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CURRENT EVENTS

In January, when I made my interest rate forecast for the year I opined that because there were both recessionary and inflationary pressures at work in the economy that what lay in store for 2007 might mirror Bette Davis’ famous line: “Hang on, it’s going to be a bumpy ride.” On February 27th, too late for inclusion in my March newsletter the first of the bumps arrived in the form of the Shanghai Surprise. The “Surprise” started with the Shanghai stock exchange taking a 10% dive, triggering a wave of selling around the world in everything from European stocks to American corporate bonds. Similar in some respects to 1929, the culprits in China were over-confidence and excess liquidity. There, banks were lending money to people to speculate in the market.

By days end, over 3 trillion dollars had been erased from the global economies. Domestically, a drop of 416 points got a lot people’s attention, and the market subsequently recovered most of its lost value and the long overdue correction of 3.3% amounted to little more than a 1-day bounce.

Our tale doesn’t end here, though, nor is it by any means the whole picture. The next bump in road occurred two weeks later when the market took another 242 point tumble on March 13th. The mortgage markets have been in turmoil for the past six weeks as more and more sub-prime lenders report high default rates among their risky borrowers. Countrywide’s sub-prime division reports that 19% of its mortgage payments are in default. Big names like Accredited, Ameriquest, Expanded Mortgage, and Fremont have been adversely affected and New

Century (the second largest sub-prime lender) has been forced to suspend their operations. Mortgage Lenders Network (MLN), Ownit, People Choice, and ResMae Mortgage have all sought bankruptcy protection. As a consequence, shock waves have reverberated throughout the industry and extended into the Alt-A and A paper markets. Guidelines have been tightened and Combined Loan To Values (CLTVs) lowered. Relatively few lenders now offer 100% financing (more familiar to borrowers as 80/20s) below a FICO score of 700; those that do are limiting these programs to only full doc borrowers. Stated income loans can be had but, it will take a FICO score in excess of 700 and the 2^nd is apt to have an interest rate in the 12s and 13s. What a difference a month makes.

As expected, when the Fed met on March 21^st it left the Fed Funds and Prime Rate unchanged at 5.25% and 8.25% respectively. Combating inflation appears to still be it’s primary focus.

A DEARTH OF IDEAS

I’ve noticed that people who are required to do “series” work, whether it be a news column, episodic show or a TV sit-com all share one thing in common–they run short of new ideas or topics to write about, from time to time. When this occurs writers often dramatize actual events as with Law and Order’s slogan “ripped from the headlines”, others borrow popular movie plot lines as with the “Simpsons” and still others ape the formats of well-known celebrities. Alas, I too, have fallen victim to this editorial malaise. So, with apologies to David Letterman the next few month’s topics are going to be a compendium of Top Ten Lists while I go in search of new ideas for this column. Thus, as they say on TV, “so without further ado”, here is this month’s topic:

TOP TEN MISTAKES BUYERS MAKE WHEN BUYING A HOME

1. Looking for a home without being pre-approved.

Pre-approval and pre-qualification are two different things. During the pre-qualification process, a loan officer asks you a few questions, then hands you a “pre-qual” letter. The pre-approval process is much more thorough.

During the pre-approval process, the mortgage company does virtually all the work associated with obtaining full-approval. Since there is no property yet identified to purchase, an appraisal and title search aren’t conducted.

When you’re pre-approved, you have much more negotiating clout with the seller. The seller knows you can close the transaction because a lender has carefully reviewed your income, assets, credit and other relevant information. In some cases (multiple offers, for example), being pre-approved can make the difference between buying and not buying a home. Also, you can save thousands of dollars as a result of being in a better negotiating situation.

Most good Realtors® will not show you homes until you are pre-approved. They don’t want to waste your, their, or the seller’s time.

Many mortgage companies will help you become pre-approved at little or no cost. They’ll usually need to check your credit and verify your income and assets.

2. Making verbal (oral) agreements!

If an agent tries to make you sign a written document that is contrary to their verbal commitments, don’t do it! For example, if the agent says the washer will come with the home, but the contract says it will not–the written contract will override the verbal contract. In fact, written contracts almost always override verbal contracts. When buying or selling real estate, abide by this maxim: Get it in writing!

3. Choosing a lender because they have the lowest rate. Not getting a written good-faith estimate.

While rate is important, you have to consider the overall cost of your loan. Pay close attention to the APR, loan fees, discount and origination points. Some lenders include discount and origination points in their quoted points. Other lenders may only quote discount points, when in fact there is an additional origination point (or fraction of a point).

This difference in the way points are sometimes quoted is important to you. One lender will quote all points, while another lender may disclose an extra point, or fraction thereof, at a later time–an unwelcome surprise.

Within 3 working days after receipt of your completed loan application, your mortgage company is required to provide you with a written good-faith estimate (GFE) of closing costs. You may want to consider requesting a GFE from a few lenders before submitting your application. With a few GFEs to compare, you can get a feel for which lenders are more thorough, and you can educate yourself regarding the costs associated with your transaction. The GFE with the highest costs may not indicate that a particular lender is more expensive than another–in fact, they may be more diligent in itemizing all fees.

The cost of the mortgage, however, shouldn’t be your only criteria. There is no substitute for asking family and friends for referrals and for interviewing prospective mortgage companies. You must also feel comfortable that the loan officer you are dealing with is committed to your best interests and will deliver what they promise.

4. Choosing a lender because they are recommended by your Realtor®.

Your Realtor is not a financial expert. He or she may not know which loan is best for you. Your Realtor® gets a commission only when your transaction closes. As a result, the Realtor® may refer you to a lender who will close your loan, but who may not have the best rates or fees. Also, many Realtors® refer you to one of their friends in the loan business–who also may not have the best rates or fees. Although most Realtors® are professional and concerned about your best interests, it pays to be mindful of caveat emptor—let the buyer beware.

5. Shop for a mortgage broker, not for a rate—that’s their job.

Interview them just as though you were conducting a job interview (which in reality, you are). Don’t be afraid to ask them “Why should I do business with you?” Then sit back and listen to what they have to say. This will tell you more about their character and professionalism than “what’s your rate” because it’s not a question that most of them used to answering. You want a broker who is genuinely concerned about your welfare, not his or her payday. Are you comfortable with him? Does she sound like she knows what she’s talking about? Is he willing to take the time to explain things to you so that you understand what you’re are buying in terms of a loan program and why? Ask them how they shop for their borrowers and how they price their loans.

