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Archive for the ‘Sub-prime Mortgages’ Category

FinalĀ Four

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I knew it wouldn’t be long before some bottom feeding lawyers started filing lawsuits against mortgage lenders. Here in Chicago, we have some ambulance chaser advertising all over the airways looking for people who are on the brink of foreclosure to file a lawsuit against the lender. The City of Cleveland, OH has decided to take it a step further and has filed a class action lawsuit against 21 major lenders – pretty much a who’s who of mortgage banking. Bank of America, Wells Fargo, Chase, and any other bank they figure has some deep pockets.

In case, you haven’t figured it out. Cleveland is pretty high up on the list of a foreclosures. There were some 7000 foreclosures in the city in 2007. That is a lot of foreclosures for a fairly small city. The Mayor is essentially blaming the lenders for leaving the city in a mass of foreclosures and Katrina like neighborhoods of boarded up crack houses. On the surface, this sounds like a typical left leaning, tug at your heart strings issue. The big bad greedy banks sucking the equity out of poor old Cleveland.

But let’s put our emotions aside and really examine why Cleveland is fast becoming the foreclosure capital. The last time I checked, no one was running to move to Cleveland. Some folks might even call Cleveland a hell hole. The city is in the heart of the Midwest and quite frankly is getting the smelly end of the stick when it comes to dying manufacturing economy that is in the toilet. The bottomline is that it is hard to pay your mortgage when you don’t have a job! Of course, instead of the Mayor figuring out how to spur the Cleveland economy and bring employment back to the city, it is a lot easier to blame the lenders. Does he really think lenders want to foreclosure on some outhouse in a Cleveland ghetto worth $100,000 with a $125,000 mortgage on it? I didn’t think so.

Let us not forget the same people crying about the big bad lenders were slamming them and filing lawsuits years ago because they wouldn’t lend to poor people. Now that poor people can’t pay their mortgages, they are crying and filing lawsuits that the big bad lenders shouldn’t have lent them money. Good lord.

Here is the article.

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hillarysm.jpgWith all the press coverage about sub-prime lending and the impending housing bubble (if there really is one), it was only a matter of time before the politicians started licking their chops and proposing brilliant plans in order to win votes. I am hoping that real estate industry is not beyond the point of no return.

Our industry’s lack of long-term thinking and focus on maintaining the status quo will most likely result in changes that will be damaging for the business and consumers alike. When we don’t self-regulate our ranks, the gubment will step in and do it for us and we all know what happens when politicians start legislating on things they know nothing about. One only needs to look at the fiasco in Chicago with the poorly thought out HB4050 legislation. The last thing we need is this kind of madness on a national level.

Nevertheless, I am anxious to hear industry insiders and consumers thoughts about how they would “fix” the business, so please chime in. If we had the ear of Hillary, Obama, Dodd, or any of the other politicos looking to make their mark on the business, what would you tell them?

There are probably dozens of different solutions or fixes to the business, but in my mind they all go back to one problem with the business which is that is too freaking easy to get into residential real estate whether you are an agent or mortgage originator. While I love the freewheeling nature of the business and meritocracy of 100% commissioned sales making us individual businesses unto ourselves, the lack of barriers to entry make too easy for unqualified and unethical people to enter the field. There are simply way too many people in this business, probably eighthy percent of which don’t belong. This breeds a mistrust among consumers and worse, a lack of respect for what we do as professionals. How can we be viewed as trusted advisors when our client’s cousin decided to become a Realtor or Mortgage Originator after failing as a Herbalife salesman or the latest get rich quick from your home scam? All one has to do is look around. Everybody knows someone who is in real estate, the bulk of which got into it in the quest of fast money.

In addition, I believe many of the other problems we have in the business such as fraud stem from the low barriers to entry. The agents and mortgage originators are the front lines, so if you have higher quality people at the beginning of the process, then I believe a lot of the other areas would correct themselves.

At a minimum I would require the following of real estate agents and mortgage originators:

  • College degree: It is absurd that we handle the largest financial transactions of people’s lives and we are not even required to have a college degree. I am sure this will prompt a lot of responses, but my position is that while the degree does not necessarily make you qualified, it at least shows a minimum level of aptitude and intelligence.
  • Testing: As it stands right now, the testing to become a mortgage originator or real estate agent are jokes. It takes more time and testing to give out $10 haircuts. I believe we need a test similar to a Series 7/63 type exam like that of other investment professionals.
  • Background Checks: Until recently, mortgage originators could be convicted felons. In fact, the new hustle for Chicago gangs is mortgages. Need I say more?

