Simply The Best Loans

Please note the statistical information in the following post is from the Commonwealth of Virginia, however, the overall outline of the differences in regulations governing different types of lenders may apply in other states as well. For those living elsewhere in the US, you should review the regulations for your particular state.

In 2006, The State Corporation Commission of Virginia reported the number of mortgage lenders and brokers it supervised at 2,952. Not included in this number, however, are federal banks, credit unions or commercial banks with “National” or “N.A.” in the name. What does this mean to Virginia consumers?

All mortgage brokers and wholesale lenders are required, by law, to disclose all fees, yield spread premiums, etc. paid on the settlement statement (HUD-1) at closing, since they are licensed by the SCC. Banks, however, are not. Consumers can be duped into believing they are saving money when dealing with these institutions because the fees they would normally find on their settlement statement from a mortgage broker or wholesale lender do not have to be disclosed by the banks. In addition, because the disclosure rules are not consistent across all institutions, some banks advertise programs that appear to the consumer as having ‘no fees’.

Any loan, no matter who the lender is or what loan program the consumer qualifies for, has costs associated with it. NO LENDER DOES LOANS FOR FREE!!! If the institution lending money to the borrower claims there is no cost for the loan, it only means the cost is not transparent to the borrower. It has been buried in the loan as a higher interest rate, a yield spread, a prepayment penalty, the loan balance or a combination thereof.

Borrowers should always ask the credit score(s) being used to determine their qualification by any lender. If their credit score is 720 or higher, special programs usually do not provide any savings to them and are better off with a conventional fixed-rate program. Sales pitches for ‘Special or First-Time Buyer Programs’ are unnecessary because these programs generally have a higher cost built-in to the program due to their broader underwriting guidelines and are specifically designed for borrowers with less-than-superior credit. Therefore, they are not cost-effective for a borrower with excellent credit.

The slow down in new mortgage applications in recent months has caused lenders to begin advertising ‘no closing costs’ loans as a means of soliciting new applications. Unless the borrower is well informed on the mortgage process and able to clearly read ‘the fine print’ of all the disclosures thoroughly and understand them, the likelihood that they may pay costs that they are unaware of is fairly significant.

This is one more area within the mortgage industry where advertising hype and inequitable regulation can result in higher costs to consumers.

Consumers will not be able to make their best mortgage choice until the mortgage process, all disclosures and fees are transparent to them, regardless of whether the lender is a broker, wholesale lender, credit union or federal bank.

In 2003, congress passed a law for Fair and Accurate Credit Transactions entitled Financial Literacy and Education Improvement. This law called for the establishment of the Financial Literacy and Education Commission. The Commission established and sponsors/hosts the website www.mymoney.gov. This website is essentially an index or a collection of links to other Departmental websites containing consumer information–some of it is useful, but consists largely of static text, the content of which is general in nature and requires the reader (1) to be highly literate, and (2) to do further, extensive research.

National Strategy for Financial Literacy-2006 and, subsequent addendum, clearly calls for more consumer education, but stops short of defining the means by which to do so. This is in spite of the presence of a number of financial literacy training advocates among the Commission’s working groups.

Treasury Secretary Henry M. Paulson, Jr. spoke on October 16, 2007 at the Georgetown University Law Center on Current Housing and Mortgage Market Developments and stated,

“…Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy.”

In the later half of his speech, he makes a number of statements which, inside the beltway, are considered a clear “call to action.”

“We need simple, clear and understandable mortgage disclosure. We must identify what information is most critical for borrowers to have so that they can make informed decisions. At closing, home buyers get writer’s cramp from initialing pages and pages of unintelligible and mostly unread boilerplate that appears to be designed to insulate the originator or lender from liability rather than to provide useful information to the borrower. We can and must do better.”

“Borrower’s have a responsibility as well. Mortgage providers must offer clear, transparent and understandable information on the mortgage products they sell. And home buyers have a responsibility to use that information. Buying a home today is a complex process, but than in no way excuses home buyers from their obligation for due diligence. Just as investors in the stock market have a responsibility to understand the risks associated with their investment, home buyers have a responsibility to understand their mortgages.”

“…we need to bring a higher level of integrity to the mortgage origination process. The development of a uniform national licensing, education, and monitoring system for all mortgage brokers is worth considering.”

It takes little effort or imagination to connect-the-dots from the Financial Literacy and Education Improvement Act of 2003 to the National Strategy for Financial Literacy of 2006 to Secretary Paulson’s comments, delivered just prior to a well-publicized meeting with the G7 Finance Ministers.

