Tag Archives: lender

Jumbo Mortgage Deals Ahead

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The Wall Street Journal quoted me in Attention, Jumbo-Mortgage Shoppers: Deals Ahead (behind paywall). It opens,

With more lenders offering jumbo loans, borrowers have more bargaining power to negotiate the best terms.

During the first quarter of this year, 20.3% of all first mortgages originated were jumbo loans, according to Guy Cecala, CEO and publisher of trade publication Inside Mortgage Finance. That’s up from 18.9% last year and 5.5% in 2009, just after the financial crisis.

“At the end of the day, it’s all just supply and demand for capital,” says Doug Lebda, founder and CEO of LendingTree, an online financing marketplace. “Over 60% of people still don’t think they can shop for loans—even rich people. But everything is negotiable.”

Since only a small percentage of jumbo loans are sold to investors, the “vast majority are winding up on bank balance sheets,” according to Michael Fratantoni, chief economist of the Mortgage Bankers Association. But because these loans are held in a lender’s portfolio and aren’t subject to the guidelines of investors purchasing them—as opposed to conforming loans, which must comply with hard-and-fast parameters established by Fannie Mae and Freddie Mac—terms and underwriting standards vary widely.

“Borrowers may find more flexibility with lenders that keep mortgages on their own books,” says David Reiss, a Brooklyn Law School professor who specializes in real estate. “These lenders can usually take a more individualized approach to underwriting than a lender that sells its mortgages off to be securitized with a whole bunch of other mortgages.”

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Here are a few things to consider when negotiating a jumbo loan:

• Prepare before applying. “Jumbo lenders are focusing on borrowers with good credit and resources,” said Brooklyn Law School’s Mr. Reiss. Before applying, borrowers should clean up their credit report and keep debt in check. Lenders look at total debt-to-income ratio and overall credit to determine how strong a buyer is; the stronger the buyer, the more the negotiating power.

• Create a relationship. “If you’re a substantial borrower with a substantial relationship with a bank—one of our wealth clients—the guidelines might get a bit more flexible,” saysPeter Boomer, executive vice president of PNC Mortgage, a division of PNC Bank NA.

• Don’t hesitate to negotiate. “They are the customer, and the lender is not doing them a favor,” says Mr. Lebda, of LendingTree. “People are ecstatic when they get approved for a mortgage, but they actually need to think about it the other way—that the lender should be ecstatic for giving them a loan.”

Why Are There Real Estate Agents?

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photo by Mark Moz

Realtor.com (admittedly not a neutral source on this topic) quoted me in 6 Reasons Real Estate Agents Aren’t Extinct. It opens,

It’s 2016, and it seems our need for real live people is ever-diminishing. There’s self-checkout instead of cashiers, selfie sticks instead of photographers, self-driving cars, self-watering plants, self-administered colonoscopies … well, you get the idea. Given that technology has become so important to buying and selling homes, you’d also think real estate agents would be a dying breed — yet they aren’t showing any signs of slowing down, with approximately 2 million active real estate agents throughout the country.

So why did real estate agents make the technology transition fully intact as opposed to, say, travel agents? We asked some experts to weigh in.

Reason No. 1: Selling is complicated

For many people, “a real estate transaction is financially momentous and complex — the most complex transaction people do in their life,” explains David Reiss, a law professor and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Comparatively, personal travel agents — the kind where you’d walk in their office and have them book you a hotel and a flight — have gone the way of the dodo, because now that’s all simple DIY stuff (to be fair, not all travel agents are out of a job — there’s still a healthy travel agency sector that thrives on corporate and luxury bookings).

“People like having an expert when dealing with large, complicated transactions,” says Jeff Tomasul, founder of Vespula Capital LLC, an investment management company based in Greenwich, CT. “Why do people still have financial advisers? They want someone who does it full-time to make sure they are not doing anything wrong.” Same with real estate agents.

And real estate transactions are often anything but straightforward. Some deals, like short sales, can be “much more intricate than a regular transaction,” Reiss says, with lenders who have requirements that “a regular person would have no idea about.”

Reason No. 2: Buying ain’t easy, either

Buying a home, even if you come in with all cash, is not a cookie-cutter task, and you can find yourself drowning in paperwork and stressed out juggling things like meeting buyers, and dealing with the seller’s agent, lender, and title companies. Agents ease the whole transaction, and it’s something that has kept their profession alive.