6. Not getting a rate lock in writing.

When a mortgage company tells you they have locked your rate, get a written statement detailing the interest rate, the length of the rate lock, and other particulars about the program.

7. Using a dual agent (an agent who represents the buyer and seller in the same transaction).

Buyers and sellers have opposing interests. Sellers want to receive the highest price, buyers want to pay the lowest price. In most situations, dual agents cannot be fair to both buyer and seller. Since the seller usually pays the commission, the dual agent may negotiate harder for the seller than for the buyer. If you are a buyer, it is usually better to have your own agent represent you.

The only time you should consider using a dual agent, is when you can get a price break (usually resulting from the dual agent lowering their commission). In that case, proceed cautiously and do your homework!

8. Buying a home without professional inspections. Taking the seller’s word that repairs have been made.

Unless you’re buying a new home with warranties on most equipment, it is highly recommended that you get property, roof and termite inspections. These reports will give you a better picture of what you’re buying. Inspection reports are great negotiating tools when it comes to asking the seller to make repairs. If a professional home inspector states that certain repairs need to be made, the seller is more likely to agree to making them.

If the seller agrees to make repairs, have your inspector verify the completed work prior to close of escrow. Do not assume that everything will be done as promised.

9. Not shopping for home insurance until you are ready to close.

Start shopping for insurance as soon as you have an accepted offer. Many buyers wait until the last minute to get insurance and find they have no time left to shop around.

10. Signing documents without reading them.

Do not sign documents in a hurry. As soon as possible, review the documents you’ll be signing at close of escrow–including a copy of all loan documents. This way, you can review them and get your questions answered in a timely manner. Do not expect to read all the documents during the closing. There is rarely enough time to do that.

MORTY’S MAILBAG

Q. Because we had very good credit (over 700) we were able to purchase a home a few years back and get 100% financing with an interest only loan that was fixed for the first 2 years and adjustable for the balance of the 30 year term. We have paid on it for 2 ½ years and because of the drop in the home prices this past year we owe 11% more than our home is currently worth and can’t refinance it because no one’s willing to loan more than 100% of its value. We went with an interest only loan because it had the cheapest payments. Now that we’re into the adjustment phase, our payments have risen $600 above what we were originally paying and are about to adjust upward, again. I know it’s too late now but, was there anything we could have done to that would have been a better alternative?

A. Since you had good credit it seems that odd that you would opt for a sub-prime loan (2/28s and 3/27s) are the province of sub-prime lenders who have clients with scores in the 500-620 FICO range. If you were a first time buyer, you probably didn’t know any better. With a score above 700 you could have obtained financing for the same or lesser price, although the term of your fixed rate would have been much longer, say 5-10 years, which would have obviated your present difficulty.

A half measure would have been to go with an amortizing loan such as a 40 due in 30 or a 50 due in 30. Either of these would have afforded you some reduction in principal (though in the early years it’s pretty slight) while keeping your payments lower than the interest only payments you’re making now. Even so, this would not have been sufficient to offset the 10% dip in prices that we’ve seen in the past year or two.

Your best alternative would have been to have waited until you had a down payment of 10% saved up. The 10% down payment would have cushioned you against the temporary decline in prices. Had you done this you probably wouldn’t have purchased your property when you did because I surmise you stretched your finances to get into this home. Ironically, if it had taken you another year or two before you were able to buy, you would have bought in near the bottom instead of at the top. As the saying goes, hindsight is 20-20. There are a lot of people in the same predicament as you. Don’t despair. The value of your property will come back in time; you just need to weather the drop in value in the meantime, if possible.

Recipients of the newsletter are invited to Ask Morty any real estate or financing questions. The answer to the question will be answered in the next issue for the benefit of all. Questions may be forwarded via mail phone or fax. (See front of issue for phone and fax numbers). Morty’s email address is Morty@MortgageStraightTalk.com.

CORRECTION

In the last issue I related the actual case history of a doctor and his attorney wife who were in a purchase transaction involving myself and a realtor. In the spirit of full disclosure, I need to make a correction. They did not get the rate I quoted nor did they do their loan with me. At the 11^th hour, a medical colleague told them of a lender with a loan program exclusively for doctors. Coincidentally, I also represented the same lender but the program was available only through the lender’s Retail division that even I, in wholesale, couldn’t beat. Until now, I have never had a borrower beat me on pricing. As the saying goes, I guess there’s always a first time for everything! Nobody beats me on service, however!

WANT TO IMPROVE YOUR FICO?

You can—and cheaply. My step-by-step manual on Credit Repair written by yours truly is available for the truly nominal sum of $14.95. It covers, in an easy to read style, Understanding, Repair and Maintenance of your FICO score. You may order your copy by phone, fax or email. (See the header on the first page for the numbers and/or addresses.

MORTGAGE MIRTH

This month’s offering is an oldie, but if you’ve never heard it before it’s new to you.

Q. How do tell when a politician is lying?

A. His lips are moving.

NEXT ISSUE’S TOPIC: TOP TEN MISTAKES BUYERS MAKE WHEN REFINANCING

Rod Haase

Associated Brokers, MLI
http://mortgagestraighttalk.com/
rod@mortgagestraightTalk.com
1-866-214-3378 ext.8584

“The Dow Jones Industrial Average (DJII) fell 415.22 points on February 28, 2007, or 3.29%, erasing the bluechip index’s year-to-date gains. This was the biggest one-day decline in the index since July of 2002. The broad based S&P 500 dropped 50.33 points, or 3.47%.

Selling began overnight in Asian markets before spreading to Europe and ultimately the United States. Although yesterday’s weakness began in the Chinese market following reports that their government may crack down on securities fraud and illegal margin lending, we believe historically high Chinese equity valuations may have also played a role.

There, Price/Earnings ratios have crept near 42x for the overall market, a level last seen in March 2004, the start of a previous sell-off. We note that the approximate 9% drop in China left the index at a level seen less than just 10 days ago. While the Chinese stock markets may remain volatile in the coming months, we note that policy measures are likely to promote a healthy capital market by improving the quality and structure of listed companies and markets rather than pricking bubbles, in our view.

