Fixed rate mortgage vs ARM. Which one is better? You can make legitimate and salient arguments for both but at the end of the day, there is no right answer. Each one has its place and its up to the borrower to decide which one is best for them. The job of the loan officer is to explain the pros and cons of both.
Let's start with the fixed rate loan. It is certainl;y hard in this environment of low rates to argue against taking a fixed rate mortgage. You never have to worry about your rate or your monthly payment increasing. But, that comfort does come at a price. Fixed rate loans have a higher rate than ARMs.
ARM products have a 30 year amortization just as fixed rate loans do. The difference is that the rate is not fixed for the life of the loan. There are 3, 5, 7 and 10 years ARMs and the rate is fixed for that respective amount of time. Think of it this way-its risk vs reward. The risk is that if you still have the loan after the fixed period is up, your rate may go up. The reward is that you have a lower interest rate. Strangely enough, because of current market conditions, those that have ARM products that are adjusting now are actually adjusting lower than the start rate. Don't expect that years in the future! Its also important to note that statistics show the average legnth of a loan to be 7 years.
Understanding the principles above leads us to the trends that guide people in deciding which product to take. Those that are buying a home in which they will stay long term tend to look at fixed rate loans. Those that see themselves in the home for 5 or 7 or 10 years, tend to look at the ARM products because the chances of entering the adjustable phase are smaller.
Know the pros and cons of each. Run the numbers and see exactly what the difference is in the payment. Its not rocket science. With that information, make the decision that is best for you or your family.
Tuesday, November 15, 2011
Friday, November 11, 2011
The mortgage appraisal process and what you need to know
It has been almost 18 months since the implementation of the HVCC appraisal process. It feels like its been 18 years. I understand the idea behind it-reduce the influence of outside sources (loan officers and mortgage brokers) on the apprasiser so the appraisal can be as objective as possible. Certainly, there was a lot of that going on among the worst elements of our business, but for those of us that are above board and have always acted with integrity, unduly influencing appraisers was not in our lexicon.
The problem is multi fold and I want to tackle them one by one:
1. Too much bureaucracy: The system requires that an appraisal management company that works with the bank chooses the appraiser. In some instances, there is a vendor management company AND an appraisal management company. Let me give you one example that speaks volumes. I have a borrower that wants to refinance her co op in Manhattan. I process the loan with the bank and give them the contact information for the managing agent so the appraiser can obtain the required information in order to complete the appraisal. 2 weeks go by and I hear nothing so I decide to pick up the phone and find out what is going on. I call the appraisal vendor company and ask for a status update. Logic would dictate that the vendor appraisal compnay can talk to the appraiser, right? Wrong. The vendor management company puts me on hold and calls the appraisal management company. The apprasisal management company is told we need a status update so they place the vendor management company on hold and call the appraiser. Remember, that I am not allowed to call or speak to the appraiser. Invariably, they cannot get the appraiser on the phone so they leave him a message to call them back. They hang up with the appraiser, take the appraisal vendor company off hold and tell them they left the appraiser a message. The appraisal management company hangs up with the vendor management company and the vendor management company takes me off hold to tell me that a message was left with the appraiser. This all takes about 10 minutes. This type of exchange goes on about 3 times during the course of the appraisal process. So when my client asks me what is going on with the appraisal, how do I explain this to them?
2. The apprasiers: I cannot confirm this as fact but I have been told by an appraiser that I know and trust with an impeccable reputation that the appraisal management companies choose the apprasiers based on lowest price and they "beat them up" to get their prices as low as they can. This speaks volumes. I have also seen instances where apprasiers are chosen who are located very far from the home to be appraised. Familiarity with the area is crucial for understanding values. Especially in NYC with co ops and condos.
3. The variation of values: There are some banks that consistently have very low appraised values and some that are more reasonable. I have seen instances where one bank will appraise a property for one value and another bank, not a few weeks later will appraise it several hundred thousand higher.
