Certainly mortgage rates have improved. In recent weeks they have been at or near historic lows. But no less important the lending system has improved. It’s not just that mortgage rates are better, it’s also that the probability of getting a good loan has gone up.

Let me provide three examples:

First, since January 2010 lenders have been required to use a new good faith estimate form. This is a big deal because HUD estimates that the new GFE will reduce borrower costs by $700 per transaction.

Second, there are no more yield spread premiums (YSPs).

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act lenders can no longer collect additional fees by selling more expensive loans. In other words, a lender was paid extra money — the yield spread premium — by hiking up the interest rate.

For instance, if you qualified for a loan at 4.5 percent on the basis of your credit standing and a lender sold you a loan at 5 percent, the lender got additional money out of the deal — and you got a higher mortgage cost for the entire loan term.

The ban on yield-spread premiums, of course, is just one reason why lenders want to revoke, revise and refine Wall Street reform.

Third, Wall Street reform has created a category of loans called qualified residential mortgages or QRMs. Lenders who offer QRMs do not have to set aside 5 percent of the loan amount in a reserve fund and they are protected against borrower lawsuits.

So what’s a QRM? The usual definition is that a qualified residential mortgage under Wall Street reform is a VA, FHA or conventional mortgage originated with a full-docs loan application and with points and fees that equal 3 percent or less of the loan amount.

Lenders, in some cases, also don’t like the QRM standards under Wall Street reform. They want the right to make riskier and more-profitable loans.

But what about the future? Won’t all loans require 20 percent down?

Nope. QRMs plainly do not require 20 percent down and they represent they overwhelming majority of the loans that borrowers want and get.

So, yes, loans are better today then they were a few years ago. Add up the changes big and small and the mortgage you get today will be less risky and less costly than loans from just a few years ago.

For all the carping and complaining about the new mortgage market, the reality is that what we’re really seeing is a return to the 1990s — a period when there were no option ARMs, interest-only loans were rare, and no-doc loan applications were expensive and uncommon.

In other words, rather than “affordability” loan products and “non-traditional” loan applications, we’re going back to mortgages and underwriting that proved successful and low risk for decades.

The crime, of course, is that we veered from these standards in the first place. There would literally be no mortgage meltdown today, no financial crisis, if we had stuck with the old, boring, dependable lending standards that worked so well. There would be no worries about mortgage-backed securities and no needless losses for bank shareholders and mortgage investors. With proper loans there would be no foreclosure spike and thus no incentive for robo-signing.

Unfortunately, our federal regulators failed to regulate and the result is the mess we have today.

Has Mortgage Lending Gotten Better Since Wall Street Reform? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Unfortunately, there’s no Steve Jobs in finance. That’s a shame because could you imagine if Jobs had turned his attention to mortgages for a day? The world would be a very different place.

As a start, you can imagine that all loan applications would have been on gray paper with easy graphics to guide the process.

Lines would have been spaced widely apart so that people with difficulty writing could be accommodated.

And information would have been clearly outlined — how much was being borrowed, the interest rate, whether fixed or adjustable and if there was a prepayment penalty.

The payments to lenders, brokers, closing companies and everyone else would have been clearly shown. And while it might have cost a little more to use a Jobs loan application it would be worth the price in terms of clarity, efficiency and design.

In effect, by designing forms everyone could understand Jobs would have transformed the lending and closing process. People would have discovered that the sale commission for title insurance might be 60 percent or 70 percent of the entire cost. They would see how brokers divide commissions and they would see the cost of taxes in one section. There would be no “gotcha” clauses.

Steve Jobs never hid his prices. He changed more and there were always cheaper competitors out there. But that was okay. People were willing to pay a little bit extra because they got something more for their purchase.

Right now the Consumer Finance Protection Bureau is trying to re-do the basic Good Faith Estimate of Closing Costs or GFE, the single piece of paper which is most important for mortgage borrowers. It took HUD 14 years to revise the last edition, the one which came out in January 2010. Now it seems as if the CFPB will be able to do the work within a year or so.

I suspect a cleaner and more readable GFE would please Mr. Jobs and it sure would have been good for the rest of us. After all, if people knew the real cost of financing they would not have been sucked into high-price subprime loans or “affordability” loan products such as option ARMs or interest-only mortgages. With clear information, a lot of people would be in their homes today and many would have avoided foreclosure.

How Steve Jobs Would Have Fixed The Mortgage Mess is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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This is important stuff for three reasons: First, HUD estimates that the 2010 GFE saves borrowers $700 per loan. Second, when a lender hands you a good faith estimate it’s a commitment to deliver a mortgage with certain terms and conditions once all application requirements have been met, say a 5 percent interest rate and not 6 percent by the time you get to closing. Third, you can check the lender’s promises at closing because the numbers from the GFE are used to complete the official settlement document, the HUD1.