Until February 28, the U.S. market has seemingly shrugged off a number of concerns, including problems in the sub-prime lending area, a slowing of industrial activity, and a seemingly complacent credit market. These issues may have compounded some longer-term issues such as high energy prices, slowing year-over-year earnings growth, and geopolitical tensions. Yesterday’s market correction does not come as a major surprise to us although the magnitude of the one-day drop was significant.”

That’s the letter from my IRA manager with Smith Barney.

Last week’s news was a shocker. The stock market plunged 416 points. In one day! Many investors were caught off guard. And the whispers from the back rooms of Wall Street say it’s going to happen again. The worst is not over.

It’s great to be a network marketer!

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CURRENT EVENTS MARCH 1, 2007

This month, the significant news items regarding mortgage rates have been even shorter than the month itself. The highly anticipated Jobs Report came out on Feb. 2. It showed 111,000 new jobs were formed in January, below the expected 150,000 forecast. Thus, it was no surprise when the Fed decided to keep the Fed Funds Rate unchanged at 5.25%, but indicated that they are continuing to keep a vigilant eye on inflation, and will raise rates further if inflation picks up steam. Despite this, I foresee no change in the Prime Rate when the Fed meets next on March 21st.

THIS MONTH’S TOPIC: THE MINDSETS OF BUYERS, BORROWERS AND BROKERS

I’ve chosen to deviate from the topic that I had promised in last month’s newsletter and defer it to next month. Usually, I write expositorily on a subject. But this is not one of those times. Recently, three instances, one involving a former client, the relative of another client, and a realtor referral have caused me to re-examine the agendas and interactions of borrowers, buyers and brokers. The actual case histories illustrate, perhaps, better than any academic discussion could the misunderstandings that have become routinely ingrained in the mortgage industry. Because of the length of this month’s newsletter and the similarity between the actual case histories and the real world questions of “MORTY’S MAILBAG” I am going to dispense with the latter for this issue.

“The unexamined life is not worth living.”

–Socrates

From time to time, everyone experiences miscues in their personal or professional lives and their underlying value lies in examining their causation and the coping mechanisms we adopt. I write this newsletter for a variety of reasons: for purposes of marketing, to benefit my readership, and to clarify my own understanding of the mortgage business. The reason for which I least write a newsletter is that it’s therapeutic. But occasionally, it provides me a forum for venting some of my frustration with the egregious misapprehensions of borrowers, buyers and sellers in real estate.

With the advent of the Internet and the myriad of telecommunications that exist, real estate borrowers and buyers alike have become rate shoppers as never before. Ironically, despite most borrowers’ fixation on rate, the average person overpays for their mortgage and is woefully undereducated when it comes to financing real estate.

We’ve all heard the bromide, “that a little knowledge can be dangerous.” It is no less true here. On my website, under the Talking Points header is a gateway page with the following admonition: Being an informed borrower is in your best interest! (You may not know what you think you know…). To the left are 15 to 20 mortgage related topics that cover everything (within reason) that the layperson might ever need to know about loans and the loan process. I encourage borrowers to become informed because they make better clients. Still, there are not insignificant numbers that resist one’s efforts at clarification or who are unwilling to correct their misunderstandings because it’s easy and they’re comfortable with their ignorance. I’ve, also, heard some brokers and bankers claim “that borrowers are simply getting what they deserve.”

WHEN A CUSTOMER IS UNABLE TO DETERMINE HOW A PRODUCT OR SERVICE IS BETTER, WORSE OR DIFFERENT FROM A COMPETITOR’S, A CONFIDENCE GAP OCCURS AND THE CUSTOMER WILL NECESSARILY DEFAULT TO PRICE.

The majority of borrowers, focus on about one-fourth of what comprises a mortgage transaction. They understand that a 5% is better than 7% when it comes to rate. What the average borrower and many loan officers fail to take into account are the other components of financing real estate, namely term, tax shelter, and leverage. I come from a financial planning background and I find that these elements, more often than not, have a far greater impact on a homeowner’s finances than rate.

If this is so, it begs two questions: why do borrowers continue to shop for rates and why do most brokers try to sell rates rather than expertise and service? I’m convinced, the reason, in both cases, is because IT’S EASIER—for the ill-informed to remain ignorant and for the seller of said services to quote a rate (however misleading) rather than trying to educate his/her borrower or buyer. The other reason that mortgage bankers and brokers sell rate is because it’s easier to charge more for a process that is little understood. Despite these caveats about how some practitioners operate, not everyone is out to fleece you.

The major thing that borrowers seem to be unclear about is that there are two elements (among a host of others) that determine a rate quote: one is the INTEREST RATE, the other is PRICE. The INTEREST RATE IS THE PERCENTAGE RATE THAT THE MONEY IS BEING LENT AT. The PRICE IS THE AMOUNT THAT ONE HAS TO PAY TO OBTAIN A SPECIFIC LOAN AMOUNT AT THE SPECIFIED INTEREST RATE. Example: The interest rate for a loan of $500,000 is 6%, but the price to obtain this rate may be .5% (or $2500). Discount points (money paid by the borrower to the lender) are used to buy the INTEREST RATE down. Rebate points (money paid by the lender to the broker) are used buy the PRICE down. PAR PRICING is where there is NO MONEY PAID OR REBATED to obtain THE SPECIFIED RATE. Thus, to obtain par pricing (or at no cost) for the same loan amount of $500,000 as in the previous example, the interest rate would likely be increased to 6.25%.

if your knowledge is less than “professional”, it’s best to know with whom you’re dealing. Despite this caveat many borrowers attempt to outwit professionals by employing a variety of tactics. Some borrowers are loathe to admit their lack of knowledge or understanding for “fear of being taken”. Others will “fudge the truth” and fish for a rates by saying that “so and so quoted me X % (a rate a .25% below what they were actually given)….can you do better?” No one can compete with liars and incompetents because what they’re offering are loans that don’t exist! And, still others, employ bravado: I can’t begin to tell you how many people I talk to, who because they’ve bought a home or two, or refinanced once or twice, think that they’re pretty much an authority on real estate finance. AS SHARP AS ONE MIGHT BE, IT IS UNLIKELY THAT YOU’LL SAVE THE KIND OF MONEY YOU WOULD, IF YOU HAVE AN ETHICAL PROFESSIONAL LOOKING AFTER YOUR BEST INTERESTS. I do what I do 40-50 hours a week and I find there are constantly new programs being introduced or programs which may benefit a borrower.

