checks can delay closings.

Subprime Mortgages Alive and Well?

When U.S. housing prices peaked in 2006-07, the subsequent period of unprecedented value depreciation was attributed mainly to housing speculation – fueled by subprime lending. Today, billions of dollars of debt is still being extended annually to consumers who are unable to qualify for conventional or FHA financing.

Some say “Subprime” mortgages have merely been disguised by re-naming them “Non-QM”. Non-Qualified Mortgages are residential loans that do not comply with post-housing crisis standards, as set by the Consumer Finance Protection Bureau (to ensure borrowers have the “ability to repay” their loans).

Lenders following CFPB guidelines are able to sell their “conforming” mortgages to Fannie Mae and Freddie Mac (government-sponsored agencies). However, mortgages that do not satisfy agency requirements are deemed Non-QM, and are either held by the originating lenders or sold to yield-driven investors.

Although opinions vary, loan underwriting is very different today than during the housing bubble. Subprime loans were generally earmarked for borrowers with poor credit, and consisted of excessive interest rates, prepayment penalties and negative amortization (where loan principal increases over the life of the loan, rather than decreases).

Mainstream national Non-QM lenders mitigate risk today through a combination of protective policy guidelines, as well as prudent credit score, reserve and debt-to-income/loan-to-value ratio requirements – all of which have helped to keep defaults and foreclosures to a minimum. Borrower liquidity and repayment ability are being more closely scrutinized by Non-QM lenders than before, and adverse loan terms are rarely seen in forward residential mortgages today – at least for now...

Here’s the Point: If you are unable to qualify for conventional or FHA financing, there are still plenty of programs available to help you with your purchase or refinance – but the terms have tightened considerably since the subprime era.

No Wonder People Are Working Longer

people working longer

Results from recent studies by Northwestern Mutual and the Federal Reserve indicate that people are relying on home equity to carry them through retirement:

  • One-in-five Americans (20%) have NO retirement savings (another 10% have less than $5,000)
  • Almost 50% of adults have taken no steps to prepare for the likelihood of outliving their savings
  • 10,000 Baby Boomers turn 62 every day (the generation closest to retirement age born between 1946-64, representing almost one third of the U.S. population)
  • One in three Baby Boomers have between $0-$25,000 in retirement savings
  • 50% of Baby Boomers have no retirement savings

These are scary statistics, especially given the continuance of rising healthcare costs and the U.S. National Debt now over $22 Trillion (renewing concerns about the adequacy of and reliance on Social Security funds). And 65% and 36% of retirees receive at least 50% and 90% of their income from Social Security, respectively.

The saving grace is that 80% of seniors have substantial equity in their homes (an all-time high).

However, with people living longer (85+ is the fastest growing demographic in America) coupled with nominal income and insufficient savings, many retirees will have difficulty refinancing their homes or qualifying for a purchase mortgage.

One alternative is to sell their home and pay cash for a downsized home – however, the change is not always economical or welcomed, and the new location may carry high homeowner’s association fees. The other alternative to seriously consider is a Home Equity Conversion Mortgage (aka Reverse Mortgage).

Here’s the Point: Retirees with nominal savings and income but decent home equity have the FHA-Insured Reverse Mortgage as a commendable solution.

Up Your Credit Score

credit score

LENDER: “We require a minimum 640 FICO score to extend a mortgage. And at 680, you’ll get a better interest rate.”

What they didn’t tell you, is that you could qualify for a conventional or FHA loan with even a 620 score. The declining lender either has an “overlay” (which means their conventional loan risk tolerance is less than other lenders), and/or they just don’t offer FHA loans.

There are many national, reputable wholesale lenders who will underwrite standard FHA mortgages at a 580 credit score – and will even accept a lower credit score if you have at least a 10% down payment.

But – What if you:

  • still don’t quite meet minimum credit score requirements?
  • just missed the next higher FICO score level – which could yield a better interest rate?