4. Lost money to the borrowers: Before HVCC, if a borrower called me to refinance or buy a property and was concerned that the appraised value was not where it needed to be, I could call any one of my trusted appraisers and ask them to do a comp search and give me a good ballpark on the value. Of course, the true value could not be done without an inspection but I knew it would be a good educated guess. I would then order that appraisal and it would be usable at almost every bank. Now, with HVCC, we are flying blind on the appraisal. I have had many client pay for an appraisal, have it undervalued and thus, it kills the deal. If my client starts with one bank and something in the process goes awry, I cannot take that appraisal to another bank. We must order a new appraisal with the new bank. Lost money for the borrower.
By the way, there are banks that still allow us to at least choose from a list of appraisers or if the value is below a certain number, we can choose the appraiser. But this is not typical as most banks require the use of HVCC. Its a tough time in the business and its difficult to close loans. The appraisal process only makes it that much worse.
The problem is multi fold and I want to tackle them one by one:
1. Too much bureaucracy: The system requires that an appraisal management company that works with the bank chooses the appraiser. In some instances, there is a vendor management company AND an appraisal management company. Let me give you one example that speaks volumes. I have a borrower that wants to refinance her co op in Manhattan. I process the loan with the bank and give them the contact information for the managing agent so the appraiser can obtain the required information in order to complete the appraisal. 2 weeks go by and I hear nothing so I decide to pick up the phone and find out what is going on. I call the appraisal vendor company and ask for a status update. Logic would dictate that the vendor appraisal compnay can talk to the appraiser, right? Wrong. The vendor management company puts me on hold and calls the appraisal management company. The apprasisal management company is told we need a status update so they place the vendor management company on hold and call the appraiser. Remember, that I am not allowed to call or speak to the appraiser. Invariably, they cannot get the appraiser on the phone so they leave him a message to call them back. They hang up with the appraiser, take the appraisal vendor company off hold and tell them they left the appraiser a message. The appraisal management company hangs up with the vendor management company and the vendor management company takes me off hold to tell me that a message was left with the appraiser. This all takes about 10 minutes. This type of exchange goes on about 3 times during the course of the appraisal process. So when my client asks me what is going on with the appraisal, how do I explain this to them?
2. The apprasiers: I cannot confirm this as fact but I have been told by an appraiser that I know and trust with an impeccable reputation that the appraisal management companies choose the apprasiers based on lowest price and they "beat them up" to get their prices as low as they can. This speaks volumes. I have also seen instances where apprasiers are chosen who are located very far from the home to be appraised. Familiarity with the area is crucial for understanding values. Especially in NYC with co ops and condos.
3. The variation of values: There are some banks that consistently have very low appraised values and some that are more reasonable. I have seen instances where one bank will appraise a property for one value and another bank, not a few weeks later will appraise it several hundred thousand higher.
4. Lost money to the borrowers: Before HVCC, if a borrower called me to refinance or buy a property and was concerned that the appraised value was not where it needed to be, I could call any one of my trusted appraisers and ask them to do a comp search and give me a good ballpark on the value. Of course, the true value could not be done without an inspection but I knew it would be a good educated guess. I would then order that appraisal and it would be usable at almost every bank. Now, with HVCC, we are flying blind on the appraisal. I have had many client pay for an appraisal, have it undervalued and thus, it kills the deal. If my client starts with one bank and something in the process goes awry, I cannot take that appraisal to another bank. We must order a new appraisal with the new bank. Lost money for the borrower.
By the way, there are banks that still allow us to at least choose from a list of appraisers or if the value is below a certain number, we can choose the appraiser. But this is not typical as most banks require the use of HVCC. Its a tough time in the business and its difficult to close loans. The appraisal process only makes it that much worse.
Tuesday, November 8, 2011
What you need to know about your credit report
In order to get your mortgage approved, there are 3 areas in which you have to pass muster-income, assets and credit. Just a few years ago, that statement wasn't true. If you had good income, but poor assets and credit, you could still get a loan. If you had good assets and poor income and credit, you could still get a loan. Get the picture? Well, those days are gone and have been for quite a while. Now, you must be able to pass the litmus test on all 3 in order to get a loan.
