This is nice, but...

The Federal Reserve has just announced some much needed changes to the rules governing lending in the U.S. You can read the initial reports here.

Here is what the boss-man had to say about why they are doing this:

"The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership," said Fed Chairman Ben Bernanke. "Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers."

After a quick review of the proposed changes, I can't say that i disagree with any of them. Here are a few examples of the guidelines that were released (from money.cnn.com).

• Creditors and mortgage brokers cannot coerce a real estate appraiser to misstate a home's value.



• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. Also, they must credit consumers' loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.



• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan, including home improvement loans or refinancings. Currently, these estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer's credit history.



• In advertisements, companies must include additional information about rates, monthly payments and loan features. The rule also bans seven deceptive practices, such as saying a rate is fixed when it can change.

While I approve of these changes and guidelines, there are a couple of things to keep in mind.

1. How does this help us now? These guidelines are intended to prevent people from getting trapped in sub-prime loans. NEWS FLASH! I could not get a you a sub-prime loan if I wanted to right now. Not that I want to. Much of this language was created to prevent people from getting caught again. But given the state of the secondary market, we are not at risk of having those sub prime loans offered any time soon. By then the Fed may be willing to offer looser standards again.



2. "Creditors and mortgage brokers cannot coerce a real estate appraiser to misstate a home's value". I am pretty sure that is RESPA violation today. That is also incredibly vague, and probably should say mortgage brokers AND BANKERS. I suppose it is good to get a refresher on the basics of real estate ethics every once in a while.



3. Speaking of today... the changes are due to go into effect October 1st 2009?!?! 2009? Really? Maybe that is a typo, and they really meant 2008. I hope so.

As we know, the best way to make sure you are not getting ripped off is to shop around, or better yet us an Upfront Mortgage broker.

New Website

I have not been updating this blog, as I have been putting the finishing touches on my new website. And here it is:

www.upfront-mortgage.com

Take a look, and let me know what you think.

Upfront Mortgages in the New York Times

It is nice when an association you are a member of gets a little attention in the big press. There is a great article in the New York Times that discusses the difficulties associated with mortgage lending:

The problem is, many people have little idea what constitutes normal closing costs for their loans. In fact, relatively few borrowers even know the important factors that determine their mortgage interest rates.

And...

It is little wonder, then, that borrowers often cannot navigate the more complex world of closing costs, which involve paying an array of fees to the loan’s originator, appraisers and those who vouch for the legitimacy of the title, among others. “You’ll absolutely find that if people don’t have the economic education background they need, they’ll end up paying more for a mortgage,” said Tim Miller, a spokesman for the Center for Economic and Entrepreneurial Literacy.

They make the following suggestion...

Borrowers can probably make their lives easier by doing business with members of the Upfront Mortgage Brokers Association. They are brokers who promise to state in advance their fees, as well as most third-party-fees, excluding items like interest and escrow expenses.

I could not agree more.

Here is the full article (free registration required)

More on Pay Option ARMs and WaMu

In my last post I discussed the idea that bankers are not really any more ethical than any other lender. My example was Washington Mutual (Wa Mu). I could have used CountryWide, or really anyone who was aggressively selling Pay Option ARMs. It is not a coincidence, then, that I stumbled across several articles today discussing WaMu, and Pay Option ARMs.

First off is "Dr. Housing Bubble"

And for those of you who say we didn’t see this coming, that paragraph was pulled from a Businessweek article in 2006 title “nightmare mortgages.” Of course, Wall Street is no longer buying this crap so that $500 billion is going to implode and no one is going to stop it. Also, you need to remember that 60 percent of that mortgage portfolio of Pay Option ARMs is here in sunny California making us confront a $300 billion time bomb.

Mr. Mortgage (a California based broker) also discusses the joys of the Pay Option ARM:

About 6 weeks ago, The Wall Street Journal absolutely nailed the Pay Option ARM story. It is about time the mainstream picks up on this. In my opinion, this is “the big one.” The “Subprime Implosion” may have been only the “pre-quake” with The Pay Option/ALT-A Implosion being the “big quake” and “The Prime Implosion” being a long series of scattered aftershocks.