In terms of graphics and layout the proposed CFPB forms — Prototype A and Prototype B — are well designed. There’s no doubt they’re easy to read and that they explain in plain language how a proposed mortgage will work. Kudos to the designers.

But while the CFPB has asked the public to comment on which design it prefers, the forms can easily be viewed as suggesting new and higher loan costs for borrowers — precisely what the new consumer bureau was designed to avoid. How? Not because of the form’s design characteristics but because of the numerical examples they illustrate.

Interest Caps

The model forms describe the terms for a 30-year ARM. The loan amount is $216,000, the start rate is 2.5 percent and the highest possible rate is 10 percent.

The forms also tell us that the interest rate can rise by as much as 3 percent after two years and 3 percent each year thereafter until the 10 percent maximum is reached.

These numbers are a gift to the worst lenders in America and describe a loan that’s simply awful. The government itself does not allow such terms for the mortgages it insures under the FHA and VA programs. Moreover, most private sector lenders — to their credit — do not demand such terms.

Most ARMs have a 2 percent annual interest rate cap and a 6 percent lifetime interest increase cap. To further clarify their terms, many ARMs also have an additional cap, a limit on the first adjustment after the start rate ends. Thus you might see an ARM with caps described as “2/6″ or “2/2/6.”

What the CFPB is describing is a 2/28 ARM with caps set at 3/3/7.5. In other words, the rate is fixed for the first two years of the loan term and then adjusts. Depending on rates at the time of the adjustment, the interest rate can rise or fall. In practice, the adjusted rate is likely to rise after the start because the initial interest level is deliberately set low to attract borrowers who might otherwise prefer a fixed-rate loan.

Why do lenders want to sell ARMs more than fixed-rate loans? Because the risk of inflation — higher interest rates — is shifted to the borrower.

So is it a big deal if the maximum rate can grow by 3 percent instead of 2 percent? You bet.

It’s possible, of course, that interest rates will not increase to the allowable maximums. However, the risk to borrowers if rates increase is enormous, especially in an environment where household incomes have been falling. Here’s why:

With the 2-percent increase annual costs can rise by as much as $2,716. If the maximum increase is 3 percent then the annual loan cost can grow by as much as $4,200. The larger increase can be as much as $1,484 per more year higher than the 2 percent standard.

Are these big increases? In many households the answer is yes. Are these increases large enough to lead to foreclosure? Unfortunately, in many households the answer will again be yes.

The situation, of course, can get decidedly worse. In year four the “better” loan can have another 2 percent increase and a third 2 percent increase in year five. That means the highest rate can grow to 8.5 percent in this example. For the loan that allows the 3 percent increase, the rate can grow to 8.5 percent in year four and 10 percent in year five, the lifetime cap.

The CFPB is on the right track. Consumer representation is a great concept, it’s long overdue and the Bureau is also new and untried. The Bureau will make mistakes. Big deal. Let’s have some perspective: The failure of existing regulators to adequately police lenders virtually bankrupted the country.

The CFPB is asking for public input, so why not do what existing regulators do and pay for a few hours of outside help?

Oh, and more thing, the forms have still another flaw. A huge flaw. But that’s a matter for another conversation.

Are ARM mortgage interest rates about to rise? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Did you ever wonder why you get so many letters and emails from lenders who offer low mortgage quotes and seem to be affiliated with the FHA or HUD? The answer, very simply, is that you ought to wonder. Why? Lenders are not supposed to imply or infer any endorsement from the federal government.

Those strange communications which seem so “official” are simply tricks to gain attention from prospective borrowers, not much better than claims you’ve won a lottery or that a seductive encounter awaits your attention.

In the world of HUD-speak a “device” can be a letter, email, ad, or channel “soliciting, promoting or advertising FHA products or programs.”

Now, says HUD, FHA-approved lenders “are strictly prohibited from displaying the official FHA Approved Lending Institution logo(s) in a location or manner within a Device that creates the false impression that the Device is an official government form, notice or document or that otherwise conveys the false impression that the Device is authored, approved, or endorsed by the Department or FHA. Furthermore, alteration or modification of the FHA Approved Lending Institution logo(s) is strictly prohibited. Non-approved mortgagees, including Third Party Originators, are prohibited from using the official FHA Approved Lending Institution logo(s) on any Device. Moreover, use of the FHA logo is strictly prohibited. No person, party, company, or firm, including FHA-approved mortgagees, may use the FHA logo.”