Unfortunately, the odds of this happening are slim to none. First, a lot of the companies in the industry survive by churning new agents and mortgage originators. Since it is fairly low costs to hire inexperienced employees, they have no incentives to really improve quality in the short-term. Every agent and mortgage originator knows of the shops that simply hire warm bodies to collect desk fees or the fees on a handful of transactions before the newbie burns out and goes back to Herbalife or the newest hot industry.

Thoughts?

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The other day one of the loan officers in my office came in to show me a good faith estimate for one of her clients. The borrower didn’t use her for a mortgage, but instead used a company that called her off a trigger list. The borrower called my co-worker back after the closing realizing that she had probably been taken advantage of. Needless to say when we looked at the settlement statement we almost choked.

I have posted the borrowers final good faith estimate here and the names of the company and borrower have been removed to protect the guilty and innocent. This is also an example of the sub-prime excess and quick buck mentality that is plaguing the industry right now.

One of the problems with the mortgage business is that is too easy to hide the true cost of the mortgage. Most borrowers have absolutely no clue how to read a settlement statement and really compare mortgage loans. The end result is situations like this. In addition, too many borrowers do not take a step back and focus on the big picture of this being the largest financial transaction of their lives, but instead spend too much time rate shopping and nick picking over $50.00 or they allow themselves to be sold by some sheister.

To summarize, this was a self-employed borrower who was going through some tough times and wanted to get some cash out of their home until things turned around. In short, they got cash out alright. They paid a whopping $22,169 in fees in order to get $27,750.17 in cash. Yes, you read that right. I don’t even think it is worth calculating the interest. Not only that, this boiler room loan officer also put the borrower into a 2/28 with a three year hard prepayment penalty of six months interest. Remember, the point of the transaction was to be a temporary fix which means refinancing as soon as possible. The prepayment penalty will also cost the borrower another $21,454 if the loan is paid off in three years. Talk about usury, this borrower would have been better off just running up their credit cards.

So how do you read the good faith estimate above?

Lines 800: These are the fees the mortgage broker and end lender charged the borrower. This section includes items such as the appraisal, underwriting, processing, and all the miscellaneous fees incurred when purchasing or refinancing. The one that sticks out is line 801 which is a $14,000 origination fee which comes out to 2.2% of the loan amount. Folks, this is pure profit for the broker. Now I don’t believe we should be working for free, but to “earn” $14k worth of fees for a few hours of work? Making you rethink medical school, huh?

The other item that sticks out is the loan discount fee of $3155 on line 802. A discount fee is where the borrower buys the rate down below par. In other words, the actual rate of the loan should have been higher, but by paying the discount fees you can get a lower rate. This is a favorite tactic of lenders when they low ball rate quotes. For instance, Quicken loans is running radio ads right now all over Chicago saying “Refinance to get a rate around 5.5%.” What they fail to tell you is that the 5.5% rate is going to cost you several thousands dollars or more in discount points. What you don’t see on here is the original good faith estimate initial disclosed which showed the broker making $18,000. My guess is what happened was the interest rates moved up, so the broker had to use the some of the origination fee to pay the discount point to keep the rate as originally promised. All of the other fees in this section are typical, albeit on the high side.

Lines 1100: These are the charges associated with the title company. There is definitely something funky going on here. Typical title fees at reputable title companies in Chicago run about $1500-$2000 on purchases. On most refinances, title charges are $500-$750. This transaction is a refinance. The total charges for title fees are $3150! More than $2500 higher than market rates. My guess is that the title company is somehow related to the lender through an affiliated business arrangement. Nevertheless, this is absolute robbery.

Lines 900: This is just prepaid interest. It is basically the first mortgage payment prorated from the day of the closing till the end of the month. Nothing out of the ordinary.

Total Estimated Funds Needed to Close: This section is detailing the crime and where all the money went in the transaction. The borrowers original mortgage was $579,293. The loan officer gave the borrower a new loan of $631,000, so the borrower had access to $51,707. However, the closing costs were $22,169 and the prepaid interest was another $1787.83 for a total of $23,956.83. So the borrower walked away from the closing with just $27,750.17. Nearly half of the cash was to pay for the closing costs, the bulk of which is broker compensation. Unbelievable. Given that there is a prepayment penalty of $21,454, the borrower AT BEST actually got $6,296.17. Of course, I didn’t even factor into this the actual cost of financing all of these closing costs into the loan which would make it even less.

What most reputable loan officers/brokers would have done is maybe charge one point origination point and dropped the discount point or just took a small yield spread premium. Since this is a short term transaction, we would have looked to minimize the total closing costs to the borrower even at the expense of a higher rate. In addition, because this is a short-term transaction, the broker would have been more than compensated by getting paid the second time around on the refinance out of this loan. Second, a prepayment penalty should have been an absolute no no in this situation.

Keep your guard up.

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