The one that I want to focus on today is credit which in my opinion has taken the hardest hit. The Fannie/Freddie government takeover has caused huge changes to how your credit score impacts your mortgage loan. Here is a perfect example:
Prior to 2007- If you had a 680 credit score or better, you didn't even have to show documentation of income or assets in order to get the best available rate out there up to 80% financing. It was called the Fannie Mae SISA program.
Today- If your credit score is 680 and you want to do 80% financing, your rate will be .375% to .5% higher than the market.
- If your credit score is 739 and you finance 80%, your rate is .125% higher than the market.
-If your credit score is 719 and you finance 70% or more, your rate is .125% higher than the market.
-If your credit score is 659 and you finance 60% or more, your rate is .25% to .375% higher than the market.
The contrast is so dramatic is incredible. A 739 credit score is very, very good yet you are still penalized. By the way, for jumbo loans not owned by Fannie Mae, the credit score requirements have not changed much at all. This is why (if you dont have a jumbo loan) you need to keep your credit as perfect as possible and here are some tips:
1. Do not have too many lines of credit. 4-6 lines is optimal.
2. Keep the balances below 33% or the credit limit. This will insure optimal scores.
3. Never, never, never be 30 days late on a payment. Any payments that are late up to 30 days are not going on your credit report. It's only if you are 30 days late and that kills your scores.
4. If you have a collection and pay it, your scores will go down before going up. Most people do not know this. The only way to get your scores up after paying a collection is to get the collection company or company to remove the collection from your report rather than have it on the report as paid. Most times, you will not get them to do it.
The one that I want to focus on today is credit which in my opinion has taken the hardest hit. The Fannie/Freddie government takeover has caused huge changes to how your credit score impacts your mortgage loan. Here is a perfect example:
Prior to 2007- If you had a 680 credit score or better, you didn't even have to show documentation of income or assets in order to get the best available rate out there up to 80% financing. It was called the Fannie Mae SISA program.
Today- If your credit score is 680 and you want to do 80% financing, your rate will be .375% to .5% higher than the market.
- If your credit score is 739 and you finance 80%, your rate is .125% higher than the market.
-If your credit score is 719 and you finance 70% or more, your rate is .125% higher than the market.
-If your credit score is 659 and you finance 60% or more, your rate is .25% to .375% higher than the market.
The contrast is so dramatic is incredible. A 739 credit score is very, very good yet you are still penalized. By the way, for jumbo loans not owned by Fannie Mae, the credit score requirements have not changed much at all. This is why (if you dont have a jumbo loan) you need to keep your credit as perfect as possible and here are some tips:
1. Do not have too many lines of credit. 4-6 lines is optimal.
2. Keep the balances below 33% or the credit limit. This will insure optimal scores.
3. Never, never, never be 30 days late on a payment. Any payments that are late up to 30 days are not going on your credit report. It's only if you are 30 days late and that kills your scores.
4. If you have a collection and pay it, your scores will go down before going up. Most people do not know this. The only way to get your scores up after paying a collection is to get the collection company or company to remove the collection from your report rather than have it on the report as paid. Most times, you will not get them to do it.
Monday, October 31, 2011
Are low mortgage rates hurting the purchase market?
For the last few months, I have seen lots of chatter on this subject. Twitter comments, articles in major newspapers, etc. It seems that more and more people are asking this question-are mortgage low mortgage rates hurting the housing market? My answer has been and will continue to be absolutely not. Here are some of the arguments that I have seen:
1. By announcing low rates through 2013, you give buyers the ability to sit and wait until the market hits bottom.
On the surface, its sounds logical and plausible but let me explain why I think this holds no water. Put yourself in the shoes of a potential buyer these days. Here is what they are worried about:
a. Losing their job to cut backs due the lousy economy.
b. Not getting their bonus this year. Something they always count on.
c. Rising credit card debt. The bills never stop and they don't get smaller.
d. College education bills.
e. If I lose my job, what are the prospects that I will get another quickly, or at all?