For nominal cost, a credit agency can run a sensitivity inquiry to quickly tell you which credit cards need to be paid down and by how much – before a credit bureau increases your score. Once you receive a statement from your creditor evidencing your pay-down, send it to the credit bureaus for a credit score adjustment (but this can easily take 30-60 days).

Alternatively, you could work with a reliable credit agency to expedite this process (usually no more than 5 business days). Under this “Rapid Rescore” process, you are notified once your improved scores are posted, and a new credit report could then be presented to your lender so that you can get on with your mortgage!


Here’s the Point: After paying down a credit card, there are “Rapid Re-Score” programs to arrange for the credit bureaus to adjust your credit score within 5 business days.

Millennials: Thank Your Parents If They Charge You Rent

millennials-paying-rent

LENDER: “Because you live at your parents' place without a lease and without having a prior mortgage, we cannot offer you an acquisition loan.”

If the above statement was the lender’s sole reason for declining your mortgage, then it is in contravention of the General Guidelines for Analyzing Borrower Credit per the U.S. Department of Housing and Urban Development (HUD). According to HUD, the lack of credit history (or a borrower’s decision not to use credit) may not be used as the basis for rejecting a loan application.

However, if, for example, in addition to no housing history:

  • your credit score is low due to prior delinquencies,
  • you are in the middle of negotiating an IRS payment plan for taxes owing,
  • you are self-employed with an inconsistent net income stream, or
  • your credit cards are new and with limited revolving credit availability,

… then you are not likely to get a conventional or FHA loan!

POSSIBLE SOLUTION: You might still be able to get a mortgage approval if you can demonstrate that you have been consistently contributing to household expenses – thereby, in effect, helping with your parents’ mortgage. Although it is always better to make payments by check (to more easily track your contributions), even cash payments can be acceptable support – in the case where your withdrawals can be matched to deposits in your parents’ bank statements.

Other compensating factors include showing that you have a consistent pattern of payments for utilities, vehicles, or insurance.

Here’s the Point: If you do not have any recent rent or mortgage payment history, then you will need to be patient and creative to get a mortgage.

Artificial Intelligence in Mortgage Underwriting

Artificial Intelligence

LENDER: “I’m sorry to say that your loan request has been declined. We just couldn’t get a green light from the software program we use.”

YOU: “So I was declined by a computer?”

LENDER: “Well, sort of. You had several factors working against you including your credit score, some late payments, and the fact that you wanted to minimize your down payment.”


The above exchange actually happens more than you would expect. The explanation, while not very helpful, is actually about the best you will get – because the workings of the algorithms used in this standard mortgage software are unknown to almost everyone in the industry, except those who designed it.

There are two programs used by lenders to qualify their borrowers for conventional or FHA financing: Desktop Underwriter (DU) or Loan Prospector (LP). DU is required by the Federal National Mortgage Association (FNMA or Fannie Mae), and LP is required by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). And, Fannie Mae and Freddie Mac, government-sponsored enterprises (GSE’s) founded by Congress, are the ultimate buyers of your mortgage. Without getting a green light from one of these programs, your loan may be declined.

Avoid these factors to maximize the probability of getting a DU “Approve/Eligible” or an LP “Accept” finding:

► Loan-to-Value ratio > 80%

► Debt-to-Income Ratio > 43%

► Low Down Payment & Cash Reserves

► New Credit Cards with Low Borrowing Capacity

► Credit Score < 640

► Late Payments/Collections

► Limited History of Mortgage/Rent Payments

► Several Credit Inquiries

Here’s the Point: Without an “Approve/Eligible Finding” from Fannie Mae, you aren’t likely to get a conventional or FHA mortgage – and you may need to call a portfolio or private lender.

Some Lenders Just Don’t Get It

apathy


Jamie Dimon, CEO of JP Morgan, once wrote in a memo to shareholders that: “…mortgages are offered as a benefit to customers, not because it's a sound investment for the bank." In a recent article by CNBC, one-third of consumers surveyed complained about how their mortgage was handled by banks – and two-thirds of the complaints related to how banks handled all loans in general.

