Under Wall Street reform several federal agencies are supposed to work out a final definition of the term “qualified residential mortgage” or QRM. However, we largely know how such loans will be defined because of the requirements of legislation.

Qualified Mortgage Standards

In basic terms, a qualified residential mortgage will look like this:

1. The loan application must be fully documented. Income and employment claims must be verified. (Kiss goodbye to “no doc” and “lo doc” loan applications.
2. For fixed rate mortgages, the borrower must be qualified on the basis of monthly costs for mortgage interest, mortgage principal, property taxes, property insurance and related assessments (think of condo fees, mortgage insurance, etc.)
3. For adjustable-rate mortgages, the borrower must be qualified at the highest rate possible during the first five years of the loan term.
4. If the lenders knows or thinks that the property will be financed with a second loan, the lender must qualify the borrower on the basis of the combined loan costs. In other words, simultaneous second and piggy-back loans are fine as long as the borrower qualified for the total debt.
5. Requires a six-month notice before the start rate for an ARM can be changed.
6. The loan term cannot be more than 30 years.
7. Points and fees are limited to 3 percent of the initial loan amount.
8. Allows prepayment penalties for qualified loans — but not for loans which are not qualified. The maximum prepayment penalty will be 3 percent the first year, 2 percent the second year and 1 percent the third year.
9. Bans lenders from requiring single-premium credit life and similar products.
10. Bans lender requirements for mandatory arbitration

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11. Requires regular monthly payments with no balloon payment at the end of the loan term.

So, generally, a qualified residential mortgage is a conventional, FHA or VA loan that requires three or fewer points at closing and is underwritten with a full-docs loan application.

I say “generally” because there are some exceptions to the rules and likely there will be more when the final definitions are unveiled.

What’s clear, however, is that lenders who offer mortgages outside the guidelines will face significant liability, so much so that you can already see changes in the financing marketplace. If you don’t believe it just try and find an option ARM….

What’s A “Qualified Mortgage” In Real Estate is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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When you refinance a mortgage you replace an existing loan with a new one. There’s no need to negotiate with the old lender because his mortgage claim will be extinguished. However, borrowers with toxic loans need to see if a refinance will set off claims for a huge prepayment penalty at closing, perhaps an amount equal to mortgage interest for six months.

Mortgage Modifications

Mortgage modifications come in several forms. First, we have loans which automatically self-modify — that’s the nature of an adjustable-rate mortgage (ARM).

Next we have mortgages where the lender voluntarily agrees to modify loan terms. Given that a mortgage is a contract such voluntary modifications are rare. Voluntary modifications might include changes in rates and terms, and also assumptions where one borrower takes over the debt of another with permission of the lender.

Tough Times

Because of the foreclosure meltdown we now have government-organized modifications under the Making Home Affordable program. In basic terms such modifications are open to those facing foreclosure or who have lost so much equity that financing to a new and lower rate is now possible outside the program.

Owners Versus Investors

When principal balances are reduced it’s possible for investors to face federal taxes on the unpaid balance, money that’s regarded imputed income. For example, if a $100,000 mortgage is settled for $75,000 then the unpaid $25,000 has traditionally be considered taxable income under federal rules. However, if the loan being modified is for a personal residence, then under Mortgage Forgiveness Debt Relief Act of 2007 the amount forgiven is generally not be taxed by the federal government. For specifics, please speak with a tax professional and be sure to ask about both federal and state policies.

Mortgage Modification or Refinance — What’s The Difference? 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.

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

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Going through this process as a consumer of real estate services suggests both that local brokers are hugely valuable and also that traditional relationships between brokers, buyers and sellers are in transition.

It’s always interesting to hear self-proclaimed “consumer representatives” discuss real estate brokerage. Inevitably their core issue — often their only issue — is transaction cost. In their eyes it seems expensive to sell real estate, unusually so.

Yet if you equate selling a home with raising money, which is what selling a home really is, then it becomes possible to compare the cost of real estate marketing with the expense of non-profit fund-raising. Given that the Better Business Bureau says charitable organizations should not spend more than 35 percent of their contributions on fund raising, the idea that real estate fees are somehow overpriced seems absurd.

What consumer groups do not normally address, and what might be useful for the brokerage community to consider, are changes to traditional listing and buyer brokerage agreements. With very little adjustment, it’s possible to make such arrangements both more consumer friendly and far better for the brokerage community.

