From Homescape

If you’ve read the business section of your newspaper this past year, you know that the mortgage industry is in an uproar. The years of “easy money” are long gone. More than 200 national and local mortgage lenders have ceased operations since 2006. Surviving mortgage companies are now adhering to the mantra of “fiscal responsibility” and have tightened the requirements to get a mortgage loan.

Building a relationship

Many homeowners are suffering from this modern day credit crunch. The lack of available mortgage money has driven many owners into foreclosure or to a forced short sale. The increased inventory has driven down housing prices, which in turn has caused lenders to scrutinize mortgage transactions with a finer-toothed comb. A slippery slope indeed.

It’s clear that past borrowers received some pretty poor advice from their mortgage advisers. Borrowers, however, are not blameless. Borrowers shirked the due diligence required to obtain the proper mortgage and are now crying “VICTIM.” Sadly, that cry is pointless when the sheriff sells the home on the courthouse steps.

At the heart of the problem is the relationship the borrower has with his mortgage adviser. Loan originators have absolutely no fiduciary responsibility to a borrower. The only responsibility a bank loan officer or direct lender has, is to her employer. If you can obtain a loan, according to the published guidelines, there’s a financial incentive for your adviser to loan you as much money as possible, regardless of your financial goals.

Mortgage brokers and their employees offer a better chance at an unbiased relationship. But even with this scenario, their compensation is tainted by the irresponsible use of yield spread premium. Rather than use yield spread premium as a tool to lower borrowing costs, many unscrupulous mortgage brokers improperly disclosed that compensation and used it to line their pockets.

Unbiased financial advice
How then, can a borrower level the playing field and get the mortgage adviser to truly offer unbiased financial advice? The Federal Reserve Bank has some suggestions about how to do just that and ethical mortgage brokers have been following the model for years now. The Fed recommendation calls to negotiate a broker compensation agreement before the loan application is submitted. Prenegotiated mortgage brokerage fees remove the appearance of bias and put the mortgage adviser on the same side of the table as the client. The idea of up-selling a product is then done with the client’s best interest at heart. Recommended loan amounts become a strategic financial planning implementation rather than a way for the adviser to earn a higher commission.

Sometimes borrowers improperly shop for mortgage loans by trying to get the lowest rate and lowest fees. It is virtually impossible to get the lowest rate on your home loan. But rather than engage in the circular practice of mortgage shopping, borrowers might shop advisers instead. Depending on the loan size, mortgage brokers typically earn between 1 percent and 2 percent of the loan amount. Fees ranging from $3,000 to $6,000 — inclusive of broker processing and administration fees — are typical in this market.

Find a loan adviser whom you trust and negotiate a fee for her services. Be transparent with the information you offer. Communicate your short and long-term goals with her, and allow her to make a suitable loan recommendation, mutually exclusive of the fee she earns.

Brian Brady

Following an increase in suspicious activity report (SAR) filings from banks and financial institutions with mortgage loan fraud, the Financial Crimes Enforcement Network (FinCEN) issued a report in November 2006 describing trends and patterns with suspected fraud cases filed between April 1, 1996 and March 31, 2006. FinCEN has continued to monitor these findings, and their latest report shows the number of fraud cases across the country increased 42 percent in 2007 over the year before.

In 2007, financial institutions filed 52,868 SARs, citing suspected mortgage loan fraud, compared to 37,313 in 2006. FinCEN says that one reason for this increase “may be that lenders are increasingly identifying suspected fraud prior to loan approval and reporting the activity ahead of time.” Suspected fraud was detected prior to loan disbursements in 31 percent of the mortgage loan fraud SARs filed between April 1, 2006 and March 31, 2007, compared to 21 percent during the preceding 10 years.

Total SAR filings on suspected mortgage loan fraud showed the greatest increases in these six states:

Illinois: 75.80 percent
California: 71.29 percent
Florida: 53.04 percent
Michigan: 51.50 percent
Arizona: 48.73 percent

Other suspected fraudulent activity included forged or fraudulent documents, 28 percent of cases; occupancy fraud, 14.4 percent; appraisal fraud, 13.1 percent; identity fraud, 10.2 percent; straw buyers, 5.6 percent; identify theft, 3.4 percent; and flipping, 2.7 percent.

