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Posts Tagged ‘Mortgage Banks’

The New York Times has an interesting graphic showing the areas of the country where home owners owe more than their home is worth.  In other words, Joe Homeowner has a $300,000 mortgage on a home that is now just worth $250,000.  This is called being underwater by about $50,000. 

Being underwater is not a good thing.  Ever.   One of the reasons there are so many foreclosures is that many home owners who are in trouble financially are unable to sell their homes at prices that would pay off their current mortgage and they are also unable to refinance because no lender is going to grant a new mortgage on a property that is worth less than the loan amount since it is the home that is securing the loan.

What is interesting is that Illinois has a fairly sizable bubble indicating a decent number of homes underwater.  My guess is that the much of that bubble is driven by the far flung suburbs.  Like many areas in the country, Illinois had unchecked development out in the middle of the sticks as homeowners moved further out into the exburbs due to cheaper prices.  However, as gas prices surpassed $4.00/gallon, living in a bland McMansion in a former cornfield didn’t seem so appealing when you have to drive 30 miles each way to work everyday in a SUV.

Most my clients that live in the city haven’t had any problems getting the needed appraised value on refinances.  Typically, we have been assuming that the home is worth what the borrower paid for it if bought within the last two years.  Generally, this hasn’t been an issue.  So while the Chicago market certainly isn’t booming anymore, it also isn’t totally cratering either.

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Consumers are often confused as the various types of mortgage lenders available to them.   It is extremely important that you know who you are dealing with when it comes to your largest financial transaction.

Mortgage Brokers: Often confused with the other lenders, mortgage brokers do not actually lend their own money.  Mortgage brokers arrange financing from relationships with a number of a different banks.  The mortgage broker will provide counsel on the types of loans you will qualify for and will guide you through the loan process.  However, the mortgage broker does not actually approve the loan, nor do they actually fund the mortgage.

The advantage of a mortgage broker is that they have very low overhead and work with multiple lenders, so on average they will be cheaper to deal with.   Mortgage brokers obtain interest rates on a wholesale basis from mortgage banks.  In addition, some of the best mortgage originators tend to work for brokers.  However, the disadvantage of a mortgage broker is that there are a lot of bad ones. 

Most mortgage brokers tend to be small Mom & Pop type businesses.  Many may have very strong brand names in their local market, but rarely any kind of national brand recognition.  However, with the recent crisis in the financial markets, mortgage brokers are seeing their numbers dwindle dramatically as most are not large enough and financially stable enough to make it through these tough times.

Direct Lenders: A direct lender is a mortgage company that has the ability to underwrite and fund their own mortgages.  Typically, after the loan is funded, the lender then sells the loan to a larger mortgage bank or institution.   In fact, a large number of direct lenders still shop multiple banks like mortgage brokers, but they retain the ability to underwrite the loan and fund it so they don’t lose control of the transaction like a pure mortgage broker. 

The advantage of a direct lender is that they can be like a mortgage broker, but they tend to be larger more stable companies and have more control over the transaction.  The disadvantage is that some direct lenders can be bloated and may not pass savings on to consumers.   Many well known mortgage lenders such as Quicken Loans, E-Loan, etc are examples of large national direct lenders.  Perl Mortgage is a direct lender.  Direct lenders often times will refer to themselves as “mortgage banks” because they are actually writing the check for the mortgage, however, this can be a little misleading as they aren’t really banks.

Mortgage Banks: A true mortgage bank is also known as a depository institution.  In other words, these banks use the deposits from its customers to make other loans such as mortgages.  True mortgage banks are the large retail banks you find on your local corner – Wells Fargo, Bank of America, Citibank, etc.  

The advantage of these banks is that they have brand recognition.  Since Mortgage Banks are the source of funds, they also underwrite and fund the loans.  The disadvantage is that they are large institutions and they also only offer one mortgage product which may or may not be the best for you or the most competitive.  In addition, big banks are not known to have the most knowledgable loan officers and you may be dealing with a call center.

Regardless of which type of lender you use to get your mortgage, it is important that you spend a lot of time vetting the individual loan officer.  Mortgage may be a commodity, but the loan officer is not.  Ninety percent of your experience will be driven by the individual loan officer which can make all the difference in the world in this market.

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Yeah, I know I haven’t been a good blogger.  The reality is that I took a little vacation from blogging to focus on my clients.  Despite all of the negative press that you have been hearing about mortgage companies going out of business, there are many of us in the business who actually are having a very good year!  In fact, 2008 is on pace for a record year in volume for me.  However, the mortgage market has been more challenging requiring more work than expected on many deals which has sucked up a lot of my time that I used for blogging in the past.  The formula is simple – increased business with increased amount of time required on deals means less time for blogging.

