The Ready Way

The Window of Opportunity; Why we can still go over 45% debt to income

Author: Administrator

For those of you who were recently told your debt to income was too high due to Fannie Mae’s new 45% debt to income restriction take note.  The majority of banks are going off of Fannie Mae’s guidelines for their retail branches.  Meaning that if you talk to Joe over at ABC Bank he will be limited to a max debt to income of 45% or 50% at best.  He will be going off of “DU Findings.”  However in correspondent lending land, the world I currently live in, we are running our loans through “LP.”  Lp is for Fannie Mae’s brother Freddie Mac.  Yes where Fannie has restricted Freddie mac has not. …yet.  With LP we are still getting accepts at 52-55%.  Sometimes it pays to not take no for an answer especially if you call around.

January 19th, 2010  |  Posted in Happy news  |  No Comments »

How we got in this mess. Another view

Author: Administrator

We have all heard the basics as to how the housing crisis happened.  Wall street got greedy, banks turned a blind eye and loan originators pillaged people.  That is more or less the sweeney toddesq version.  

One of the huge problems is that in order to be a loan consultant 5 years ago, or even at some places today, you did not need an education or really anything beyond the ability to “sell.”  This lack of requirements led to a industry of salespeople who did not understand the long term consequences of the products(loans) they were “selling”. 

Loan originators are often blamed for tricking people but a large portion of them really believed the bogus loans they were selling were great.  They did not know any better and did not have the aptitude to recognize the potential long term problems.

I got into the loan business at the tail end of the “glory days.”  The stated option arm was the go to product.  It was sold to me as “Jen, this is a great way for borrowers to manage their money.  Why make a full payment, if you can live in your house, make a low payment, and write off the interest?”  My response was the loan balance is growing, and when it adjusts the borrowers payment will jump and they are going backwards. To which I got “prices are just going up,just refi them before it resets.”  At that time that was true but my concern was that refinancing is expensive and it did not make sense to do the Option Arm due to the potential issues. The response to that concern was “if you do not do it the client will just go to the lender down the street.” yikes.. I did one Option Arm and it haunts me to this day.

Here’s the thing, if a loan consultant understands what bad things a loan can potentially do to someone they are less likely to push it.  Now here we could get into a ethics debate, but if a loan consultant does not even realize the product is bad they have no ethical dilemma.  The product looks good, the bank wants them to sell it so they sell it.  Client loses, market tanks etc…

If the loan consultant understands the product has potential devastating effects at least they have to have the inner ethical debate before they sell it.  

It would be great if a consumer group put together a test that all loan consultants had to take that tested their reasoning ability.  Seeing if they understand cause and effect through a bunch of hypothetical multiple choice questions. Like

Q: If Bob chooses an option arm loan and makes the minimum payment while his value decrease dramatically and his rate adjusts what can Bob do?

A) Refinance into another option arm

B) Accept the new higher payment or face foreclosure

C) Try to modify his loan or short sale his home

D) B and C

The answer is D. 

Or

q:  If you state Bob makes $10,000 per month so that he can qualify for a $400,000 house but Bob really makes only $5000.  Can Bob really afford his house?

a) No

b) Yes

Obviously A is the answer. It may seem like a silly question today but just a few years ago thousands of people answered b by their actions and that is a big reason why we are in the mess we are in today.

Bottom Line: Loan Consultants deal with large financial transactions. They should be able to reason and understand cause and effect.  This is not a just a sales job, we are helping people frame their financial future.

January 13th, 2010  |  Posted in Call for action, What the media is saying  |  No Comments »

New disclosure laws. I hope you like to sign papers

Author: Administrator

As of January 10th we have new disclosure laws.  Basically, the good faith estimate is supposed to be accurate and if any fees increase the good faith has to be presented to the borrower again so they can agree or disagree.

In the past good faith estimates were a bit of a joke.  I constantly would come up against good faith estimates that were completely BS.  The old trick lenders would use is quote low up front and high at the end.  This is supposed to halt that practice.