I ask you, will a few hundred dollars in lower mortgage payments or the prospect that real estate values may drop within the next 2 years be a big enough influence to make people buy something? Not a chance. People are frozen by fear because the economy is in the toilet.
2. Everyone is refinancing to a lower rate and in order to recover closing costs fees, the borrowers feel the need to stay where they are for several years.
I have never once heard a borrower say something like that to me. If they see a new house that they want, a few thousand in closing costs will never stand in their way.
I think you would be hard pressed to find someone who doesn't think that the Fed lowered rates to spur the purchase market. That is, other than myself. The Fed knows that consumer sentiment is in the tank and that people are scared to buy. They did it because they wanted to put as much money in people's pockets as they could. Short of a tax cut, refinancing a home loan is the single greatest way to accomplish that. Call it the "homeowner tax cut". Any people that are still buying in this environment could gain from it as well but its intended target are existing homeowners.
1. By announcing low rates through 2013, you give buyers the ability to sit and wait until the market hits bottom.
On the surface, its sounds logical and plausible but let me explain why I think this holds no water. Put yourself in the shoes of a potential buyer these days. Here is what they are worried about:
a. Losing their job to cut backs due the lousy economy.
b. Not getting their bonus this year. Something they always count on.
c. Rising credit card debt. The bills never stop and they don't get smaller.
d. College education bills.
e. If I lose my job, what are the prospects that I will get another quickly, or at all?
I ask you, will a few hundred dollars in lower mortgage payments or the prospect that real estate values may drop within the next 2 years be a big enough influence to make people buy something? Not a chance. People are frozen by fear because the economy is in the toilet.
2. Everyone is refinancing to a lower rate and in order to recover closing costs fees, the borrowers feel the need to stay where they are for several years.
I have never once heard a borrower say something like that to me. If they see a new house that they want, a few thousand in closing costs will never stand in their way.
I think you would be hard pressed to find someone who doesn't think that the Fed lowered rates to spur the purchase market. That is, other than myself. The Fed knows that consumer sentiment is in the tank and that people are scared to buy. They did it because they wanted to put as much money in people's pockets as they could. Short of a tax cut, refinancing a home loan is the single greatest way to accomplish that. Call it the "homeowner tax cut". Any people that are still buying in this environment could gain from it as well but its intended target are existing homeowners.
Thursday, October 27, 2011
What changes mortgage rates?
It's truly amazing how volatile the mortgage market can be. I always tell my clients that rates are like the stock market. They go up and down and can do so several times within a day. It's like trying to hit a moving target. There are many factors that change mortgage rates but I want to stick to a timely topic-The stock market in relation to the EU crisis.
I will start by saying I am not an economist and don't claim to be one. Nor do I play one on TV. Besides, why would the lay person want an intricate explanation anyway? Here it goes:
As a general rule, when the stock market does well, mortgage rates tend to go up and when the market does poorly, mortgage rates tend to drop.
Why is that? The bond market control mortgage rates. When people feel good about investing in the stock market, there is a tendency to move away from the more conservative bond market. More demand for stocks lowers the demand for bonds. When the demand for bonds goes down, their prices go down and their yield goes up. Higher bond yields means higher mortgage rates. The EU crisis is a perfect example of this. Yesterday was a good day for mortgage rates because there were rumors that the talks to put an aid package together was falling apart. If they did, people knew that the market would tank and thus be afraid to invest in the market and thats exactly what happened. There was a "flight to safety" in bonds and mortgage rates dipped.
Once the aid package was announced, a sense of balance and relief was felt by the markets and people felt more secure about investing in the market. Therefore, the demand for bonds dissipated and rates when up today.
Sentiment drives market changes. How people feel about what may happen can and will move markets and of course that includes the mortgage market.