Mortgage Factoid: the average Californian moves every six years and 4 months and refinances, on average, every 3 years and 7 months. What this means to me, as a mortgage broker, is that a homeowner is legitimately interested in talking to me two times in ten years or, on average, once every 5 years. Consequently, I do everything within my power to give them what they want–or something even better.

Now that I’ve gotten all the prologue out of the way let’s get down to actual case histories.

In January, a client whom I had refinanced 3 years earlier called me early one Friday to say that she had lost my number and had to “Google” me in order to locate me (evidently, she had not been receiving or reading the newsletter). I was flattered, not just by her faith in me, but also by her resoluteness and industry.

She told me that she and her husband, a dentist, were looking to lower their payments and refinance out of their $700,000 15-year fixed-rate loan @ 5.875% into a $900,000 30-year fixed rate, with $200,000 cash out for purposes of debt consolidation and improvements. I pulled their credit and called her the following Monday and told her that I could do a zero point loan @ 6.375% plus the added tax shelter benefits afforded them by paying off their high interest rate credit cards. She was less than overjoyed because she didn’t want to part with the 5.875% rate I’d gotten her earlier. She was fixated on rate.

I explained to her that this was a case of “that was then and this is now”. I reminded her that the Fed Funds rate, a pre-cursor to the Prime Rate, had been at 1% back then, but it was now at 5.25%. The fact that I could get her a rate that was only a ½ percent higher for twice the length of her original term I deemed fairly remarkable.

She countered, “But our credit was in the low 600’s then, now we’re above 680” (A paper territory). She speculated that maybe a Home Equity Line of Credit (HELOC) for $200,000 would be a sensible substitute. I pointed out to her that even with a HELOC below the current Prime Rate (8.25%) they’d be paying somewhere between 7.5% & 7.75%. She said maybe they’d hold off on doing anything until rates dropped in a few months. I told her that I didn’t foresee rates dropping, before the end of the third quarter of 2007, if at all. She said she’d talk it over with her husband and they’d let me know what they decided to do.

Four days later, I still hadn’t heard back from her (never a good sign), even though I’d sent her a couple of emails and forwarded via snail mail a number of pieces of loan, investment, and credit literature. So, I called her back. I suggested another option: a zero point loan of $900,000 @ the same 5.875% they currently had, thereby saving them about $3818 per month.

She complimented me on “really going after a sale” and emailed me back that after I’d given them my original quote on a 30-year term, “in the 6’s” her husband had called Greenlight Financial and been quoted a rate of 5.875% on a 30-year fixed with no points and closing costs of just $295. She added that they weren’t sure what they were doing but yet but promised to let me know.

The way in which points are sometimes quoted is all-important. Some lenders include discount and origination points in their quoted points. Other lenders may only quote discount points. Corporate real estate licensees and mortgage bankers (Greenlight Financial, E-Loan, Chas. Schwab & Co., et als) unlike mortgage brokers, ARE NOT REQUIRED TO DISCLOSE THEIR REBATE on the Good Faith Estimates (GFEs). It may sound cynical but it would seem that mortgage bankers and corporate licensees have better lobbyists than the National Association of Mortgage Brokers (NAMB). While rate is important, you have to consider the overall cost of your loan. One needs to pay close attention to the APR, loan fees, discount and origination points.

I replied that I had researched this with 20 different lenders and that rate didn’t exist for a jumbo (loan amount above $417,000) for a 30-year fixed and that anyone doing it would have to pay a point to buy the rate down on 30-year fixed rate loan.

I suggested that most likely one of two things was happening either the rep had inadvertently OR deliberately misquoted her husband OR that her husband had misunderstood some part of the quote. I told her that if she’d send me a copy of the Good Faith Estimate I’d welcome the opportunity to show her why it was not valid OR how I could improve it. In the meantime, I analyzed their entire consumer debt picture and sent out my proposal showing how I could save them about $3800 a month over what they were currently paying as well as another $15,000 in tax deductions.

In my desire to leave no stone unturned I contacted Greenlight Financial and asked them for a quote using the same loan parameters and was told that they could do a zero point loan, 30-year fixed rate loan @ 6.75% with closing costs of $295. I told Greenlight that one of my “friends” had been quoted a rate @ 5.875% to which the agent said they could do that but it would cost of 3.25 points (or $29,250 in this case) to buy the rate down. I asked about a 15 year term and was told that it could be bought down to 5.25%, again, if one were willing to pay 3.25 points.

I communicated this to the borrower and she said she’d mention it to her husband and they’d let me know. In the meantime I refined the 15 year deal further and found two lenders that were willing to give me a rebate such that I could do a zero point loan @ 5.75%. But, I received no further communiqué from my borrower.

After two more weeks, I called her—to see what they had decided. She said they’d gotten the loan from Greenlight. “And it was just as represented–they got a zero point, 15-year fixed rate loan and only paid $5900 plus closing costs of just $295.”

“Well,” I asked, “how could it be a zero point loan if you paid $6000 for it?”

“Because,” as she put it, “we did some other things.”
What Greenlight had done was charge them $5900 in discount points (to buy the rate down) but represented it as a “zero point” loan because there was no origination fee AT THAT RATE. The loan that I had found for them was an 1/8th cheaper in rate and $6,000 less in fees but the closing costs on my loan were about $3500 higher. Net result: they paid $2695 (5900 + 295 – 3500) more for a higher rate, but they thought they got a better deal because the husband and wife didn’t understand the difference between a discount point and a rebate point and what a zero point loan is! For those of us who are ethical, not to mention all the work you put into a deal for a client, these are the ones that break your heart.

