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Archive for the ‘Industry News’ Category

The Federal Housing Finance Agency released the 2009 conforming loan limits on Friday.  The conforming loan limit is the maximum loan amount that both Fannie Mae and Freddie Mac will purchase from banks.  Loan amounts higher than their guidelines are referred to as non-conforming and typically have higher interest rates and stricter guidelines.  These loans are often referred to as jumbo mortgages.  Each year, the housing market is assessed and a conforming loan limit is determined based on the data. 

The new conforming limit for single unit properties nationally will remain where it has been for the past three years at $417,000.  While I hoped Chicago would be considered a high cost area and see a higher conforming limit, it is some what good news that the conforming limit has not been lowered.  What this means for Chicago home buyers is that in order to get the best financing terms, you generally will want to get a mortgage that is $417,000 or less.

In certain high cost areas, the limit will be a maximum of $625,500.  This is bad news for areas that have been hard hit by the housing market crash such as California.  Earlier this year, the conforming loan limit was temporarily raised to $729,750 in most areas of California making it easier for qualified borrowers to get mortgages at reasonable terms.  Now that the high cost conforming limit has been lowered, it is going to continue to put additional downward pressure on home prices in those areas.  A lower high cost conforming loan limit means there are less people in the market to buy higher priced homes which means home prices have to come down further in those areas.

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I appeared on nationally syndicated morning show First Business X yesterday to discuss if housing has bottomed out.  I am never one to make predictions, but I do think we are close to the bottom.   However, there may still be a little more downward pressure on prices due to the continuing constriction mortgage guidelines in many areas.   In addition, there is still a glut of inventory on the market, particularly with new construction condos.   So the combination of still fairly high inventories and the difficulty of obtaining financing I believe there is still going to be some price drops in certain areas.

Nevertheless, I do think it is a great time to buy as there are some phenomenal deals in the market, particularly with short sales and foreclosures.  Investors are coming out of the wood work like vultures to pick the bones clean.

The reality is that no one knows where the bottom is and by the time we officially recognize that we are at the bottom, the smart money will have already called it and prices will be higher.  A wise man once said, if you read about in the media it is too late.  Take it for what it is worth…

Here is the link.

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Online lender E-Loan recently announced that they will be shutting down their mortgage operations after the first of the year.  Most people will chalk this up as another lender cratering due to the credit crisis.  I chalk it up as just a failure of the online business model for mortgages.  Ever since the internet all but destroyed travel agents, every one has been predicting the same would happen to mortgage brokers.  The failure of E-Loan puts the nail in the coffin of that theory.  The credit crisis merely exposed the flaw in the business model.

The Role of the Loan Officer

The reason E-Loan failed is because they did not understand the role of the loan officer.  The simplistic way of thinking is that you can eliminate the highly paid workforce of loan officers and pass the savings on to the consumer by opening up huge call centers staffed with hourly workers.  The problem with this approach is that it ignores the central role of the loan officer at a bank or brokerage which is to GENERATE BUSINESS (bring in mortgage loans). 

The Flawed Model

The theory behind businesses such as E-Loan is that they would be able to lower costs and pass it on to consumers.  This almost never happened.  Business models like E-Loan instead chose to spend a ton of money on advertising to bring in business and minimize the role of the loan officer as the rain maker.  There are two obvious problems with this approach.  First, it ignores the inherent cost of large scale advertising.  Second, it costs a ton of money to staff up a call center with non-productive loan officers.  As a result, E-Loan could not pass on the cost savings to consumers OR its shareholders because while the loan officers compensation may have been lower, the other expenses with running the business were a lot higher than your typical mortgage brokerage that employs loan officers that bring in business with minimal advertising.  In other words, E-Loan was simply not efficient at originating mortgage loans. 

To make matters worse, the business model only really works in booming refinance markets when mortgage loans are falling off the trees.  However, in a down market, it actually takes skill and relationships to bring in mortgage loans.  This is why many mortgage companies who employ top producers are still doing well.  There are several loan officers at Perl who will still close in excess of $75 million in loans this year in a market in which many loan officers can barely close one loan a month!

The mortgage business is very complex and is a lot more involved than simply pushing paper around.  As any great mortgage company will tell you, it is the loan officers that seperate the one company from the next.  When companies devalue their loan officers, it is almost like they are choosing to sell an inferior product.  The results are evident.