Because of the new rule, starting in May you’re likely to see a whole new class of messages from lenders, messages which plainly state that the missive is not authored, approved, or endorsed by HUD or the FHA.

When looking at lender letters which hint or suggest some sort of government affiliation there are some question to be asked:

1. Is the sender an approved FHA lender?
2. Is the sender affiliated with your current lender? This is important because letters often contain the name of your current lender in big and bold type — but the senders actually have nothing to do with your lender.
3. No matter how seemingly “official” are you looking at a government form or some concoction churned out by a lender’s art department?
4. Is some sort of official sounding program mentioned? Is there actually any such program? Look up the program by name on the Internet and see if you find any government sites which explain the program in detail.
5. How can you get those low, low rates featured in the letter? That is, how do you qualify? (Beware, in some cases you can only get the lender’s touted rate by completing your loan application on the skin of a unicorn….)
6. Is there a minimum loan amount? How about a maximum?
7. Are the rate mentioned in the “device” subject to change?
8. Does the letter tout monthly payment savings? Does it also say that if you refinance with the lender it’s possible that your interest rate or overall loan costs could actually rise over the life of the loan?
9. Does the letter include some legal-sounding jargon about interfering or obstructing the mail? Does it make the letter seem more important? Is it anything but nonsense?
10. Does the letter make any reference to borrowers with bad credit? If you have damaged credit do you really think the lender has some magical way to offer a discounted interest rate?

Of course, when looking for a mortgage always protect your interests — shop around, speak with several lenders and get written Good Faith Estimates (GFEs).

New HUD Rule Goes After Fake Mortgage Loan Letters is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The new form from HUD has raised a question among some lenders as to whether a pre-approval letter or a pre-qualification letter is also an enforceable loan commitment. The issue — say some lenders — is that they cannot possibly issue such a letter without a lot of information from the borrower, information which they cannot require.

Of course, when toxic loans were popular, lenders issued pre-approval letters, pre-qualification letters and entire loans without too much checking in the case of so-called no doc and low doc loan applications. The result was a big part of the mortgage meltdown, especially when a lack of documentation was combined with option-ARMs and interest-only financing.

So now some lenders — but not all — do not want to issue pre-qualification and pre-approval letters. This is a problem for real estate buyers because such letters — known generally as hand-holding letters — help assure home sellers that a would-be purchaser has at least met with a lender and can qualify for a loan.

Hand-holding letters are not loan guarantees because they invariably contain an “out” making them subject to “changing market conditions” or the need to review an appraisal, credit report, or whatever. However, many lenders continue to issue pre-approval and pre-qualification letters with the understanding that they are not promises to make a loan, just evidence that a borrower has met with a lender to discuss financing.

Worksheets

“A worksheet,” says FHA Commissioner David H. Stevens, “is a document issued by a loan originator that may include generic information regarding interest rates and loan fees, or a document that may provide additional information to the consumer regarding the cost of the overall transaction outside of loan fees that are disclosed on the GFE.”

However, says Stevens, lenders must use care when issuing a worksheet:

A worksheet may be provided to a customer for a rate quote if the consumer does not want to provide the information necessary to generate a GFE. However, loan originators should ensure the following: (1) to eliminate consumer confusion, a worksheet should not look like a GFE and should not lead the customer to believe that it is a GFE and (2) a loan originator should NEVER use a worksheet in lieu of a GFE.

A loan originator may also use a worksheet to provide the consumer with additional information about his or her loan transaction, such as the amount of cash needed to close, seller credits, and other non-loan transaction fees that would be helpful to the consumer.

In other words, borrowers can find value in a worksheet but it’s plainly not a good faith estimate, it’s not binding and if it is presented as a GFE or the equivalent of a GFE then go elsewhere for mortgage financing.

What Is A Mortgage Loan Worksheet? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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FHA-backed mortgages are now a huge part of the financing landscape, but since April the up-front mortgage insurance premium has been 2.25 percent for most FHA borrowers. Now there’s some discussion regarding the idea of a 1 percent up-front MIP — but a higher annual MIP, a charge that would go from .55 percent now to .90 percent for most FHA borrowers.

A revised MIP schedule would lower the cash needed to close an FHA mortgage — but increase monthly cash costs.

It seems difficult to imagine that the up-front mortgage insurance premium (MIP) will soon be reduced given the rising claims and payouts faced by all mortgage insurance plans, including the FHA. That said, such a reduction is not outside the realm of possibility.

How do we know? It’s what the FHA is telling Congress. No less important, the math favoring such a change is entirely plausible.