Another client referred his brother to me. The brother had an asset account with E-Trade and their mortgage division, E-Loan was offering him a 30 year fixed rate loan of $417,000 @ 5.875% with zero points and he wanted to know if I could beat it. A week or two earlier when E-Loan quoted the offer, I could have easily beaten the rate, but the rebate pricing had worsened and again it was a case of “that was then and this is now” so all I could do in good faith was quote him the rates that existed as of that moment. And speaking of Good Faith, I asked him if he had one–a Good Faith Estimate (GFE) and a rate lock @ 5.875%. He said, “No, but that was what they quoted me.”

IF THE RATE IS NOT LOCKED AND IT’S NOT IN WRITING, YOU HAVE NOTHING. Rates move daily and sometimes intra-day, as well.

The lender may honor their quote (easy to do if rates have fallen), but then again, they may not (unlikely in the event they’ve risen).

Most homeowners have grown up with the notion that the 30-year fixed rate mortgage is the gold standard in terms of desirability. Yet only 3% of Californians will carry their 30–year fixed-rate mortgages to completion. Why? Because as I alluded to earlier, 50% will move within 6 and 2/3 years and another 50% will refinance within 3 years and 7 months (Source—California Association of Realtors). This begs the question why pay a premium of 12% to 20% for a 30-year fixed rate mortgage that 97% of homeowners will never utilize.

I went back to this borrower with what I termed two an unbeatable deals:

1) a zero point, 10/6 ARM loan (fixed for 10 years, adjusts semiannually beginning in year 11) @ 5.25%

2) A zero point, 5/6 ARM loan (fixed for 5 years, adjusts semiannually beginning in year 6) @ 5%

He said, in effect, “thanks, but no thanks,” because he was fixated on a program, even though what I was offering was between 12.5-17.5% cheaper. In fairness to him, you have to respect a borrower’s comfort zone and he admitted that he was conservative. Yet, he was content to pay a one full-percent more for a program that there was about a 3% chance that he would ever use. The last I heard, he went ahead with E-Loan and I don’t know what he ultimately ended up with. Borrowers are often “penny-wise, pound foolish”.

The last case involves a couple that were referred to me by a realtor.

They had owned a home before, back East, but were a bit surprised by the price of real estate and as a result had been renting. The referring realtor had nice things to say about me and they were wondering if I could help them. Now, they were looking to buy and they told me that they had stock and retirement accounts through Chas. Schwab & Co. Schwab had approved them for a maximum purchase of $812,500 and offered a rate of 6% for the 1^st ($650,000) with no points and I don’t recall if they ever mentioned the rate for the 2^nd. Because of what had recently transpired, I thought, “Oh here we go, again.”

The wife, an attorney, had managed the family finances very well—almost too well—because they had virtually no debt and consequently very few open credit lines. Nevertheless, they were willing to be guided by a couple of professionals and willing to listen to suggestions. The realtor found them a house that was about $50,000 more than Schwab had approved them for and I found them a lender and a loan for the higher amount. Subsequently, the wife told me that to get the 6 percent rate Schwab had quoted they were actually paying 1.875 points to get that rate. I said, “I thought you said this was a zero point loan they were offering.” She wasn’t clear on whether that 1.875 referred to discount points or something else. The net result was that I found a lender with 100% financing on an $860,000 purchase with a very advantageous niche for high FICO borrowers such that they ended up with a rate of 5.75% interest only (I/O) with zero points.

No one lending institution does all things well. Mortgage bankers, such as a Schwab & Co. or an E-Loan have a limited range of programs. Generally speaking, it’s better to have a choice when it comes to products, services, rates and ability to qualify. Mortgage brokers clearly have the edge in this regard.

Moreover, as a broker, I shop for rates and programs and price my loans among 15-20 different lenders. On the other hand, I know there are many brokers that don’t shop—they just stick the client into the first loan that satisfies the borrower’s parameters. Even I, shopping as much as I do, am amazed by the fact the lender that had great rates for a given program last month may no longer offer competitive rates or programs a few weeks later. Not only does it pay for brokers to shop around—it’s our job. Note, I said brokers, not borrowers. The major difference among the previous examples was that in the last case, the borrowers allowed a couple of real estate and mortgage professionals to do what we are paid to do–to shop for their clients and provide economic benefit and counsel throughout the transaction. As licensed professionals, we have a fiduciary responsibility to do precisely this.

Bottom Line: If you’re going to hire a professional, know whom you’re dealing with and trust them to do their job.

MORTY’S MAILBAG WILL RETURN NEXT MONTH!

MORTGAGE MIRTH

[Forgive me Lily and Kingsley] Did you hear the one about the unfortunate Chinese couple whose son had a learning disability and compounded the problem by naming him Sum Ting Wong?

NEXT ISSUE’S TOPIC: TOP TEN MISTAKES BUYERS MAKE WHEN BUYING A HOME

Rod Haase

Associated Brokers, MLI
http://mortgagestraighttalk.com/
rod@mortgagestraightTalk.com
1-866-214-3378 ext.8584

CURRENT EVENTS

With the New Year less than a month old, a lot of New Year’s resolutions have already been broken. One that has not is the Fed’s continuing resolve to curb inflation. The unexpectedly high Jobs Report surprised a lot of traders and revealed that wages increased 4.2% over last year further adding to inflation.

CHINESE NEW YEAR

Abroad, China’s central bank appeared similarly focused on slowing economic expansion and containing inflation when it raised reserve requirements for banks on January 5th. Not far behind, on January 10th, the Bank of England raised interest rates by a quarter percentage point to 5.25% to head off rising inflation amid a boom in the housing market and strong economic growth. As I mentioned last month, dollar-denominated assets have less appeal compared with the looming prospect of higher returns in Europe and elsewhere.

These developments are added fodder for the Fed not lowering rates anytime soon because of the adverse impact on currency exchange rates. The fixed income and equity markets appear to be rethinking their beliefs that the Fed will be lowering interest rates in the first half of this year and may not lower them until the third or fourth quarter, if at all.

THIS ISSUE’S TOPIC: LOAN PRICING DETERMINANTS (PART 2)

FOREWORD: Because of the length of last month’s topic, this is the conclusion of a two-part series that covers the potential 12-17 pricing factors that are involved in answering the question of “What’s your interest rate (for a given loan)?

RATE vs. PRICE

To review: there are two elements that determine an interest rate quote: one is the INTEREST RATE, the other is PRICE. The INTEREST RATE is the prevailing percentage of a sum of money charged for its use.