On October 22, US Representatives Brad Miller (NC 13th), Barney Frank (MA 4th) and Mel Watt (NC 12th), introduced HR-3915-The Mortgage Reform and Anti-Predatory Lending Act of 2007 in the House Financial Services Committee, where Rep. Frank presides as Chairman. This could be cause for concern if regulatory action, once implemented, becomes burdensome and costly to both the industry and consumers.

While the overarching problem effecting the mortgage industry is diverse and disparate in its origins, implementation of (1) a well-managed certification and accreditation program for mortgage professionals, (2) paralleled by a concerted effort to lift the veil of complexity on mortgage-buying for consumers, are an essential part of any solution whether devised by government or industry, and will serve to keep us from repeating this situation again when the market returns to good health.

The current mortgage crisis did not begin when the subprime lenders began to announce that they were facing financial difficulties due to a surge in defaults. It didn’t begin when Greenspan was discussing the housing market ‘conundrum’. It wasn’t caused by the real estate ‘bubble’ popping. It wasn’t terrorists, the war in Iraq, inflation or increased cost of barrel oil. While none of these things caused the current credit crisis, they certainly may have contributed to it. In addition, so did mortgage lenders, underwriters, appraisers, real estate agents, title companies AND consumers.

The responsibility for the current credit crisis can not be unilaterally assigned to one or all of the groups referenced above, moreover, it is an effort in futility. The road to recovery from this crisis and addressing the pervasive effect it is having on multiple levels within the economy must be focused on finding appropriate, lasting solutions. Not quick-fix, self-serving band-aids and/or rhetoric from lenders, brokers, appraisers, realtors, title agents and government agencies. We don’t need anyone else to tell us what’s wrong and who’s responsible–we need solutions. We need education and information; not legislation.

Consumer protection laws, disclosure documents, etc. have been around for years, yet it wasn’t sufficient to shield us from this crisis. We need to lift the veil of complexity and mystery rampant in the mortgage process. We need better education, information and training at all levels to both recover from the current crisis and produce lasting solutions for the future.

For the last several months, I have been talking with a number of consultants, industry experts, legislators, regulatory agencies and members of Congress about the current credit crisis. With the hope of providing you with a better understanding of the crisis, how it’s progressing, how it could affect you and resources that are available to those that need assistance, I am starting a series of posts.

The focus of these posts will be to identify what the root problem(s) are, the symptoms which may or may not be part of the root issues, and ideas for positive long-term solutions. So far, I’ve found that those willing to discuss the crisis are more focused on ‘assigning responsibility (to others)’ than on addressing the issues and looking for solutions. As with any crisis, resources need to be pooled from all areas and people will have to work together to establish positive lasting results.

Due to the far-reaching effects and consequences of the credit crisis, the series of posts will appear here and on www.protectyourgoodcredit.com.

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Finally, whether purchasing or refinancing, once your loan is approved, your loan officer should confirm your loan commitment from the lender and provide you with a closing date. If you are purchasing, the date set is the day the loan transaction will occur. If you are refinancing, the closing date is the day you will sign all the new loan documents and your new loan will actually fund and record three days from the date you sign the documents. This means that if you are doing a cash-out refinance, you will not be given a check for the money you are cashing-out until the 3 days have passed and your new loan has been recorded. At any point during the 3 day period, if you chose, you can change your mind about the loan and withdraw without penalty.

No matter what type of loan you need or how much you need to borrow, your loan officer’s job is to make the process clear and easy for you. Your questions and concerns should be addressed and any issues that arise addressed immediately. By working with you, your realtor and closing agent, your loan officer should make the entire loan process seamless and stress-free.

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Fourth, once you have contracted to purchase a home, completed the loan application and provided all required documents to your loan officer, your loan will be submitted for underwriting. Once the underwriting process has been completed, your loan officer should tell you the results. Make sure that your loan officer reviews your underwriting results and lets you know if it impacts the terms that you had outlined on your Good Faith Estimate.

You should know once underwriting has been completed if you will have any adjustments to the terms outlined on your GFE. If there are, it may affect your interest rate or other terms of your loan. It is your loan officer’s job to review your credit, income, debt and loan options well enough that your underwriting should not present any unexpected results. However, if something should arise, your loan officer should bring it to your attention immediately.

If working with a conscientious loan officer, you will be kept abreast of your loan’s progress. Even under the best of circumstances, underwriters can set unexpected conditions which could impact your loan differently than the loan officer initially outlined. Your loan officer should notify you immediately of any conditions set by the underwriter that are unexpected. Remember, the underwriter’s job is to find a reason to deny the loan.

Don’t be alarmed if your loan officer tells you that the underwriter has asked for something that seems out-of-the-ordinary or trivial. The best thing to do, whenever possible, is to provide the underwriter with whatever information they request as quickly as possible.