I will start by saying I am not an economist and don't claim to be one. Nor do I play one on TV. Besides, why would the lay person want an intricate explanation anyway? Here it goes:
As a general rule, when the stock market does well, mortgage rates tend to go up and when the market does poorly, mortgage rates tend to drop.
Why is that? The bond market control mortgage rates. When people feel good about investing in the stock market, there is a tendency to move away from the more conservative bond market. More demand for stocks lowers the demand for bonds. When the demand for bonds goes down, their prices go down and their yield goes up. Higher bond yields means higher mortgage rates. The EU crisis is a perfect example of this. Yesterday was a good day for mortgage rates because there were rumors that the talks to put an aid package together was falling apart. If they did, people knew that the market would tank and thus be afraid to invest in the market and thats exactly what happened. There was a "flight to safety" in bonds and mortgage rates dipped.
Once the aid package was announced, a sense of balance and relief was felt by the markets and people felt more secure about investing in the market. Therefore, the demand for bonds dissipated and rates when up today.
Sentiment drives market changes. How people feel about what may happen can and will move markets and of course that includes the mortgage market.
Tuesday, October 25, 2011
What's it like trying to process and close mortgage loans these days.
To the best of my ability, I am going to try and explain what its like trying to get a mortgage loan closed these days. My clients never hear this side of the story as I do a good job of shielding them from the day to day nonsense of dealing with banks in 2011. Frankly, if I told my clients everything I deal with, they would be suicidal and probably not believe half of what I tell them anyway.
Just getting the loan to the bank is much more difficult and paper intensive than it used to be. It used to take me about an hour to put a file together. It takes 3 times that now. The lenders have added (and continue to add) new disclosure forms all the time. Mostly, they are due to new legislation or amendments to current legislation. When we receive them, we most often are not sure exactly how to fill them out and we get very little direction from the banks on how to do it. Added to that, we can speak to 3 different people at the bank and get 3 different answers. Its crazy but a most of the time, the banks are getting no direction from the regulators because the laws are all subject to interpretation. Its the blind leading the blind. The politicians pass the laws and its like the wild west after that. Good examples of this would be the Good Faith Estimate and the Mortgage Broker Disclosure Form. The updated GFE is more than a year old and I still have a hard time explaining to clients how it is structured. Here are some more examples o wha i deal with getting a file to the bank:
1. Most of the dates on the paperwork must match.
2. If some of the documents are not filled out properly, the bank may cancel the loan and the interest rate lock.
3. If you submit bank statements that comprise a hundred pages and the last page of the statement is missing, some banks will suspend the file pending receiving that last page.
Getting the commitment letter can take 2-3 weeks. In a normal environment, it would be 2 days. The appraisal process is a disgrace and that's not an understatement. It used to be that I could order an appraisal through an independent appraiser who I knew and trusted and that appraisal would be good at any lender. Now, the bank orders the appraisal and I am not even allowed to speak to the appraiser. In some cases, I am 3 people removed from the appraiser. What should take a few days, is taking weeks.
We are seeing more bizarre conditions now than ever before. I had 1 bank tell me that he borrower needed to change the address on their drivers license because it didn't match their home address and that they needed to explain why their bank statements were coming to their primary residence. How do you explain this type of stuff to a client? I have seen banks sign off on appraisals and then weeks later ask for additional comparables right before closing. Moving files into the closing department is like pulling teeth.
The positive in all this is that my clients know almost none of this as I do a good job shielding them from the nonsense. Most of the time, all they know is that it takes a little longer to close a loan and there are more documents to sign than before. Their experience is very different from mine but that's the way I want it.