The PRICE is the amount that one has to pay obtain a particular rate.

Example: The interest rate for a loan of $500,000 is 6%, but the price to obtain this rate may be .5% or $2500. Par pricing is where there no money paid or rebated to obtain a particular rate. New loan officers frequently use the two interchangeably with disastrous results. They make adjustments to rate instead of to the price and vice versa.

Whether adjustments for various determinants correspond to rate or to price are indicated by bold-faced type. NOTE: to maintain a degree of uniformity, the pricing spreads for the following determinants are all from a single lender on the same day. Aside from lenders’ guidelines and Debt To Income (DTI) ratios the following factors will impact the rate and pricing:

To recap: In the previous issue 6 of the 12-17 interest rate determinants were covered. They were: loan amount, LTV, FICO score, occupancy, property type, and loan type. Today’s discussion will focuses on the remaining 11 factors that affect a loan’s interest rate.

DOC TYPE

The basic rule of thumb is that the more documentation you’re willing to provide the less risk that is attached a loan for a lender. Consequently, lenders are willing to discount the price. In ascending order of price would be Full Doc, Stated Income with Verifiable Assets (SIVA) and Stated Income with Stated Assets (SISA), NO RATIO (NORA), NIVA (No Income, Verifiable Assets), NINA (No Income No Assets), and NO DOC. The spread between the different programs is all over the place. Different lenders may offer stated income loans at the same price as full-doc or price them a ¼ - ½ point higher. As the LTV increases, the price of the loan jumps accordingly. For example, there’s no difference between the spread on a NIVA and a NORA at 60% LTV and only a ¼ point bump for a NINA. But with an LTV of 95% the price for the NIVA is ¾ of a point, the NORA is a full point and the NINA 1.875%. For a fuller explanation of the differences in loan doc types, see the May newsletter (or on the web vol. 3 issue 5).

INDEXES

There are several different indexes. Among the most well known and frequently used are the CMT, the LIBOR, the COFI, the MTA, and the COSI. The interest rate spread is often as much as a full point. For example, right now the COFI stands at 4.38%, the MTA, at 4.82% and the LIBOR, at 5.34%. But this is only part of the story, because the indexes with the lowest interest rates usually have higher off-setting margins which negate the difference in the indexes. Incidentally, difference in the indexes is a factor of their volatility. Some are more stable than others. When rates are rising, those with the greatest volatility will spike the most quickly, but when rates are falling they will, likewise, be the quickest to drop. For an in-depth discussion of the various indexes, see the December newsletter (vol. 2, issue 10 on the website).

LENGTH OF FIXED RATE

Normally, the shorter the period that the rate remains fixed, the cheaper it is. Thus a 6 month Libor (where the rate is fixed for 6 months and adjusts based on the LIBOR Index) is apt to command a lower rate than say a 3/1 Treasury (where the rate is fixed for 3 years and adjusts annually based on the CMT (Constant Maturity Treasury Index). The fixed rate periods range as follows: 1 month, 6 month, 1 year,
3 yrs., 5 yrs., 7 yrs., 10 yrs., 15 yrs., and 30 years. Thus, a loan that’s fixed for 30 years would typically command the highest premium. With a normally ordered yield curve one might expect to see an eighth of point spread between the various fixed rate periods. I say “normally”, because in the past few years we’ve had several instances when the yield curve has been inverted, during which time, short term (6 mos. – 3yrs) money at fixed rates has cost more than intermediate term money (5-7 yrs.) and numerous instances where long term (10-30 yrs.) less dear, than 3-5 yr. (short-intermediate term) money.

TERM

A rule of thumb that may be applied here is the shorter the term, the cheaper the rate. The options normally afforded a borrower are: 15, 30, 40 and even 50-year terms. Some lenders also offer 10 year terms based on 15 year pricing (with a .25% adjustment) and 20 year terms based on 30 year pricing (again, with a .25% adjustment downward). With 40+ year terms one can expect to see price bumps ranging from .25% to .625%.

LOCK PERIODS

The range of lock times is between 15-75 days. Lock times come in 15 day increments; the longer the lock, the higher the price. At present, the spread is about 1/16 of a point per 15 day extension.

CASH OUT

If you’re refinancing a property and need cash out (beyond $2,000) you can expect to see a .25% adjustment upward in the price.

PREPAYS

They come in increments of 1, 2, 3, & 5 years. The value to the borrower is that your broker may be in a position to offer you a zero point loan, that is, one with no origination fee. Thereby saving you thousands of dollars.

POINTS OR NO POINTS?

Do you want the lowest rate or the lowest price? If you want the lowest rate you’ll opt for the wholesale price, but this will necessitate an origination fee. If you desire the lowest price, you may be able to get a rate only a quarter percent higher that will pay the broker a rebate, thus saving you thousands of dollars in origination fee. If you’re holding time is less than 5 years, it will probably benefit you to go with rebate pricing as opposed to wholesale pricing. (See Prepays above. In certain instances you may be able to get the best of both—a rate at par with no origination fee, if you elect to go with a prepay).

IMPOUNDS

Some lenders offer reductions to borrowers if they have their taxes and insurance impounded because it diminishes the chance of a tax lien (which would affect the lender’s collateral) or lapses in insurance coverage (which would affect the lender’s security). The differential is ordinarily .25% in price.

BUYDOWNS

Interest rates can be bought down either permanently or temporarily. Buy downs are not cheap, however, as a “general rule of thumb,”
a discount point of 1% will lower your fixed interest rate loan .25% and your adjustable interest rate loan .375%. In other words, it would be necessary to pay 1% of the total loan amount in price to lower your rate a ¼ to 3/8 of a percent.

2NDs

With LTVs (Loan To Value) above 80% one has 3 choices: 1 loan with Mortgage Insurance included, a fixed rate 2nd or a variable rate loan like a HELOC (Home Equity Line Of Credit). With an LTV in excess of 80% one can expect one’s price on the 1st to increase anywhere from .25% to 1.5% depending on one’s FICO and LTV.

(Note: as of 2007 the Mortgage Insurance premium becomes fully tax-deductible for borrowers who make less than $100,000 per year.)