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My phone has been ringing off the hook today with Sundays news that Uncle Sam is going to takeover Fannie Mae & Freddie Mac.  Of course, there has been a lot of speculation as to what this means. 

For consumers, this means lower interest rates.   Mortgages rates have actually remained low throughout this credit crisis, but they should be even lower.  Based on historical indicators, a 30 year fixed rate should be about 5.25 – 5.5%.  Thirty years rates had been hovering around 6.375 to 6.5% for the past couple of weeks.  Not surprisingly, mortgage rates fell dramatically this morning and a 30 year fixed rate is around 5.75% right now. 

However, there is a catch and I don’t think this is going to help the housing market too much.

The catch is that borrowers still have to qualify under the tighter underwriting guidelines.  See, the credit crunch has resulted in lenders not wanting to take risks.  This means you need larger down payments, higher credit scores, single family homes instead of condos, etc.  The problem is that many of the people in trouble do not meet the tough standards that lenders are demanding.  At the end of the day, regardless if mortgage rates fall, regardless if Fannie Mae and Freddie Mac are infused with cash, consumers are not going to benefit and the housing market will still not recover if they cannot get reasonable financing.

However, Fannie & Freddie under conservatorship of the US government may spur investors to relax a bit and this could have a positive impact.  It is too early to say.  Nevertheless, if you still can’t verify your income for a full doc loan and have 5 or 10% available to put down, you still are going to have a hard time getting a mortgage.

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Yeah, that is a bold headline, but it seems like there are a large number of consumers in the market right now who don’t have a freaking clue about how hard it is to get a mortgage right now. I don’t care how great your credit is or how much money you make, it is tough. Underwriting guidelines are changing week to week, if not day to day. Even the most experienced mortgage brokers and loan officers find it challenging to stay abreast of the market changes.  I was recently interviewed by nationally syndicated news show First Business X on tightening guidelines.

If you are serious about a home purchase, it is more important than ever to engage a qualified mortgage professional to ensure you have a clear picture of your financing options and if you truly can get a mortgage BEFORE you even think about looking for homes.

I am getting at least two or three calls per week from borrowers who have entered into contracts on properties and are having problems getting a mortgage. Many are well beyond their mortgage commitment dates and may wind up losing their earnest money.

Get Yourself Pre-Approved, not Pre-Qualified

The first step in buying a house is getting yourself pre-approved. I mean really pre-approved. A pre-approval is when you sit down and have a lender formally underwrite the mortgage. A pre-approval means the lender has completed all of the due diligence by evaluating your credit, income, and assets. The goal is to get a formal loan commitment from the lender in writing.

If you haven’t submitted w-2’s, paystubs, and bank statements YOU HAVE NOT BEEN PRE-APPROVED.  Pre-approvals take days, not minutes!  No bank is going to commit to lend hundreds of thousands of dollars and they haven’t seen a paystub! If your lender is saying you have been pre-approved, demand to see a formal loan commitment outlining the loan “conditions” and signed by the underwriter.

A prequalification is just the mortgage broker or loan officers opinion.  All it means is the loan officer feels you have a reasonably good chance of getting a mortgage.  However, until the underwriter actually approves the loan, they really don’t know.  The problem with pre-qualifications is that they are only as good as the person giving it.  Many inexperienced or shady mortgage brokers and loan officers will tell ANYONE they are pre-qualified or pre-approved just to increase their chances of getting your business.  Often times, you won’t know until it it too late or you have to take a worse loan program.

Don’t Let Your Greed Bite You

One of the biggest problems consumers face is that they want the “best deal” and there is nothing wrong with ensuring you are getting competitive terms on your mortgage. However, the problem is that consumers often times forget the other side of the equation which is expertise, service, and professionalism.

What consumers often fail to understand is that rate quotes ARE NOT A COMMITMENT TO LEND. Any mortgage broker or loan officer can tell you they have a super low rate or can still do 100% financing. However, the issue is if the loan can actually close? As a consumer, you won’t know this until it closes. You have to put your faith in what the mortgage broker or loan officer is telling you. This is why it is important that you look beyond the interest rate and ensure the person you are dealing with is reputable and can actually deliver what is being promised.