Nevertheless, I am back with a vengenance.

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My blog posting on how some mortgage banks are holding consumers hostage by refusing to subordinate second mortgages was recently selected as a Magnificant Seven by Larry Cragun. 

Larry runs a great blog at www.realestateundressed.com and I woud encourage you to visit.  He scours the internet for blog posting that are rich with content and great advice for consumers and compiles the best seven every other month or so.  While this isn’t my first time on the list, it is always an honor for others to recognize what myself and other bloggers are trying to do in regards to educating consumers about their largest financial transaction – mortgages!

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Final Four

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I haven’t been shy about pointing out that the mainstream media seems determined to paint mortgage brokers as the bad guy.  While I am not a conspiracy theorist, I can’t help but wonder if mortgage banks are paying off the media big wigs or are journalist really just not qualified to discuss financial issues.

On Friday, CNN’s Gerri Willis will be doing a show on the Mortgage Meltdown.  While I expect the whole show will be devoid of facts and attempt to absolve the consumer of any responsibility for fiscal mismanagement, something caught my eye today that leads me to believe the media is really biased.

CNN is running a web piece called “The lies broker’s told.”    It then goes on to say, “An ex-Ameriquest mortgage broker reveals how he talked borrowers into loans then couldn’t afford.”  The piece shows Gerri Willis interviewing some guy as a former Ameriquest employee discussing how he duped consumers.

Here’s the problem.  Ameriquest, the poster child of predatory lending, is not a mortgage broker.  In fact, Ameriquest was a mortgage bank.  Ameriquest did not broker mortgage loans.  They were a retail sub-prime mortgage bank. 

Are there bad mortgage brokers?  Sure.  However, the media has done an effective job of placing the whole implosion of the mortgage market at the feet of the broker community.  I don’t think it is accurate and their lack of knowledge of the business shows in hit pieces like this…

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Quite a few people who sought to refinance over the past month or so may have gotten some nasty surprises in regards to their second mortgages.  The second mortgage holder won’t let them refinance!  I know, you are saying WTF? 

What many people don’t know is that if you have a second mortgage or a home equity line of credit, the second mortgage lender has to approve the refinancing your first mortgage.  This is called subordination.  Basically, the second mortgage lender has to agree to take a back seat to the new first mortgage holder.  In the past, this used to be just some additional paperwork as part of a regular refinance.  You want to lower your first mortgage interest rate, but leave the second mortgage alone.  We simply fax a few things to the second mortgage lender and they approve it and everyone is happy.  Not anymore.

Second mortgage lenders have been bearing a lot of risk recently with the implosion of the mortgage market since they are subordinate to the first mortgage holder.  In other words, when a loan goes into default, it is the second mortgage lender who is going to really lose their shirt as the may get nothing back.  As a result, many second mortgage lenders have gone out of business altogether or significantly tightened their guidelines.  Because of the increased risk, they no longer want to be subordinate to new loans and in some cases (although they won’t come right out and say it) would prefer if the borrower just paid the loan off so they can get it off their books because the loan no longer carries the same value.

I recently had a client looking to refinance their first mortgage and they had a second mortgage with National City.  National City declined our request to subordinate to the new first mortgage even though we were shaving almost a full percentage point off in rate.  Fortunately, I was able to find my client’s a better second mortgage, so we just paid off National City and told them to go have a Coke and a smile.  What is retarded about this situation is that my clients are IMPROVING their situation so you would think banks would be happy.  But alas, they are not.  As I have mentioned in previous post, banks don’t make loans because they make sense. They make loans because they have a value to investors on Wall Street.  Often times, this dynamic results in situations like this where banks literally do some things that seem very illogical.

National City is basically refusing to subordinate any second mortgages at this point.  However, I would like to point out that they are being pretty shady about it given that they will offer to refinance the first mortgage with National City.  In other words, they won’t let you use the lender of your choice and using the fact that they have subordination rights on the second mortgage to force you to get a National City first mortgage.  Of course, their rates aren’t going to be the most competitive either.   Talk about predatory lending.

Quite frankly, I hope  enough people get pissed off about this to get a lawyer to file a class action lawsuit against some of the lenders pulling this kind of BS.  Remember, it is large mortgage banks who are screwing people over like this, not mortgage brokers as the media would have you believe.

Much to my surprise, the mainstream media is reporting on this very issue.  See an article in the Wall Street Journal today.

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