How? Let’s consider some specifics:

*Listing success today is typically related to the attainment of a “ready, willing and able” buyer. But sellers are really interested in something different, the completion of the transaction. Why not avoid both litigation and bad PR and instead relate listing compensation to the sale and settlement of the property? One could then offer a standard owners can instantly understand: No check for the broker without a check for the seller.

*Buyer brokerage agreements seem remarkably broad. Why would purchasers have an interest in agreements which include an entire state? Instead, why not an agreement that’s specific to a few communities and counties where a salesperson has particular expertise?

*Buyer brokers often say their services are “free,” an expression which surely means the purchaser should not have any payment obligation. Given this view, why not have brokerage agreements that authorize buyer brokers to seek payment only from owners and listing brokers — but NOT from buyers? And like listing agreements, why allow any buyer brokerage fee to be earned unless there is a completed transaction?

*Lastly, why not have listing and buyer brokerage agreements that allow for early termination by either party without penalty? Such arrangements instantly end consumer worries about broker relationships. If broker performance is not satisfactory to the consumer, the agreement can quickly end. For brokers, such clauses mean being freed from buyers and sellers with implausible expectations.

Are the ideas above revolutionary — or merely revolting? Do they make any sense at all?

When looking for listing brokers and buyer brokers we expressed an interest in the terms above and the reaction from hugely-successful professionals was universally the same: Sure.

Why? We think the answer is that the representatives we selected are enormously successful and had confidence in their ability to get the deals done. Relating compensation to completed transactions was not an issue — that’s what they do.

But was there additional risk for our representatives? In theory, yes. We could have bought a property outside the counties where we had engaged our buyer broker — but how realistic is that? We might not have finalized the sale of our investment property — but why would we do that?

Here’s another risk for our buyer broker: We could have bought from a self-seller or someone offering a minimal fee. In such circumstances we would have had no obligation to pay a commission.

What if our brokers were wrong and there were no transactions? Part of being in business is risk, nothing is assured. No doubt if deals failed our two professionals would merely move on to the next clients. Alternatively, while other brokers might hem and haw about contract details, our brokers got the business — and hefty checks for their services.

From a consumer perspective, our modified agreements were comforting. They suggested, first, that we were dealing with professional people who wanted to advance our interests. Second, our agreements removed potential entanglements and complications that were discomforting to us.

In the end both our listing broker and our buyer broker were very well paid. The transactions were fast, straight-forward and we will make a point of recommending the professionals who served us so well. In effect, what they earned was not only a commission for particular transactions but also referrals and a potential stream of future income. Not bad for a little bit of flexibility.

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Published originally by The Real Estate Professional and posted with permission.

The Case For Flexible Real Estate Commissions is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Answer: Maybe. You need to ask several questions. For instance:

First, what does the agreement say? Does it have a rescission or cancellation period during which time you can change your mind without penalty?

Second, what do the rules say? For instance, some states require a three-day rescission period for timeshares.

Third, when does the clock start running — and when does it end? The moment you sign? Midnight? Do weekends and holidays count?

Fourth, how must notice be provided? Is a certified letter with a return receipt sufficient? E-mail? A phone call? How do you verify receipt?

Have an attorney review the agreement to determine your rights — and make sure to do it quickly.

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Syndicated originally by Content That Works and posted with permission.

Can We Get Back Our Deposit? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Answer: You need to look at this very carefully. A mortgage is a contract. It has certain terms and conditions. You want to honor all conditions.

In the usual case and with virtually all lenders mortgage payments are due on a certain day each month. Payments made after the due date are, literally, late. The question then becomes: What are the consequences of being late?

Most mortgage agreements today provide a grace period after the due date. There is no late fee for payments received during the grace period — but the payment is, again, literally late.

The reason for grace periods is that payments can be delayed in the mails, due dates fall on holidays, a payment may not be immediately processed, etc. Rather than debate when a payment was mailed or how it was processed, lenders allow a grace period.

The consequences of a payment received during the grace period are, usually, zero. There is no late fee and nothing shows up on your credit record. (Payments less than 30 days late, even if they result in a late fee, typically are not reported to credit bureaus or listed on credit reports, thus they will not impact credit scores.)

Why do I say usually? Because not all loan agreements have grace periods. A mortgage agreement read literally could allow a late payment to result in the loan being called. And not all mortgage contracts are fair — think of predatory loans where interest rates can rise or step fees can be imposed when payments are late. For these and other reasons, borrowers should make a point of always paying mortgages on or before due dates.

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Syndicated originally by Content That Works and posted with permission.

Are Late Mortgage Payments Ever Okay? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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