Should we be surprised that WaMu has more defaults than it can handle (portfolio.com)?

The elephant in the living room - commissioned sales people

I regularly watch for news concerning mortgage fraud. The justice department is "aggressively" pursuing the situation according to an article in the New York Times (login required, but free):

Mr. Mukasey made clear that he saw the mortgage fraud problem at the root of the nation’s housing crisis as a serious one. But he said he was confident that the Justice Department’s current approach — using local prosecutors’ offices around the country to oversee separate F.B.I. investigations — was adequate.

Since he took over as attorney general last November, Mr. Mukasey has grappled with how best to deal with the law enforcement side of the growing housing crisis. He said in March, for instance, that the Justice Department was still struggling to determine whether there was a “larger criminal story” behind the housing crisis.

What this suggests is that there is originator-level fraud at the root of the housing crisis. What is seriously lacking in this article is an examination of why. It is clear to anyone currently paying attention that credit was too easy. It is also apparent that the entire mortgage industry was predicated idea that home values would continue to rise for ever. The article does mention part of the problem:

Christopher J. Dodd, the Connecticut Democrat who leads the Senate banking committee, said Mr. Mukasey’s comments suggested that the administration “vastly underestimates the scope of this problem.”

Mr. Dodd said in a statement that “millions of borrowers were lured into mortgages they could not afford by unscrupulous lenders and brokers, resulting in a housing crisis that has affected neighborhoods across America. The administration ought to be aggressively pursuing the perpetrators of these abusive practices.”

But we are still dancing around why brokers and lenders would lure people into these products. He takes a step in the right direction by pointing out that it is not just brokers, but also lenders. The real problem is that most loan officers ( brokers and bankers alike) are commissioned sales-people. When a lender provides a loan officer with a commission incentive to do something, they are going to do it. That is what incentives are for.

Let's take the example of Washington Mutual (WaMu). When I began in this business it was with a small local bank. We were a correspondent lender, which is essentially the same as a mortgage broker. A couple of times a month our WaMu rep would come in and explain their products to us. On a typical product/rate sheet, the most common loan programs are featured on the front, and the more arcane ones are featured on the latter pages. One day our rep came in and started to tell us about Option ARMs. By now we know that these loans can be disastrous for the average home owner. It is easy to fall behind (because the minimum payment is less than the monthly interest accrued), and the payment can quickly become unmanageable. In any case, our rep came in one day and the Option ARMs had moved to the front of the rate sheet. The Option ARM was never designed for the average consumer. But it was obvious that WaMu wanted us to sell these, and to sell a lot of them. My rep kept talking about how you could earn up to 3 points, twice as much as we usually made on a loan, if we added a prepayment penalty.

Here we had banks giving huge incentives to brokers (and other bankers!) to sell these Option ARMs to everyone. Of course at the end of the pitch my rep always amended, "for the right borrower, of course." As if that would deflect the anger that was surely to come when these loans started to adjust waaay up.

In an earlier post I said the time for finger pointing was over. I believe it is. I am really making a point about banks here, as much as anything else. Banks are currently trying to translate the enmity towards mortgage brokers into an increase in market share. But banks (as we have seen) are not any more ethical than brokers. If your loan officer is commissioned, and incentivized, then they have a conflict of interest. The only way to eliminate that conflict of interest is get force them to be up front about the terms and conditions of their loan offerings, including how they are incentivized. Remember, in Michigan, they are required to do this by law. If they can't (or won't) disclose, it is time to move onto the next loan officer. One who is willing to conduct business transparently.

The upfront Mortgage broker commitment

Last time I talked about your rights as a borrower in Michigan. That is a good list, and something everyone who is considering buying a house should consider. As an Upfront Mortgage Broker, I make an additional commitment to all of my clients. This is our code of conduct:

1. The broker will endeavor to act in the best interests of the customer.

2. The broker will establish a price for services upfront, in writing, based on information provided by the customer. The price may be a fixed dollar amount, a percent of the loan, an hourly charge for the broker's time, or a combination of these.

The price or prices will cover all the services provided by the broker. If the broker charges a loan processing fee, the amount will be disclosed to the customer, regardless of whether it is paid directly to the broker or to a third party.