Just getting the loan to the bank is much more difficult and paper intensive than it used to be. It used to take me about an hour to put a file together. It takes 3 times that now. The lenders have added (and continue to add) new disclosure forms all the time. Mostly, they are due to new legislation or amendments to current legislation. When we receive them, we most often are not sure exactly how to fill them out and we get very little direction from the banks on how to do it. Added to that, we can speak to 3 different people at the bank and get 3 different answers. Its crazy but a most of the time, the banks are getting no direction from the regulators because the laws are all subject to interpretation. Its the blind leading the blind. The politicians pass the laws and its like the wild west after that. Good examples of this would be the Good Faith Estimate and the Mortgage Broker Disclosure Form. The updated GFE is more than a year old and I still have a hard time explaining to clients how it is structured. Here are some more examples o wha i deal with getting a file to the bank:
1. Most of the dates on the paperwork must match.
2. If some of the documents are not filled out properly, the bank may cancel the loan and the interest rate lock.
3. If you submit bank statements that comprise a hundred pages and the last page of the statement is missing, some banks will suspend the file pending receiving that last page.
Getting the commitment letter can take 2-3 weeks. In a normal environment, it would be 2 days. The appraisal process is a disgrace and that's not an understatement. It used to be that I could order an appraisal through an independent appraiser who I knew and trusted and that appraisal would be good at any lender. Now, the bank orders the appraisal and I am not even allowed to speak to the appraiser. In some cases, I am 3 people removed from the appraiser. What should take a few days, is taking weeks.
We are seeing more bizarre conditions now than ever before. I had 1 bank tell me that he borrower needed to change the address on their drivers license because it didn't match their home address and that they needed to explain why their bank statements were coming to their primary residence. How do you explain this type of stuff to a client? I have seen banks sign off on appraisals and then weeks later ask for additional comparables right before closing. Moving files into the closing department is like pulling teeth.
The positive in all this is that my clients know almost none of this as I do a good job shielding them from the nonsense. Most of the time, all they know is that it takes a little longer to close a loan and there are more documents to sign than before. Their experience is very different from mine but that's the way I want it.
Tuesday, October 11, 2011
Another refinance boom?
Boy, its been a while since my last post. I have been saying for weeks that I need to write something, anything new. But, I have been so busy with new applications, that I have not had a chance. I guess its good news, but it actually has some downside to it as well. You would think that not having a minute to spare in the last 45 days would mean I have a hundred loans. Well, the answer is no. It is taking 2-3 times longer now to prepare a file for the bank. Additional disclosures, Good Faith Estimates that need to be perfect, making sure the file will get approved at the bank. Loan officers are working much harder now and for less money (but that is a discussion for a different day). It just feels like I have done the work of a hundred loans.
Rates fell below 4% for a 30 year fixed conforming and the rates for ARMs (even the jumbo loan) are off the charts good. In some instances, the rates are below 3%. I recently closed a loan of $900,000 on a 5 year ARM at 2.5%. After the tax deduction, its like free money!!!
There is also a very good government program out there called HARP for those that are underwater or close to being underwater. No its not a perfect program but I think many people don't realize that they can benefit from it.
With Operation Twist in full swing, rates will stay low for a while. The key is to make sure you are prepared. What does that mean? Make sure that you work with your loan officer to have a package ready to go to the bank at a moments notice. Rates are very volatile and can go up and down quickly. If you have the package ready to go, you can lock the rate and get it off to the bank quite quickly. If you lock the rate before having a package ready for the bank, trust me, you will not close within the lock period. Banks are overwhelmed and understaffed. A lethal combination.
Rates fell below 4% for a 30 year fixed conforming and the rates for ARMs (even the jumbo loan) are off the charts good. In some instances, the rates are below 3%. I recently closed a loan of $900,000 on a 5 year ARM at 2.5%. After the tax deduction, its like free money!!!
There is also a very good government program out there called HARP for those that are underwater or close to being underwater. No its not a perfect program but I think many people don't realize that they can benefit from it.
With Operation Twist in full swing, rates will stay low for a while. The key is to make sure you are prepared. What does that mean? Make sure that you work with your loan officer to have a package ready to go to the bank at a moments notice. Rates are very volatile and can go up and down quickly. If you have the package ready to go, you can lock the rate and get it off to the bank quite quickly. If you lock the rate before having a package ready for the bank, trust me, you will not close within the lock period. Banks are overwhelmed and understaffed. A lethal combination.
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