“They can hold your hand through the process,” Reiss explains. “They might say, ‘This lender takes a long time, so put in your contract immediately and sign this and that paper and get all this stuff ready before you’re walking over hot coals with the lender for money.”

Reason No. 3: It’s their top priority

Your own interests and priorities will very likely always be split — because of those pesky little things like, say, job and family — but a Realtor can be laser-focused on getting the deal done. “A Realtor has a singular aim: to sell houses,” Reiss says.

Simply put, having a real estate agent can make your life easier. Tomasul found himself in a frustrating position when he tried to sell his apartment in Manhattan without an agent. “Showing it was so tough with my schedule, and it was hard having a full-time job and keeping up in a timely matter with potential buyers,” he recalls.

That means the less you make time for buyers, the longer your place will stay on the market — and that’s not good for your bottom line.

Reason No. 4: They know the market, and the players, better than you

“The agent knows the market intimately, even more than a pretty informed resident,” Reiss says. And all that knowledge saves time. “Tracking sales, knowing listings, spending a lot of shoe leather on houses already for sale — right off the bat, they know more than the ordinary Joe and Jane. They understand condo boards and title companies. As a player in the game, they know what the other players are looking for and how to deliver.”

Reason No. 5: They’re objective

Without an agent showing your house for you, you have no shield from criticisms that can — and will — be made about your house from prospective buyers. Your favorite room in the home might be described as “tacky,” “needing a renovation,” or much worse. Sometimes such comments are negotiating tactics. Sometimes they are heartfelt, off-the-cuff opinions. But either way, they can lead to problems.

“It impacts objectivity for a seller to hear negative things about their own place,” Reiss explains. ” Realtors aren’t emotionally invested. They don’t take comments personally. It’s not ‘Oh, you don’t like my chandelier? Then get out of my house.’”

Calculating Closing Costs

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Realtor.com quoted me in How Much Are Closing Costs? What Home Buyers and Sellers Can Expect. It reads, in part,

Closing costs are the fees paid to third parties that help facilitate the sale of a home, and they vary widely by location. But as a rule, you can estimate that they typically total 2% to 7% of the home’s purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500. Yep that’s one heck of a wide range. More on that below.

Both buyers and sellers typically pitch in on closing costs, but buyers shoulder the lion’s share of the load (3% to 4% of the home’s price) compared with sellers (1% to 3%). And while some closing costs must be paid before the home is officially sold (e.g., the home inspection fee when the service is rendered), most are paid at the end when you close on the home and the keys exchange hands.

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Why Closing Costs Vary

The reason for the huge disparity in closing costs boils down to the fact that different states and municipalities have different legal requirements—and fees—for the sale of a home.

“If you live in a jurisdiction with high title insurance premiums and property transfer taxes, they can really add up,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “New York City, for instance, has something called a mansion tax, which adds a 1% tax to sales that exceed $1 million. And then there are the surprise expenses that can crop up like so-called ‘flip taxes’ that condos charge sellers.”

To estimate your closing costs, plug your numbers into an online closing costs calculator, or ask your Realtor, lender, or mortgage broker for a more accurate estimate. Then, at least three days before closing, the lender is required by federal law to send buyers a closing disclosure that outlines those costs once again. (Meanwhile sellers should receive similar documents from their Realtor outlining their own costs.)

Word to the wise: “Before you close, make sure to review these documents to see if the numbers line up to what you were originally quoted,” says Ameer. Errors can and do creep in, and since you’re already ponying up so much cash, it pays, literally, to eyeball those numbers one last time before the big day.

Climate Change and Residential Real Estate

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By U.S. Air Force photo/Staff Sgt. James L. Harper Jr.

Freddie Mac posted an Economic & Housing Research Insight, Life’s A Beach, that addresses the impact of climate change on residential real estate. It discusses the limitations of our potential responses:

Even with significant and coordinated global action like that outlined at the Paris climate conference, some of the projected impacts of climate change appear to be unavoidable. Governments and private organizations are working on plans to mitigate impacts where possible and to adapt to changes that are inevitable. Many are taking notes from the experience of the Netherlands, which has prospered for centuries despite lying below sea level.

However, the dikes and sea walls used by the Dutch may not solve the problems of South Florida. Florida sits on a substrate of porous limestone that holds Florida’s supply of fresh water. As the sea level rises, it infiltrates the limestone underground and contaminates the freshwater supply. A sea wall might stop storm water surges on the surface, but it can’t prevent the underground incursion of salt water.