The excitement you experience during your first real estate purchase quickly dwindles when your bank demonstrates their apathy.

There are so many ways for banks to make the mortgage experience much less frustrating, yet “quality service” and “follow-up” tend to be forgotten. For example:

  • You were told that your loan application would be reviewed before the end of the week [But then you call your bank for an update and find out the underwriter in charge of approving your loan is out of the office]
  • You compile all back-up support to evidence your income and property insurance [But then you call your bank for an update and find out three of these items have been misplaced, and were never seen by the underwriter]
  • You go to the closing to sign documents and get the keys to your new property [But then you call your bank for an update and find out you need to wait three hours before they approve the documentation and authorize the loan disbursement]

The way some bankers handle mortgages for consumers is certainly not the way they would handle their own mortgage!

Here’s the Point: There are plenty of mortgage lenders who understand the importance of service – just make sure to pick the right one.

Jumbos Can Be A Beach

jumbo beach house

Your wife just fell in love with a beautiful house on Valentine’s Day.

“Honey I will love you forever!”

If your purchase requires a loan amount that exceeds the standard conforming loan limit ($484,350 per the Federal Housing Finance Agency), it will be considered a "jumbo loan", for which special rules may apply.

For example, if you prefer your down payment to be only 10%, your bank statements or retirement savings accounts may need to show additional liquidity in the amount of 12 months PITI (the projected monthly amount of your Principal, Interest, Taxes and Insurance).

And, you will need to address these questions:

  • Is the loan for your primary residence?
    [If not, there will be higher down payment, credit score, and reserve requirements for a second home or investment property]
  • Is your credit score at least 680?
    [If not, you may need to use a private lender, and your interest rate will be higher]
  • Do you have enough reserves?
    [If not, consider structuring a piggyback mortgage – that is, a conventional first mortgage up to the $484,350 maximum limit (so that the higher jumbo loan reserve requirements do not apply), and obtain a Home Equity Line of Credit for the balance]
  • Is your Debt-to-Income ratio below 43% (40% if a 1st Time Homebuyer)?
    [If not, you could increase your down payment (to lower your monthly PITI obligation), pay-off your car loan (to reduce your non-housing debt obligations), or negotiate an interest only structure (to eliminate your principal amortization)]


Here’s the Point: Jumbo loan rules can be discouraging, but there is usually a way to make it work.

Buying Your Uncle’s Partial Property Interest

Florida Vacation Home

You just returned from a fantastic holiday at your family’s Florida vacation home. You have always loved the home, which is owned debt free by your Mother and her Brother (your Uncle). Now your Uncle might like to unload his interest. He wasn’t gripped by your suggestion of gifting his 50% interest to you, and so you need a mortgage to make this work.


Here are some lending options (be sure to consult with legal and tax professionals):

1. PURCHASE

  • Although your Mother wants to keep her interest, she must be removed from title along with your Uncle (so the lender’s mortgage can be secured by 100% of what will become your property)
  • Your Mother could provide you with a “gift of equity” (her 50% interest), and you could obtain a loan for the balance of the purchase price
  • Quit-claiming a 50% interest back to your Mother after closing would be prohibited (although the lender is not likely to audit this after closing)

2. REFINANCE

  • As your Mother will remain on title, she can qualify for a “cash-out refinance”, and you could be added to title at closing (at the same time your Uncle is removed from title)
  • Although borrowers cannot refinance a property until they have owned it for 6 months, this condition is satisfied by your Mother’s prior ownership – but she must be a co-borrower

3. UNCLE LOAN (Fastest/Cheapest)

  • Have him quit-claim his interest to you, and pay him back over time at a reasonable interest rate


Here’s the Point: It is probably easier to avoid a third-party mortgage when buying a family member’s partial property interest.

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