Speaking before the Senate Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies last week, FHA Commissioner David H. Stevens said that “while HUD is moving to increase the upfront premium to 225 basis points we are ultimately planning to reduce that premium to 100 basis points, offset by a proposed increase in the annual premium to 85 basis points for loans with loan-to-value ratios (LTV) up to and including 95 percent and to 90 basis points for LTVs above 95 percent.”

Back-Loading Fees

The FHA mortgage program has to have premium money for reserves so it can pay lender claims in case borrowers default. At the same time the FHA wants to get more people into homeownership. One of the best ways to make homes more affordable is to reduce up-front costs. In the case of the FHA mortgage program that’s done by requiring 3.5 percent down instead of the 5 percent to 20 percent required for most other mortgages– but the down payment is not the whole story. There are also costs for closing and that pesky up-front mortgage insurance premium which was raised from 1.5 percent to 2.25 percent as of April 5th.

HUD has moved to cut financing costs by $700 per transaction through the use of its new good faith estimate and HUD-1 forms. If it also can cut the FHA up-front MIP the settlement savings per transaction would be significant.

More Marketplace Volume

The move toward lower up-front costs could make it easier for first-time buyers to enter the marketplace. That’s important because the National Association of Realtors says first-timers represent 40 percent of all purchasers. You need first-time buyers so owners can sell current residences and purchase replacement properties. At the same time, the FHA reserves would actually grow over time. Here’s why.

The FHA has both an up-front mortgage insurance premium AND an annual mortgage insurance premium. The annual MIP is now .55 percent of the loan balance for most borrowers. If the annual mortgage insurance premium is raised from .55 percent to .90 percent then the FHA will see an increase in premium revenue that looks like this:

A home is sold for $300,000. the FHA loan amount is $289.500. In year one, if the annual MIP is .55 percent, the borrower is paying roughly $1,592.25 per year or $132.69 per month for FHA insurance. If the annual MIP is raised to .90 percent the monthly payment will be $217.13 ($2,605.50 divided by 12). The annual increase is $1,013.25 in year one. (All numbers are approximate because the loan balance is reduced each month as a result of amortization.)

The up-front MIP in our example was reduced from 2.25 percent to 1 percent. In this example the cash required at closing fell from $6,513.75 to $2,895 — a difference of $3,618.75. If the FHA will now collect an extra $1,013.25 in the first year of the loan and it will only take about 3.6 years to bring in as much cash as the old system.

Affordability

While the idea of a lower up-front insurance premium for FHA borrowers is attractive, not all loan applicants would benefit. Although a smaller up-front MIP would encourage homeownership, the new and higher annual MIP would make homes less affordable. Buyers would need more income to qualify for financing because monthly costs under the new plan would be higher. The tougher affordability standard would off-set some of the increased volume represented by lower up-front costs, a consideration not to be ignored.

Is The FHA Moving Toward 1% Up-Front Insurance Premiums? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“Before writing the letters, lenders like to see proof of income, such as a pay stub or tax return. But under the Real Estate Settlement Procedures Act rule that took effect Jan. 1, lenders may not require such documents before giving the borrower a good-faith estimate of closing costs.

“Since lenders are now being held to those estimates, they want to hold off on issuing them as long as possible. So some lenders are reconsidering or backing away from preapprovals. Without them lenders could end up wasting time on loan applications that fall out.” (See: Respa Rule Has Lenders Balking on Preapprovals, US Banker, March 2010)

No one has ever believed that a pre-approval or pre-qualification letter is a loan commitment of any kind because at the time the letter is provided the value of the property is unknown and the borrower has not submitted all required documentation. Moreover, requiring documentation to obtain a pre-approval or pre-qualification letter has certainly not been a concern for lenders who have offered low-doc and no-doc loan applications.

“In too many cases,” I wrote in 1999, “lenders provide nothing more than a glorified hand-holding letter when applicants seek preapproval. The usual letter isn’t an absolute loan commitment, because it typically contains language allowing the lender to again check credit and consider the property’s appraisal and survey before proceeding.” (See: Closing fast, It Could Happen, REALTOR magazine, November 1, 1999)

A Good Faith Estimate, on the other hand, IS a commitment from a lender. The new forms developed by HUD and required as of the first of January actually show the real costs of getting a loan.

If Lender Smith will not give you a pre-approval or pre-qualification letter, go elsewhere. You can bet that Lender Jones will want your business.

And Lender Wilson and Lender Johnson, etc., etc., etc.

No More Pre-approval Letters, Say Lenders is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Until this point HUD has generally allowed lenders to offer their own Good Faith Estimate of Closing Costs, however the new standard form for all lenders — a form that took 14 years to develop — will finally assure that borrowers actually understand what’s being charged for their loans, why and by whom.