IF SOMEONE QUOTES YOU A RATE WITHOUT TAKING THESE 12-17 FACTORS INTO CONSIDERATION, I WOULD STRONGLY QUESTION THEIR CREDIBILITY AND PROFESSIONALISM.

MORTY’S MAILBAG

Q. When we filled out our Loan Application I noticed that below the section labeled Gross Monthly Income there was a designation “Other income”. What are they referring to, part-time or second jobs? What qualifies?

A. There are many other potential sources of income (like Social Security and Disability payments, to name but two) and the use of them for qualifying comes down to a very simple rule. It must be reliable, recurring, and verifiable and extend into the future for at least 3 to 5 years.

Recipients of the newsletter are invited to Ask Morty any real estate or financing questions. The answer to the question will be answered in the next issue for the benefit of all. Questions may be forwarded via mail phone or fax. (See front of issue for phone and fax numbers). Morty’s email address is Morty@MortgageStraightTalk.com.

MORTGAGE MIRTH

Slappy White, the comedian, once observed: “The trouble with unemployment is that the minute you wake up in the morning—you’re on the job!

If you’d care to share one that you’ve heard, please email it to me at rod@mortgagestraightTalk.com .

HAVE YOU HEARD FROM ME, YET?

If not, I’ll be calling to ask you a question or two. Many of you read the newsletter (I know, because I get compliments on it from time to time); others, probably, circular file it. I’ll be contacting you to find out which camp you’re in. I want to know because each issue costs me a $1.50 per copy with printing, paper, and postage. (Those little inkjet and laser cartridges don’t go very far).

The other reason is that I’m looking for ways to improve the newsletter, so if you have any ideas, topics you’d like to see me treat, or features you’d like to see implemented, I’m all ears.

Rod Haase

Associated Brokers, MLI
http://mortgagestraighttalk.com/
rod@mortgagestraightTalk.com
1-866-214-3378 ext.8584

NEXT ISSUE’S TOPIC: TOP TEN MISTAKES BUYERS MAKE WHEN
BUYING A HOME

CURRENT EVENTS

Where are interest rates headed, this year? It seems to be a topic for debate, to be sure. Economic assessments of the current state of the economy, never mind the future, are all over the place. Domestically, they involve monetary policy, employment and inflation and internationally, huge trade imbalances and deteriorating exchange rates.

At home, the Fed’s primary concern has been inflation—and protecting not only us but future generations, from runaway prices of goods and services. To combat inflation, it has used a measured approach of seventeen consecutive ¼ point stair-step rate hikes over the past 30 months designed to slow economic expansion. The latest jobs report shows an economy operating at nearly full employment. The upshot of this is that with a tight labor market employers are forced to bid up wages to attract new hires, which further exacerbates inflation. Despite this, core inflation has decreased to an annual rate of 2.6%, but still well short of the Fed’s target range of 1-2%. For the Fed, the trick is to slow the economy down, but not so much that it stalls and triggers a recession. In short, the Fed has been trying to fine-tune the economy to achieve a “soft landing”.

But, in early December, when things appeared to be going so well and the prospect of a soft landing looked possible—the dollar dropped sharply against a range of major currencies. Once it fell below the $1.30 exchange rate for the euro, it accelerated. The currency sell-off came as investors weighed a number of issues that complicate the prospects of the United States in the coming months, including a huge trade imbalance with China and a drastically impacted housing market.

The fall further highlighted concerns about softness in the American economy in the coming months as economies abroad continue to expand. The first week in December, the European Central Bank (ECB) raised rates to an almost 4 year high to combat inflation in an effort to slow the growth of member economies in the European Common Union. As the ECB seems committed to tightening rates further this year, dollar-denominated assets have less appeal compared with the looming prospect of higher returns in Europe.

Additionally, China holds almost 1 trillion dollars of foreign exchange reserves—which are mainly ours, in the form of mortgage bonds. Their huge appetite for our bonds has helped keep bond prices high and home loan rates low. Their central bank is looking to diversify the country’s foreign-exchange reserves into other foreign currencies and gold in light of recent developments.

Extremists see the Fed in a no-win situation. One side claims that if the Fed were to raise rates, the real estate market would collapse, the other side says that if it were to lower rates, the dollar would collapse. As with so many things in this life, it rarely comes down to an either/or situation.

This kind of confusion about what’s going on is what typically happens when the economy is at a turning point when an economic expansion is about to turn into a recession (or vice versa). At turning points, the various indicators that usually tell us which way the economic wind is blowing often point in different directions, so that both optimists and pessimists can find data to support their position.

The last time things were this confused was early in 2001, when most economists failed to realize the United States was sliding into a recession. If that sounds ominous, it should: the bond market, which has a pretty good record of forecasting recessions, is pointing toward a serious economic slowdown next year.

By mid-December, the fixed-income markets indicated the Federal Reserve will be cutting rates in the near future because of the threat of too much of an economic decline and that stimulation in the form of rate cuts will be needed to boost a faltering economy. Furthermore, Fed Futures traders priced in a 70% chance of a rate cut at the Federal Open Market Committee’s March meeting and speculated that the dollar’s depreciation would force the Fed to abandon its war on inflation.

Yet, When the (FOMC) met on December 12th, the Fed left rates unchanged for the fourth consecutive time, warning that inflation remained a concern and offered little hope of a rate cut early next year. At the same time, it acknowledged the adverse impact the rate hikes have had on the housing industry which led some to theorize that this was “Fed speak” for setting the stage for the first of a series of rate cuts in the 1st or 2nd quarters of this year.

I would venture to say that a rate cut is inevitable, it just may not arrive until the 2nd or 3rd quarter. With all these different market forces at work it looks to be an interesting year ahead. To quote Betty Davis in “All about Eve:” “Hang on, it’s going to be a bumpy ride!”

THIS ISSUE’S TOPIC: INTEREST RATE DETERMINANTS (PART 1)

FOREWORD: Because of the length of this month’s topic, this is the first of a two-part series.

The most frequently asked questioned by borrowers is “what’s your rate?” They often expect you to quote a rate without their affording you much in the way of pertinent information other than their name. The easy, open ended answer is “I have programs with rates that range from 1% to 12%. Let’s see which one you and your property (or purchase) qualify for”.