We started the new process January 1st, early, because that is the way we roll.  As with any new requirement it has issues.  Here are two I discovered today.

1) By law we have to disclose within 3 days of taking the application.  If your rate is not locked at the time we disclose we will have to re-disclose the good faith estimate and potentially the truth in lending as soon as we lock the rate.  What this means: is more paperwork, forms to sign and changing $ amounts.

2) We need to have accurate title fees when we disclose.  Title will not have accurate fees until they get the prelim which takes 3-5 days.  We have to disclose within 3 days, we cannot wait for title. Which means we have to ask title to give us their best guess.  If their fees are higher once they get the prelim we get to re-disclose. What this means: is more paperwork, forms to sign and changing $ amounts.

After really looking at how this works it may protect a few borrowers from high fees but will not protect them from rate crime.  Unless it was  required for the rate to be locked for the loan process to begin there is always the risk of being quoted low upfront and high once you are half way through.  Rates change every day as per the market.  Your rate is only as good as your loan consultant is ethical.

The best thing any consumer can do is interview the loan consultants upfront.  Ask for recommendations, how they feel about money etc… 

All lenders are not the same and you need someone you can trust.

January 5th, 2010  |  Posted in Uncategorized  |  1 Comment »

Good news; for real

Author: Administrator

I have spent the last two weeks trying to figure out how to approach the ever constricting market.  The past few weeks it has seemed as though the flow of money was at risk at being turned down or off .  With Fannie Mae and Freddie Mac tightening up and FHA critics screaming poor it was starting to look truly dismal.  Well, finally a bright spot.  The treasury has given Freddie and Fannie an open check book of sorts.  This should help loosen things up a touch (I pray).

Well, this seems less than awesome for taxpayers ,without it we very well could face a depression.  Not to be a downer but the market is a long way from recovered to a safe level.  There are still a multitude of obstacles such as adjusting arms and beaten down homeowners that have to be addressed before the recovery is real. Hopefully this will turn obstacles into opportunities.

December 24th, 2009  |  Posted in Uncategorized  |  No Comments »

The Rise of the Government loan.

Author: Administrator

Question:  How to get out of a box that keeps getting smaller?

Answer:  The Government.  Seriously.

Conventional lending is getting tighter.  Beyond the new max 45% debt to income ratio you now have the push back on appraisals escalated to an all time high. One would think that with all our new and expensive shiny hoops we get to jump through to get an appraisal that then that appraisal would be enough. Jump through the hoops=get to the end.  Not so much.

 Keep in mind as a loan officer we are now not allowed to choose who does the appraisal.  Appraisers are chosen at random and then we are not told who it is until after we get the appraisal back.  This is so we will not contact them and “convince” them to “inflate” the value of the home.  This system was set up to protect consumers from corruption and greed.  Well, one would think that since the appraisal is now done in such a non- corrupt way that it would actually be used as a way to value the home.  That is what you are paying $375-$450 for right?

Not so much.  Enter the 2nd appraisal my friends.  Jump through the hoops see the end and then 30 more hoops pop up.  If you are buying a home with 20% down the chances of you needing either a desk review appraisal or full 2nd appraisal are 90%.  If you are putting 25% or more down the chances go down, however, some banks require a desk review on all loans even if you put 90% down.  Other lenders/banks require a field review or full 2nd appraisal on purchases or refinances with 20% down.  Why is 20% down not enough to escape the 2nd appraisal?  Because investors are scared and we are in a declining market. 

The 2nd appraisal is like a little yummy cookie in the file that makes the investor feel like they are getting a good deal.  If two appraisals say the house is worth $200,000 then it must be.  While this is a lovely cookie for the investor it is less than great for the borrower who gets to pay for 2 appraisals. 