On third party services, such as an appraisal, ordered by the broker but paid for by the customer, the broker will provide the invoice from the third party service provider at the customer’s request. Alternatively, the broker may have the payment made directly by the customer to the third party service provider.

3. Any payments the broker receives from third parties involved in the transaction will be credited to the customer, unless such payments are included in the broker's fee.

*If the broker's fee is 1 point, for example, and the broker collects 1 point from the lender as a “ yield spread premium”, the broker either charges the customer 1 point and credits the customer with the yield spread premium, or charges the customer nothing and retains the yield spread premium.

4. The broker will use his best efforts to determine the loan type, features, and lender services that best meet the customer's needs, and to find the best wholesale price (rate and points) for that loan from the lenders with which the broker is approved.

5. After the terms have been locked, if requested by the customer, the broker will provide a copy of the applicable lender's rate sheet that discloses the wholesale price.

6. When directed by a customer who has met lender lock requirements, the broker will lock the terms (rate, points, and other major features) of the loan, and will provide a copy of the written confirmation of the rate lock as soon as it has been received from the lender. At the same time, the broker will guarantee all fees charged by the lender who locks the rate.

7. If a customer elects to float the rate/points, the broker will provide the customer the best wholesale price available from the lenders with which the broker is approved on the day the loan is finally locked.

8. The broker will maintain a web site on which its commitment to its customers is prominently displayed, along with any other information the broker wishes to convey. If the web site displays mortgage prices, the broker will indicate whether the prices are retail or wholesale. If prices are retail, the markup will be shown. If prices are wholesale, a prominent note will indicate that the broker's fee will be an added charge.

Copyright Jack Guttentag 2006

Your Mortgage rights in Michgian

If you are getting a mortgage in Michigan, you have clearly spelled out rights. Since I only arrange financing in Michigan (I mostly do mortgages in Ann Arbor), I don't know how other states handle it. But Michigan's Borrower Bill of Rights is very robust:

1. You have the RIGHT to shop for the best loan for you and compare the charges of different mortgage brokers and lenders.



2. You have the RIGHT to be informed about the total cost of your loan including the interest rate, points, and other fees.



3. You have the RIGHT to obtain a "Good Faith Estimate" of all loan and settlement charges before you agree to the loan or pay any fees.



4. You have the RIGHT to know what fees are nonrefundable if you decide to withdraw your loan application.



5. You have the RIGHT to ask your mortgage broker to explain exactly what the mortgage broker will do for you.



6. You have the RIGHT to know how much the mortgage broker is getting paid by you and the lender for your loan.



7. You have the RIGHT to ask questions about charges and loan terms that you do not understand.



8. You have the RIGHT to a credit decision that is not based on your race, color, religion, national origin, sex, marital status, age, or whether any income is derived from public assistance.



9. You have the RIGHT to know the reason if your loan application is turned down.



10. You have the RIGHT to receive the HUD settlement costs booklet "Buying Your Home"."

If you are shopping for a mortgage in Michigan you need to get this from your lender or broker (loan originator), and you need to make sure that they address all of these points.

I think that the two items on this list that an Upfront Mortgage Broker addresses directly are items 2 and 6. Both of these items require your loan originator to disclose how much they are making, and how they are making it. Why should you, the consumer, care how much your loan originator is making? Most brokers and bankers would argue that it is none of your business. You are getting a rate you are happy with, why should you care how much your broker makes? Because the rate, points, and fees directly impact how much the loan originator is making. Or put another way, your originator makes more if your rate is higher. And frequently originators will charge points on a lower rate. This is the problem with utilizing the "best interest rate" mentality when shopping for a loan. A loan originator will see you coming a mile away, and disguise their income has points, or as "junk fees". My advice is to make sure the mixture of points and originator fees totals less than 2% of the loan amount. Your originator is required to give you a Good Faith Estimate (GFE) within 3 days of application. This is a federal law.

Now, some of the fees on a (GFE) are not the originator fees. Taxes, title fees, appraisal, and survey fees are generally not included as part of the 2%. But make sure your originator explains what counts as his compensation, and what fees are merely the cost of doing business.