While technical solutions may stave off some of the worst effects of climate change, rising sea levels and spreading flood plains nonetheless appear likely to destroy billions of dollars in property and to displace millions of people. The economic losses and social disruption may happen gradually, but they are likely to be greater in total than those experienced in the housing crisis and Great Recession. That recent experience illustrated the difficulty of allocating losses between homeowners, lenders, servicers, insurers, investors, and taxpayers in general. The delays in resolving these differences at times exacerbated the losses. Similar challenges will face the nation in dealing with the impact of climate change. (5-6)

The report also highlights a bunch of concrete problems that homeowners and taxpayers will need to confront as climate change wreaks greater havoc:

  • Will the federal government continue to subsidize flood insurance?
  • Will property values in flood zones drop over time?
  • Will climate change increase social dislocation as the landscape of coastal areas is permanently altered by rising sea levels?

The federal government has dropped the ball in taking a leadership role in this area and many states have done so as well. It will likely take a tragedy (likely to be a preventable one) to get them to focus on this in any meaningful way.

Couples Leave Money on Closing Table

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photo by Dustin Moore

Geng Li, Weifeng Wu and Vincent Yao, three Fed economists, have posted a research note, Do People Leave Money on the Table? Evidence from Joint Mortgage Applications and the Minimum FICO Rule. The authors state that there “is mounting evidence that households make suboptimal savings and investment decisions” and find that

many mortgage borrowers appear to have failed to apply for mortgages that give the lowest interest rates. Specifically, we find that nearly 10 percent of prime borrowers who applied for their loans jointly could have lowered their mortgage interest rate at least one eighth of 1 percentage point if the mortgage was applied for by the applicant with a higher credit score and an income high enough to qualify for the mortgage. Furthermore, among the joint applicants with a lower credit score below 740, for whom mortgage interest rates are most sensitive to credit scores, more than 25 percent could have significantly reduced their borrowing cost by having the individual with a higher credit score apply. This is due to the fact that when lenders price mortgages with joint applications, the interest rates are determined by the lower score of the two–often known as the minimum FICO rule. We estimate that such borrowers could reduce their annual interest payment by between $220 and $1,400. Consistent with the existing literature, we find that couples who appeared to have left money on the table tend to have lower credit scores and be much younger and less financially sophisticated. (1, emphasis added)

This note provides an example of just how complicated the mortgage underwriting process is, particularly for less financially sophisticated borrowers.

One wonders if the CFPB should take a look at this. Should lenders be required to evaluate if joint mortgage applicants would get a better rate if only one of them ended up taking out the mortgage? And when the answer is yes, should lenders be required to share that information with the applicants? I can think of a variety of reasons why that should not be the case (not the least of which is that it could leave just one member of the family holding the bag if things go south), but it might be worth exploring this question more systematically.

Co-signing: Smart or Stupid?

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Realtor.com quoted me in Co-signing a Mortgage: Smart or Stupid? It opens,

There’s no doubt about it: Buying a home these days is hard. Even if you’re lucky enough to be a homeowner yourself, that doesn’t mean your kids or assorted loved ones can easily follow in your footsteps—at least, not without help.

One way that “help” can occur for home buyers who don’t qualify for a mortgage? Getting someone else—like you, dear reader—to co-sign. In a nutshell, that means that if they can’t pay their monthly dues, the lender will expect you to cough up the cash instead.

 It’s a noble idea, helping someone buy a home. But also, of course, a scary one. It’s no surprise that many co-signers are parents doing what parents do: putting their own financial well-being aside to help their children move into a home.

But let’s be clear here: The risks are huge. Some of them are obvious, but there are plenty more that you may not have even considered. So if you’re considering co-signing, it’s best you know exactly what you’re getting into, and how to protect your finances in case things don’t go well. Here are the main caveats and considerations to keep in mind.

Identify if your borrowers (and you) are good candidates

We’re not saying co-signing is a terrible idea across the board. There are plenty of legit reasons why those near and dear to you may have trouble getting the loan on their own—say, because they’re self-employed, which makes banks leery. But if your kid can’t get a loan because he just can’t seem to pay his AmEx card on time, well, that’s a different story. Judge your own risk accordingly.

Co-signers should also consider whether they’re good candidates to be taking on more financial commitments. Generally, you should consider co-signing only if you meet a few requirements. For example, “You own your home free and clear and don’t require much credit or have a need for it,” says Mary Anne Daly, senior mortgage adviser with San Francisco–based Sindeo.