The lender is stuck with the desk review fees in many cases but if the underwriter wants a 2nd appraisal (which is becoming more and more common every day; loans need to be sold, my friends)  then you get to pay for it.  Awesome right?  Bright side; you will have multiple opinions on your home and pictures:)

Strangely enough on a FHA loan under $417,000 with 3.5% down we never need 2nd appraisals or desk reviews.  Easier and faster to get a government loan?  Yep, that is the way the cookie crumbles. You can have higher debt to income, put less down and have less appraisal drama. We all know who the investor is on these loans and they are insured which means we do not need “cookies” in the files. Keep in mind in late 2007 FHA was a bad word. Inmost offices there were few people who did FHA loans.  They were considered too difficult and time consuming.  Now the majority of loan consultants in the business who stay busy have become FHA experts and can quote the guidelines in their sleep.  What a difference 2 years makes.  If you had told the loan consultants of 2006 that 2009 would be the year of the government loan they would have thought you were mad. 

Forecasting for 2010 it will be another year of the government loan.  The conventional market will not loosen up for quite awhile.

FHA, VA and USDA (yes they do loans) bring it on, we can quote your guidelines in our sleep. ZZZZZZZZ

December 21st, 2009  |  Posted in Government, Important lending changes  |  No Comments »

Suggestion: Hey right hand see what the left is holding and other wild ideas to solve the crisis

Author: Administrator

It seems as though often these days the left hand does not know what the right is doing.  The government has just greatly restricted lending via Fannie Mae reducing the back end debt ratio down to 45% from 64%.  The back end ratio includes your principal, interest, taxes and insurance + all your credit card, auto, student loans, etc…   What this means is yout total debt cannot exceed 45% of your gross income.  Dropping from 64-55 fine but 64-45 is HUGE.  That restriction will make it impossible for many people to buy or refinance a home unless they do FHA.  FHA, which keep in mind is also looking at adding new restrictions.

Since Fannie Mae made the move to 45% the banks are following suit as they should, since they have been targeted for risky practices in the past.  This has led to a giant segment of people virtually being stamped with denied on their loan applications.

Today our President, implored the banks to lend more.  Hmm…Did no one tell him about Fannie Mae’s new rule?  Did they forget to tell him about the troubles with FHA?  

Banks are lending right now as long as people fit within the guidelines.  Generally, the guidelines that Fannie Mae sets. Obviously the banks have noted the ludicracy of the contradiction and thus the quick movement to pay back bail out funds. 

In theory if one really wanted people to get help with modifications why doesn’t Fannie Mae have a loan modification program where you can refinance your house even if your note is not currently owned by Fannie Mae for a lower rate even if it is completely and utterly upside down. I am talking about houses worth $600,000 with $700,000 loan amounts. If they can qualify to make the payments at today’s low rates, why not? I mean all the money used to bail out the banks was to help people right?  They want the banks to modify loans that are utterly and completely upside down. 

I constantly have people come to me who are in ARMS and slightly upside down.  All they want to do is finance into a fixed rate and we cannot because they are upside down.   That seems like a missed opportunity to fix what will potentially become another foreclosure if not handled. 

There are solutions. We just need to think outside of the box.

December 14th, 2009  |  Posted in Foreclosure, Government  |  No Comments »

I guess I really do need a blog for my less than PC thoughts

Author: Administrator

Julie and I blog on Trulia about the market almost daily.  I have never had any problems and generally the blogs are well received.   Well last night I wrote a blog that was meant for The Ready Way but ended up on Trulia because the server for Ready Way was down.  Big mistake.  I posted the blog, checked it had posted and went to sleep happy; feeling that I had pointed out some solid issues.  This morning I told Julie to check it out and lo and behold it was gone. No email, nothing.  It was as though it had never existed.  What did I talk about that would need to be scrubbed so quickly?  Must have been pretty wild right?  Not really.