“The mortgage crisis,” says former HUD Secretary Steve Preston, the last HUD secretary appointed by President Bush, “was fueled in part by people agreeing to mortgages that they ultimately could not afford. In some cases, people didn’t understand or know that their mortgages could result in large payment increases after just two or three years. Others did not recognize the total costs that come with homeownership. And others paid higher loan origination and closing costs simply because they did not know about other affordable options.”

So what makes this form better?

First, it’s a three-page document that every lender will have to use — meaning that offers from lenders will be the same and can readily be compared.

Second, the document is not just a list of fees and charges, it also explains in basic terms the purpose of each expense.

Third, mortgage brokers will have to show their yield-spread premiums (YSPs), costs which Preston says were “rarely understood by, or fully disclosed to, borrowers. These premiums are directly tied to the higher interest rates that borrowers pay. Consumers deserve to understand this and they need to get credit for essentially paying these premiums.”

Page One

The first page is actually a summary of loan costs — the specifics are found on page two.

Item 1 tells you how long the quoted rate and terms last. Items 3 and 4 concern loan lock-ins — how long the rates and terms will last if you lock them in at the time the GFE is issued.

The loan summary tells you the amount of the loan, the initial loan rate and monthly payment. IMPORTANT: If you have an ARM the next few items will tell you:

• How high the interest rate can go.
• When the interest rate can first rise.
• The maximum monthly payment you can expect.
• If a prepayment penalty is allowed and, if yes, how much it will cost.
• Whether there is a balloon payment at the end of the loan terms.

Next the form will tell you whether the lender will create an escrow or “trust” account to collect money each month for property taxes and insurance. Generally, if you buy with less than 20 percent down an escrow account is required by the lender.

Finally, the form adds your origination charges (the “A” items on page two) with other settlement costs (the “B” items on page two). Be aware that you can have additional costs at closing, depending on how the sale agreement is written.

Page Two

The second page is divided into two parts, A and B. Part A looks at “origination” fees, the cost to buy your mortgage.

First, the form shows your origination fee in a dollar amount, including any yield spread premium (YSP). Under the old rules, the yield spread premium could be shown as either a dollar amount or as a percentage of the loan. Now, the entire cost of the loan, including any YSP, is shown as a single dollar amount.

Next, the form shows if your interest rate is being impacted by the origination fee. In other words, let’s say you can borrow $100,000 at 6 percent interest over 30 years with no points. This is called the par pricing for this loan. But, let’s say that you could also borrow $100,000 at 5.75 percent — if you were willing to pay 1 point at closing. A point is equal to 1 percent of the loan amount or $1,000 in this case. The form shows if you are paying for any reduction of the interest rate OR any increase in the rate by paying a smaller origination fee.

Next we go to part B. This part of the form shows the cash costs you can expect to pay at settlement (or escrow) when the loan closes. As the bottom of part B is a total which shows “Your Charges for All Other Settlement Services.”

The totals for parts A and B are then shown at the bottom of the page and on the bottom of page one as well.

HUD encountered considerable opposition from the lending industry, especially with regard to the question of how yield spread premiums should be disclosed. In an important decision which reviewed 14 years of effort to update the good faith form, a court found in 2009 that HUD had acted fairly and in the public interest with the form it produced.

Page Three

The last page should really be the first page because it contains instructions for understanding the form.

The first section lists charges that the lender cannot increase, charges that can rise by as much as 10 percent, and charges that change prior to settlement. This is important information, it means that you should check the numbers on your good faith estimate with the final figures presented to you at closing.

Next, HUD gets into the issue of higher or lower settlement fees. In the same way that mortgage loans have par pricing, so does the settlement process. In other words, if you are willing to pay a somewhat higher interest rate you may be able to lower your cash costs at closing. Indeed, you may not have to bring any cash to closing.

In the third section HUD offers borrowers the opportunity to compare loan offers from different lenders. This is important because borrowers should look at different loan offers to find the rates and terms which best meet your needs.

Lastly, HUD notes that your loan may be sold in the future. If so, after settlement “any fees lenders receive in the future cannot change the loan you receive or the charges you paid at settlement.” Translation: A contract is a contract.

HUD estimates that the new form will save typical borrowers $700 each time they finance or refinance a home. That’s a lot of money, but more could be done to cut borrower costs — and it shouldn’t take 14 years to make additional changes.

——————————

Copyright 2009 Peter G. Miller. All Rights Reserved. Use of this material without permission is illegal, however direct links to this page are welcome.

How To Read The New Good Faith Estimate Forms is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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