Consider the pitfalls

If your borrower has a less-than-stellar history of paying back creditors or holding down a job, proceed with caution. Extreme caution.

“Unfortunately, I’ve seen parents dig further into their savings to pay the mortgage when their child can’t make the payment,” says Ryan Halset, a Realtor® with Seattle-based Boardwalk Real Estate. And if you can’t pay, it will tarnish your credit history and future odds of borrowing money.

“Your chance of getting a loan yourself in the future could be in jeopardy,” says Janine Acquafredda, an associate broker with Brooklyn-based House N Key Realty. “Not to mention the risk of ruining relationships if things go sour.” But maybe that last part’s a given.

Think like a lender

Hard as it might be, try to keep your personal relationship with the home buyer from coloring your decision. Even if it’s your child or a longtime pal, it shouldn’t (entirely) trump the warning signs.

“Before you commit, think like a lender and look at the borrower’s income, work history, and existing debt to determine if the borrower is worthy and not a potential liability to your good credit,” says Frank Tarala, owner of Sterling Heights, MI–based Principal Brokers Network.

Saying no may be tough, but it could save you tons of heartache down the road. David Reiss, professor of law and academic program director for the Center for Urban Business Entrepreneurship, recounts a situation where parents stepped in as co-signers just before the financial crisis hit. The home’s value plunged by more than half. The borrower then left the area—and his home—in search of a new gig and couldn’t make both the mortgage payments and the rent on his new apartment.

“The parents, retirees living on a modest pension in their own home, found themselves dealing with the default of their son’s mortgage with no financial resources available as a buffer,” Reiss says. “This situation has devolved into a nightmare of defaults and attempted short sales with no end in sight.”

Did Dodd-Frank Make Getting a Mortgage Harder?

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Christopher Dodd

Christopher Dodd

Barney Frank

 

 

____________________________________________________________

The short answer is — No. The longer answer is — No, but . . .

Bing Bai, Laurie Goodman and Ellen Seidman of the Urban Institute’s Housing Finance Policy Center have posted Has the QM Rule Made it Harder to Get a Mortgage? The QM rule was originally authorized by Dodd-Frank and was implemented in January of 2014, more than two years ago. The paper opens,

the qualified mortgage (QM) rule was designed to prevent borrowers from acquiring loans they cannot afford and to protect lenders from potential borrower litigation. Many worry that the rule has contributed to the well-documented reduction in mortgage credit availability, which has hit low-income and minority borrowers the hardest. To explore this concern, we recently updated our August 2014 analysis of the impact of the QM rule. Our analysis of the rule at the two-year mark again finds it has had little impact on the availability of mortgage credit. Though the share of mortgages under $100,000 has decreased, this change can be largely attributed to the sharp rise in home prices. (1, footnotes omitted)

The paper looks at “four potential indicators of the QM rule’s impact:”

  1.  Fewer interest-only and prepayment penalty loans: The QM rule disqualifies loans that are interest-only (IO) or have a prepayment penalty (PP), so a reduction in these loans might show QM impact.
  2. Fewer loans with debt-to-income ratios above 43 percent: The QM rule disqualifies loans with a debt-to-income (DTI) ratio above 43 percent, so a reduction in loans with DTIs above 43 percent might show QM impact.
  3. Reduced adjustable-rate mortgage share: The QM rule requires that an adjustable-rate mortgage (ARM) be underwritten to the maximum interest rate that could be charged during the loan’s first five years. Generally, this restriction should deter lenders, so a reduction in the ARM share might show QM impact.
  4. Fewer small loans: The QM rule’s 3 percent limit on points and fees could discourage lenders from making smaller loans, so a reduction in smaller loans might show QM impact. (1-2)

The authors find no impact on on interest only loans or prepayment penalty loans; loans with debt-to-income ratios greater than 43 percent; or adjustable rate mortgages.

While these findings seem to make sense, it is important to note that the report uses 2013 as its baseline for mortgage market conditions. The report does acknowledge that credit availability was tight in 2013, but it implies that 2013 is the appropriate baseline from which to evaluate the QM rule. I am not so sure that this right — I would love to see some modeling that shows the impact of the QM rule under various credit availability scenarios, not just the particularly tight credit box of 2013.

To be clear, I agree with the paper’s policy takeaway — the QM rule can help prevent “risky lending practices that could cause another downturn.” (8) But we should be making these policy decisions with the best possible information.