While some analysts fear that the number of fraud cases will be camouflaged as lenders begin providing more refinance options to distressed homebuyers with adjustable rate mortgages, I believe more of these cases will be unveiled as banks and other financial institutions take a thorough look at the loans that were initially approved by a different lender. We're just now starting to peel away the layers masking the housing boom, and the truth isn't going to be pretty.

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.

'

'

'

'

'

I was having dinner with a friend of mine the other night, gorging on all-you-can-eat sushi, when we started talking about real estate. My friend, who is planning on buying her first home this summer, told me she started reading more about the housing crisis so she could get a better understanding of today’s market. Despite her studious efforts, she tells me, she “still doesn’t get it.”

Like many people who aren’t agents or mortgage brokers, trying to understand the causes of the housing meltdown is like trying to read Mandarin. While the housing problems are a lot more complex than I can even understand sometimes, after talking with various industry experts and reading up on new reports from National Public Radio, The Wall Street Journal, The New York Times, CNNmoney.com, and Bloomberg News, the explanation below is a simplified answer to my friend’s query.

Wall Streets jumps in
Back in the “good old days,” banks use to meticulously review a borrower’s financial portfolio because they wanted to make sure they got their money paid back to them. But times have changed, and over the past decade, Wall Street has created a cash cow from mortgage backed securities by repackaging the loans and selling them off to investors from all over the world.

As a result, selling loans quickly turned into a commission game to lenders. During the housing boom, some brokers felt that getting the $20,000 commission was more important than denying less-qualified borrowers a loan. Once the loan was sold, it had become someone else’s problem. But investors didn’t question these high risks, because home values were going up and everyone was making money. That was until all those unqualified borrowers, who shouldn’t have been approved for the loans to begin with, started defaulting on their payments. Due to the rapid growth of mortgage companies over the last decade, industry standards have been limited and inconsistent.

Industry standards
The housing problems stemmed not just from zero-down loans, but because these loans were given to people with terrible credit and insufficient income to sustain their monthly payments. A good handful of lenders, underwriters and investors turned a blind eye during the housing free-for-all. Accountability usually results form oversight, and without one the other cannot exist. Now nobody really wants to take the blame for the one of the worst housing crashes in U.S. history.

Visiting various housing industry blogs, I’m surprised to still see mortgage brokers pushing loans with low-down-payments and high interest rates. I’m told by one broker that there’s still three private lenders offering zero-down payment loans. But the heyday of under-regulated lenders may be over. Both Republicans and Democrats agree that that their needs to be greater regulations within the industry, and better controls in the systems. Over the next year we’re going to start seeing proposals for tougher rules both from the government and financial leaders. But as the old adage goes, “hindsight is 20/20.”

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.

I have two friends who are looking to buy a home this year. With a combined income of $100,000, and solid credit scores — somewhere above 660 I’m assuming — knowing what I know about the market, it would appear that they would have a good chance of getting approved for a home loan. To fit their lifestyle and budget, they’re in the market for a two-bedroom condo for around $265,000 in Chicago. I instantly thought, no problem, they shouldn’t have a hard time getting approved for a loan, even with stricter regulations from lenders. But when they told me they had less than 5 percent saved up for a down payment, their sunny outlook didn’t look so bright anymore.

Tougher lending standards
Before the subprime mortgage fall out, many nonprofit groups and government sponsored agencies pushed for home buying programs targeted to borrowers with a solid job and good credit, but didn’t have a lot of money saved up for a down payment to invest in a home. Various Federal Housing Administration and nonprofit programs were created for this subgroup of people. But with the subprime fallout, borrowers are seeing some of those programs tighten their standards even more.

According to a mortgage broker I spoke with over the weekend, while the zero-down-payment loans are no longer being offered by most lenders and banks, low-payment mortgage programs where you can put down as little as 3 to 5 percent of the purchase price are still being touted as an option. To qualify you generally have to have excellent credit — 680 and above — and purchase private mortgage insurance (PMI). The PMI alone can tack on an additional $100 or more on your monthly mortgage payments. Borrowers can also expect to pay higher interest — between eight to 10 percent — and more up-front fees with these types of low-money-down loans.

While it’s still possible to get a loan with less than 10 percent down, it doesn’t mean you should. Putting down 20 percent will assure the home buyer a cushion. If home values drop 10 to 15 percent or if you face job loss, you’ll still have some equity left in your home and you won’t get stuck paying more on your mortgage than your home is worth — a problem many home owners are facing today.