Too many consumers are not balancing the desire to get that best deal with ensuring they can actually get a mortgage.  In other words, everyone is shopping on price and not results which is a dangerous position to put yourself in as a consumer when you have thousands of dollars on the line in your largest financial transaction.  Buying a home is not the kind of transaction where you need to worry about saving $50 bucks.  It is kind of like shopping for attorney based on their hourly rate without consideration to their win/loss record in court.  Saving money is important, but sometimes you have to focus on the overall big picture.

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Yesterday the Federal Reserve released guidance to banks on subprime mortgage lending.   Like most government initiatives, this guidance is a day late and a dollar short.  In efforts to slam the lenders, the main stream media also forgot to ask one very important point about the guidance.   Who exactly are these lending guidelines supposed to apply?  The last time I checked, the subprime mortgage industry was all but wiped out.  Did the Fed’s take a look at the lender implode-o-meter?  Seriously, I don’t even think I can name a subprime mortgage lender that is still in business!

Nevertheless, let’s take a look at some of the subprime guidance.

Verification of Income:  Lenders must verify income.  This means no more stated income loans.  This will probably hurt a lot of self-employed borrowers, but the reality is most lenders eliminated these products like a year and a half ago.  Once again, a day late and a dollar short.

Ban Prepayment Penalties:  The ban would cover loans that have a rate change in the first four years and be limited to two years on on some higher cost loans.  I don’t really have a problem with this ruling.  One of the insidious tactics of subprime lenders was to put a three year prepayment penalty on a two year adjustable rate loan.  Of course, trapping an already marginal borrower in a high cost loan that is going to get even costlier makes a lot of sense (sarcasm off).  I really want to know who the genius was that came up with that idea.

Establishment of Escrow Accounts: Requires lenders to set up escrow accounts for taxes and homeowner’s insurance.  This is already required on most prime loans when you don’t put 20% down, but subprime loans it was not required.  I have mixed feelings about this.  First, if you aren’t responsible enough to save for taxes and insurance when the bill comes due, maybe that is a sign you shouldn’t be a homeowner.  Secondly, if the borrower can’t afford to save for taxes and insurance on their own, maybe they don’t qualify for the mortgage in the first place.  Forcing them to pay it monthly doesn’t change that fact.  At it’s worst, this ruling is basically saying subprime borrowers need the lender to be a nanny for them because they are too stupid to do it themselves.

Lenders & Brokers Can’t Pressure Appraisers:  I am still trying to figure this one out.  Appraisers have been complaining that lenders pressure then to meet values.  My position is that either appraisers are professionals or they are not.  Getting the Feds to say lenders and brokers can’t pressure appraisers is basically saying that appraisers are bunch of pansies.  Maybe they just need to grow a pair and learn to say no.   This is like me as a lender saying the borrower pressured me to over state their income, so I need a law in place that makes it illegal.  Give me a break.  You either are going to commit fraud or you are not.

Better service from “Servicing” Companies:  Basically says they need to get their act together in terms of applying payments and just doing things that make good business sense.  Part of the problem is half the call centers are located overseas.  Maybe the Feds should have just said hire people who speak english and make more than $5.00 to work in service centers.

Good Faith Estimates:  Creditors must provide good faith estimates within three business days.  I don’t know… I thought we already had to do this.  My feeling about GFE’s is that they are only as good as the person preparing it.  I think the Feds should have just said to consumers to stop focusing on nickel and dime rate shopping and hire a professional mortgage provider to handle your largest financial transaction.  A lot of the above points could be prevented if consumers actually took the time to care about who is handling the transaction instead of who is $50 cheaper.  But I digress…

Advertising:  Basically says advertisements need to be more truthful.  What this really means is that mortgage ads are now going to look like pharmaceutical ads where the fine print takes up two pages, but the ad is only half a page.  Refer to the point above.  The Fed should have just said consumer should ignore mortgage advertising altogether because most mortgage professionals will tell you that there is no way to truthfully advertise mortgages.

Yield Spread Premiums:  This was the biggest news.  The Fed basically showed they know that YSP is nothing more than a profit margin and that there is a difference between the wholesale rate and retail rate.  YSP is not an evil three letter acronym and the commie consumer groups have no idea what they are talking about when it comes to YSP and its impact on consumers.  In short for consumers, YSP is the profit that brokers make that is paid to them by the bank.  Nothing more.  All you need to worry about as a consumer is what your final rate is and the total out of pocket cost to get that rate.  All the other stuff is just too much information.

Just my two cents…

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Final Four

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