Of course I do not have a copy as it did not cross my mind it would be scrubbed, but here is my position.  I had read an article in a local newspapers about modifications.  It was the same article I have read in various newspapers and magazines for the last year and a half.  There is always a picture of a nice family doing something wholesome (lawn with kids; cooking etc..) and the article says nothing substantial.  We get it loan modifications are hard to come by and the nations largest banks are not rushing to do them.  This is not “news.”  What would be news is if they told us what various investors guidelines were for a modification.  What would be news is if a newspaper or magazine actually had some useful facts in their story.  Crazy right.  I called out journalists to do some investigative work and get to the bottom of what is really going on.  We need a lending Watergate.  It is insane that we know all of  a famous golfers text’s but not the guidelines for modifications.  Instead of looking into how to help Americans by providing them an inside look we are getting an inside look into a red headed starlets propensity to go back to rehab. There is something off in the balance system here. I challenge all journalists to right the balance.

December 7th, 2009  |  Posted in What the media is saying  |  1 Comment »

Another reason to live in Sonoma County

Author: Administrator

Tonight I watched Food Inc.   I had read the omnivores dilemma and fast food nation and they had slightly traumatized me but not like the actual Food Inc movie.  After this movie I am officially eating localonly.  The beauty about Sonoma County is that eating local is an option.  In many parts of the state I would need to become a vegetarian but here we have such amazing sources of food that now I just have to shop at Sheltons or the Farmers market.  If you have not seen Food Inc check it out.  It is life changing.  The Government may want to put a little less energy into cotrolling financial institutions and a little more into providing safe food sources.

December 1st, 2009  |  Posted in Uncategorized  |  1 Comment »

FHA: It’s the end of the world as we know it…

Author: Administrator

Over the past two weeks there have been many articles highlighting the woes of FHA.  Their reserves are lackluster and it seems that people have just realized that FHA is the new sub prime.  Yes cringe, everyone cringes when you say it is the new sub prime but guess what?  That is what it is.  Lets do the math:

Low Down Payment+less than stellar credit+higher debt ratios= SUBPRIME

There have been FHA borrowers that I have not felt are qualified to buy bicycles that other lenders have helped get homes. 

In a nutshell with the way it is set up it sets the borrower up for failure.  Reserves are not a requirement of the loan and the 3.5% down paymentcan be a gift and the seller can pay 6% of the closing costs.  You basically can have someone get into a house with no money down and $50 in their checking account. So here is the million or trillion dollar question, since the tax payers will ultimately bail this bad boy out.   What happens when something goes wrong.  A car breaks down or the water heater blows.  The person has NO RESERVES.  Looks like they are not making a house payment and the foreclosure cycle starts again.

Now that a few congressman have noted the “Oh no, this will tank everything again,” they are attempting to fix FHA.  They are proposing stricter underwriting requirement or higher down payments.  They are also proposing perhaps instead of tougher underwriting and higher down payments maybe increasing the upfront mortgage insurance fee  and the monthly mortgage insurance because “it will not hurt the borrower as much.”  It will up their monthly payment but whatever right….? 

Let’s talk about the Upfront mortgage insurance fee.  Every FHA loan has a built in 1.75% upfront mortgage insurance fee.  They are proposing                 2-2.25.%  It is basically a gimme fee.  It can be built into the loan and 95% of the time it is built into the loan. And yes you will still pay mortgage insurance monthly.  Currently it is .55%, they are proposing .75%.  The one justification right now for the upfront MI fee is that the MI on FHA is cheaper then conventional.  Raise the upfront MI and the monthly MI and that is no longer true.  People will still get the loans but will be set up further for failure with the higher premiums.

I have shaken my crystal ball and I think that they will not increase the down payments or the underwriting standards but instead will up the fees.  It will be interesting to see what happens.  If they increase the down payments and underwriting guidelines it will put a stall in the market as currently FHA is the most popular loan program.  If they do not stall now they will have a flood of foreclosures later. It is lose lose.  If they up the fees it is a bit akin to taking the last $20 before it is gone.

November 28th, 2009  |  Posted in Foreclosure, Government, What the media is saying  |  1 Comment »