Mortgage expert’s advice              

"Yoda" is an Atlanta-based mortgage expert with over 30 years of experience with home loans.

My mortgage guru, who I like to call Yoda, had this advice to give to my friends looking to buy with less than 10 percent down:

“While it is somewhat more difficult to get them approved with a smaller down payment, higher credit scores and higher cash reserves will most likely be required and mortgage insurance companies are requiring lower debt-to-income ratios. But with today’s mortgage climate, changes occur daily so I cannot say with any confidence that these loans will remain available in the near future.

“Being on the lending side, I would say that the point of the 20 percent down payment is to protect the lender and various investors. The down payment, among other things, is the incentive for the borrower to keep making the monthly payments. Without the borrower’s investment, the likelihood of delinquency goes up tremendously. From the borrower’s perspective, if they have little or no equity when they purchase the property, they may have less or even negative equity, but they still have the same home they chose to buy and there was surely some motivating factor besides the financial one. If borrowers remain patient, the odds are still good that values will return and their purchase will have been a good decision.

“As to whether or not I would recommend the couple to buy now, is a little more complicated. First, they should be committed to staying in this property for some time. Also, the individual market makes a difference. Some markets are relatively stable and some are still declining. There are some great bargains available if one is a savvy shopper and not solely motivated by what you think you have to have instead of what you need. Finally, if you find the house that meets your requirements and you are committed to living there for five or more years, it might just be an excellent time to buy.

“Sales prices are lower and fixed-rate loans are available below six percent. It is a buyer’s market. But I always try to remind people that real estate has always been considered a long term investment and increases in value should not be treated as income to be spent on yet a bigger-screen TV.”

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.

The day after Sen. Hillary Clinton delivered a major policy address on the housing crisis, Republican presidential candidate John McCain decided to ratchet up his rhetoric on the issue and toss in his million-dollar idea into the boxing ring. But McCain’s proposal lacks the one-two-punch needed to knock out today’s housing problems.

McCain's solution

McCain is calling for a meeting of the nation’s top mortgage lenders as part of a solution to the rise in home foreclosures, saying the bankers should look to the example of General Motors, which offered zero-percent financing on new cars after the terrorist attacks of September 11, 2001.

The Arizona senator has voiced his opposition towards a major government bailout, arguing that tax payers should not have to be held responsible for the irresponsible actions of mortgage brokers, lenders, Wall Street financiers and home buyers. The proposal drew immediate criticism from economists, who said the situation with GM in 2001 is not comparable to the current crisis.

David Henderson, an economist and research fellow at Stanford University’s Hoover Institution, told the The New York Sun, that “GM’s initiative was effectively a discount and did not come from government pressure.”

Other economists pointed out that GM’s financing plan served the company’s interest as much, if not more, than it did the nation’s, by enabling it to sell off excess inventory and make way for the following year’s models.

“In a capitalistic economy, it’s the profit motive that matters most,” John Lonski, the chief economist at Moody’s Investors Service, told The Sun.

Down payment dilema

McCain is placing blame for the housing crisis on lenders who let standards fall too low and on borrowers who bought homes they couldn’t afford. He pointed to the “zero down” payments as a major contributor to the subprime mortgage mess, and called for more transparency, “so that every borrower knows exactly what he is agreeing to and where every lender is required to meet the highest standards of ethical behavior.”

While McCain’s GM solution for the housing crisis may be way off the mark, I think his call for stricter regulations for lenders to require significant down payments from borrowers is a key component that Clinton’s proposal doesn’t address.

If home prices fall 10 to 15 percent — which is what has happened in states such as Florida and California — after a borrower buys his house without a 20 percent down payment, he’ll quickly find himself “upside down,” and he’ll be owing more on his home than it’s worth. Due to widespread home depreciation across the country, some economists say one out of 10 homeowners could now be upside-down.

If you put 20 percent down and home values declined 10 to 15 percent, you will still have a safety net with a little bit of equity left in your home. Homeowners without that cushion could end up selling their home for less than they bought it for or maybe be forced into foreclosure. You’re playing Russian roulette with your home if you opt out of a down payment.

With the faltering economy as a forefront issue of the presidential election, McCain’s latest proposal reveals his weakness on economic policies, an area he openly admits to being less knowledgeable about compared to military and foreign affairs. But I commend him for addressing the down payment issue, which is often omitted from political speeches, because it doesn’t carry with it the glitzy headline of a $30 billion rescue fund.

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.