What borrowers often fail to realize is the complexity of coming up with a VALID quote because not only do the rates change daily, and occasionally, multiple times in the same day, but that each lender may have 20-50 different loan programs. On top of this, Associated Brokers, my parent company is approved with over 100 different lenders. So, if you do the math, there are literally thousands of different programs. Each program has 10-15 different parameters that influence the pricing.

What most brokers do (if pressed by a borrower for a number on the spot) is quote from the one or two lenders they use most often. Some don’t bother qualifying the borrower by running their credit—they simply quote them the “A Paper” rates and assume that the borrower has a 680 mid-FICO or above. Obviously, this can present problems down the road.

RATE vs. PRICE

There are two elements that determine a rate quote: one is the INTEREST RATE, the other is PRICE. The INTEREST RATE is the prevailing percentage of a sum of money charged for its use. The PRICE is the amount that one has to pay obtain a particular rate. Example: The interest rate for a loan of $500,000 is 6%, but the price to obtain this rate may be .5% or $2500. Par pricing is where there no money paid or rebated to obtain a particular rate. New loan officers frequently use the two interchangeably with disastrous results. They make adjustments to rate instead of to the price and vice versa.

Adjustments for the various determinants whether they are to rate or to price are indicated by bold-faced type. NOTE: to maintain a degree of uniformity, the pricing spreads for the following determinants are all from a single lender on the same day. Aside from lenders’ guidelines and Debt To Income (DTI) ratios the following factors will impact the rate and pricing:

Loan Amount

Lenders’ base interest rates are determined by the size of the loan. There are three categories: Conforming (under $417,000), Non-Conforming a.k.a. Jumbo ($417,001 to 1.5 million) or Super Jumbo ($1.5 million plus). The smaller loan amounts, typically, have base interest rates that are lower by .25% to .375%.

LTV

With a lower LTV (Loan To Value) classification, there is a reduced risk of default for the lender and consequently, the pricing to be had is better. The range varies with the LTV. The best pricing will usually be at LTVs of 60% or less.

MID-FICO SCORE(S)

Your mid-FICO score is another prime determinant of price. Notice that I said mid-FICO, not the high score, not the low, but the middle score in a tri-merged credit report. If there is a co-borrower or spouse on the loan, the lender will almost always go with the lower mid-score of the two borrowers on the theory that “a chain is only as strong as its weakest link” and so too, with the likelihood of a default on a loan. There are a few lenders (usually sub-prime), however, that will go with the higher wage-earner or will go with a blended FICO score (the average of the borrower’s and co-borrower’s mid-FICO scores).

OCCUPANCY

Financing for one’s Primary Residence will be more attractively priced than for a 2ND Home or an Investment Property (a.k.a. Non-Owner Occupied). The reason for this is that an owner is far less apt to default on the payments on their principal abode than a 2nd home or an investment property. Lenders have correlated the risk on investment property to be generally a full 1 percent higher in price over a primary residence. A 2nd home would likely necessitate an adjustment of only .125% in price.

TYPE OF PROPERTY

Differing types of property affect the price of a loan. The reason being is in the event of a default certain kinds of property offer better collateral or are easier for a lender to market than others. An SFR (single family residence) or a PUD (planned unit development) is better collateral than say a CONDO because the land beneath the dwelling is owned outright as opposed to a condo whereby only the unit is owned outright and the land owned in partnership with the other condominium owners. Lenders are also reticent in lending on condo projects where fewer than 50 or 60% of the units have been sold.

LOAN TYPE

Depending on what a borrower is trying to accomplish the type of loan will have a direct effect on the rate as different loan types have different rates. For example, if a low payment is desired the ideal vehicle may be an interest only type of loan, if the borrower is looking to shorten one’s pay-off time he may opt for a Home Equity Accelerator Loan or a 15-year term, and if maximizing one’s cash flow is a priority he or she may want to consider an option ARM with a 1% start rate. All of these programs have different prices and interest rates associated with them, respectively.

Conclusion of Interest Rate Determinants (Part II) in Next Issue

IF SOMEONE QUOTES YOU A RATE WITHOUT TAKING THESE FACTORS INTO CONSIDERATION, I WOULD STRONGLY QUESTION THEIR CREDIBILITY AND PROFESSIONALISM.

NEW LAW FOR 2007

Congress has enacted a new law for 2007 that allows Private Mortgage Insurance (PMI) premiums to be tax-deductible. By doing so, it is often cheaper and obviates the need for a 2nd mortgage in many cases.

MORTY’S MAILBAG

Q. Please explain to me what constitutes the difference in lenders eyes between a primary residence and a 2nd home. I’ve been told it’s the distance thing but this doesn’t make sense because I know of instances where such couldn’t be the case. Also, can you have a 2nd home, if you don’t have a first home?

A. For most lenders it is as you put it “a distance thing”, wherein the 2nd home needs to be more than 60-65 miles distant from one’s primary residence. There are exceptions where the 2nd home is in a resort or vacation destination. An example of an exception might be one where the principal residence was in the city and one had a 2nd home at the beach or a ski resort, even though it may be within a 60-65 mile radius of one’s principal residence.

Judging from your question, I interpret your question to mean “Can one have a 2nd home if they don’t own their primary residence?” The answer is yes. Their primary residence might be a rental here in California and own a 2nd home in another state, for example.

Recipients of the newsletter are invited to Ask Morty any real estate or financing questions. The answer to the question will be answered in the next issue for the benefit of all. Questions may be forwarded via mail phone or fax. (See front of issue for phone and fax numbers). Morty’s email address is Morty@MortgageStraightTalk.com.

MORTGAGE MIRTH

Although I enjoy their company probably more than any other profession’s, almost everyone has had a bad experience with an attorney at some time or other, thus we have this month’s offering:

Q. Why do they bury attorneys 12 feet under?

A. Because -deep, deep down they’re really good people!
If you’d care to share one that you’ve heard, please email it to me or call:

Rod Haase

Associated Brokers, MLI
http://mortgagestraighttalk.com/
rod@mortgagestraightTalk.com
1-866-214-3378 ext.8584

NEXT ISSUE’S TOPIC: LOAN PRICING DETERMINANTS (PART 2)