Again, a good loan officer will guide you through this aspect of the loan process easily. Continued, part 5, Closing.

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Third, your loan officer should tell you what type of loan programs you qualify for and explain their differences so that you can make a proactive decision about the type of loan you want.

Do you want a fixed rate loan?

Do you want a “no down payment” loan?

Will you have to pay PMI (private mortgage insurance)?

Can you use gift money? Is there a prepayment penalty?

Can you make interest-only payments?

These are just some of the many variables loan programs can offer. In providing this information, your loan officer should explain the meaning of each aspect of the loan as well as outlining the pros and cons of each program. Make sure you understand how the program works, what your payments will be now and in the future. If aspects of the loan program can change such as the interest rate, make sure you understand how and when the rate can change. Always ask for details and answers when you don’t understand.

Continued, Part 4, The Underwriting Process–

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Second, your loan officer, once you are pre-qualified for a mortgage within a specific dollar range, should provide you with a detailed Good Faith Estimate (GFE). The GFE is a federally mandated form.

It will give very specific information regarding your loan amount, proposed interest rate, term (years) of the loan, and principal and interest payment. It will give you general estimates of other loan fees. Lender fees will include amounts for processing, underwriting, wire transfer, flood certificate, etc. The closing agent (usually a real estate attorney or title company) will have fees for title insurance, deed of trust, courier and preparation of closing documents.

The GFE will also indicate fees charged by state and local government, recording of documents at local courthouse, and taxes. You should question any fees that are not explained or not listed here. Many first time home buyers don’t know that a survey is required only if requested by the lender. Those refinancing don’t know that they can save almost 50% of the cost of their title insurance if they provide a copy of their current owner’s title policy to the closing agent.

Make sure that your loan officer addresses these items with you as well. –Continued, Part 3, Loan programs

When applying for a mortgage to buy a house, whether it’s your first or fifth, there is certain information your loan officer should tell you. It doesn’t matter whether you are applying for your mortgage with your local bank or with a mortgage broker, the information you want is the same.

First, your loan officer will have to pull a credit report to accurately qualify you for a mortgage. If you are qualified without having your credit pulled by the loan officer, then your qualification is not necessarily going to mean that you would actually qualify for a loan. In such a situation, the qualification would only mean that your debt to income ratio falls within the lender’s guidelines.

Assuming that the loan officer has pulled a credit report, they should tell you what your credit scores are. Credit scores over 620 are considered acceptable and/or average credit. Credit scores over 720 imply that you have an excellent credit history. Your credit report will also indicate if you have had any late payments, have any accounts in collections or have any judgment outstanding. If you find that any one of these kinds of things showing on your report—don’t panic. Unfortunately, it is becoming more and more common that such items are being reported in error. If this is the case, your loan officer should provide you with all pertinent information from the report so that you can investigate the situation and have it corrected.

For credit issues that need to be addressed (e.g. Collection accounts or outstanding judgments) your loan officer should offer you information for what you need to do in order for your issue to be addressed and pass the underwriting requirements for a loan. (For further information on correcting credit reports and addressing credit issues, see www.protectyourgoodcredit.com)

A complete pre-qualification for a mortgage loan will include a review of your gross monthly income, your monthly debt (total of minimum payments on all accounts, not including rent or current mortgage payment or utilities), and your credit scores. Once completed, your loan officer should provide you with a pre-qualification letter for your real estate agent or for the seller of the home you wish to purchase. Pre-qualification should not be confused with pre-approval. To be pre-approved for a loan, your loan officer must submit a completed loan application and a credit report to a lender for underwriting. The application will either be denied or approved pending certain underwriting conditions being met. Loan commitment is given by the lender only after all conditions are met and the loan is ready to schedule for closing. It is very important to understand these distinctions as both realtors and many loan officers will often use the terms interchangeably despite their specific differences. –Continued in Part II-The Good Faith Estimate.

Anyone worried that late or non-payments will result in foreclosure should consider making a few phone calls to their lender and/or servicing agent. The federal government has recommended that lenders and servicing agents (companies that collect mortgage payments for lenders) take steps to work out payment plans or alternative financing solutions for many borrowers that are facing higher payments due to their ARMs adjusting. It may take several calls to find the right department or person to talk to but diligence can pay off big if you are able to work out a more favorable payment and/or refinance into a lower rate. No one wants to see a property go into foreclosure and most lenders will work with homeowners that make the effort to contact the company and ask for help. Foreclosure is devastating to an individual’s credit rating. Be proactive in looking for ways to make your payments and keep them timely—asking your lender and/or servicing agent for help and options is the first step.