BradyLoan.com

Removing Bias from Mortgage Origination

This article was published on HomeScape, last week.  As you can see, it drew the ire of an originator at a direct lender:

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.

San Diego Mortgage Rates Report: April 29, 2008

No real change in my posture.  I still believe that San Diego mortgage rates have room to go lower in the next 30-90 days but I'm advising clients who are closing in less than 17 days to lock. All others can float.

Mortgage-backed securities traders have "baked in" a .25% rate cut from the Fed when they meet tomorrow.  If Bernanke doesn't cut, mortgage rates will jump quickly.  This week is filled with economic data.  If the data are reported weaker than the estimates, we could see lower mortgage rates in the next week.  The risk of that not happening, in this volatile market, is real so I'm sticking to the recommendation of locking your loans if you are closing before May 15.

Countrywide Financial  reported a a big loss from foreclosures while MasterCard reported huge profits.  While MasterCard doesn't actually issue the cards (they just make money from transactions), it shows that people are walking away from their mortgages and using credit cards more frequently.  Traders think that Bernanke is fixing the financial crisis in this country but those two events should give you reason to deliberate.  We're still bouncing around on choppy seas and should be through the end of the year.  I just don't see San Diego mortgage rates above the 6.5% level at all this year.

San Diego Mortgage Rates Report- April 21, 2008

What a wild week this past one was for San Diego mortgage rates.  On April 14, 2008, I advised folks who were closing in the month of April to lock rates; mortgage bonds plummeted from 101 to 99.5.  If you were closing in April and didn't lock your mortgage rate, it would have cost you about 1.5% in discount points to get that same mortgage rate, on Thursday- that's $7,500 extra in closing costs for a $500,000 loan!

I also advised that all May closings float.  Mortgage bond prices rebounded to 100.5 today; I still think there's room for upside in the mortgage bond market which means lower mortgage rates.  I don't have high hopes for the American economy through the summer.  The foreclosures, weak housing prices, and credit crunch have closed the consumer's "virtual ATM ".  Higher food and fuel prices are starting to take a bite out of the consumers' budget.  A gallon of gas and a gallon of milk both cost in excess of $4. In past years, a homeowner would suck it up and throw the money on his HELOC.  Now, with HELOCs frozen, the consumer has to tighten his belt.

The consumer drives much of the American economy so his tightened belt means less spending.  That should hurt this economy until we see the banks loosen up a bit.

Will we see lower mortgage rates in May?  I think so but the volatility of the mortgage bonds market still compels me to advise home buyers to lock their mortgage rates for transactions closing within 14 days.  All longer closings should float...for now.

Bullish on Oceanside Investment Properties

In an earlier article, Brian outlined one of the strategies we use to advise our real estate investment clients.  Here is the link to Brian's article: Oceanside Investment Properties.  There is nothing secret about how we make money for our clients.  We are value investors: when we see an asset that is undervalued we recommend that our investors buy it.  This is especially true when it comes to "blue chip" assets like beach towns.

When we evaluate an investment, we look at more than just value.  We use a number of criteria and one of the basic rules is: know why this is a good investment.  Translation: if you know why it is smart to buy now, you will know when it is smart to sell.  Another criteria is cash flow.  We are always looking for real estate investments that provide a strong, safe cash flow for our clients.  So here's a big secret for you from a couple of Wall Street players: the why in this scenario is cash flow.  Why will cash flow continue to be strong in Oceanside?

The answer to the question - and one of the reasons we recommend Oceanside to our investors - is simple: Camp Pendleton.  There are nearly 40,000 Marines & Sailors and their dependents stationed at Camp Pendleton.  This provides a tremendous rental base for the area.  Steady supply of renters with steady supply of income equals good investment property.

Applying Wall Street principles to real estate investing is how we increase our clients' wealth.  With Oceanside we ask ourselves a simple question: What is our level of confidence that Camp Pendleton will remain in Oceanside?  If confidence is high (which it is), we give a buy recommendation.  If you see indications that the base is going to move, disappear or significantly shrinking: sell.

Sanity Amidst The Culture of Doom

Mike Farmer calls for some sanity over at Bloodhound Blog.

It is now pervasive, whether fact, fiction, miscalculation or a misunderstanding of economic adjustments — doom and gloom has colored our lexicon and everyone’s on board. The “realists” are merely pointing out facts, the politicians are merely offering a big hand to help all the little people in this troubling time, the agents are merely accepting fate, the lenders are merely going broke, the pundits are merely predicting a dour future — it’s over, real estate is dead.

If you don’t believe it you are an idiot, a Koolaid drinker, a liar, a naive babe in denial or an unscrupulous player preying on the unsuspecting. When someone asks you about the real estate market, tell them it’s dead and getting worse. Tell them there is nothing positive in sight, that it might go for years, decades, a century, who knows, just tell them it’s dead.

He's pointing out that ANY talk about a recovery is akin to a discussing the merits of pornography at a Church picnic.  Funny, but true.  I am in receipt of pitying looks when I describe my chosen profession.  His summary is hilarious.

I know this is true because I just read five articles saying so, and a hundred before that, and I heard it on the news, in the barber shop, whispered a little too loudly in restaurants — everywhere, everywhere, real estate is dead

Of course, Mike's written a satirical piece.  The comments thread interested me.  Dave Shafer, another lender, said:

I believe it was JP Morgan who said, “when my shoeshine boy is giving me stock tips, then it is time to sell it all!” Consider this the opposite.

I replied:

Absolutely, Dave.  Warren Buffet describes his investment philosophy (paraphrased):

Greedy when all else are fearful and fearful when all else are greedy.

The data are proving of a decline BUT that’s already PAST data. What’s going to hurt the pessimists and bubble bloggers is that the market will turn around. In 10 years, housing prices will be up 50-75%, from today’s valuations…then what?

Is today the absolute best time to buy? Of course it is. It is always a great time to buy appreciating assets (if you can get them at the right price).

We need to adopt Jim Cramer’s approach; there is always a buy out there. Now before someone points out that he blew Bear and CFC, he’s been right a lot more than he’s been wrong.

Trends, people. Consistency, people. Future prognostications, not pointing at past data. Do your homework for your clients. Buy good properties on weakness. Put enough money down so that they cash-flow. Hold them. Sell. Repeat.

But the best comment came from someone known only as "Chris".  Typically, pseudonyms are the preferred practice of bubble bloggers.  "Chris" captured my thoughts (edited for content):

On a serious note, this is my motto when I invest:
“to buy while blood is running in the streets”
Mayer Amschel Rothschild

Blood is certainly flowing, time to go buy some property! All the pessimists and bubble bloggers better get their Geo’s the h311 out of the way of my V12 Mercedes in a few years, when the markets return and they will have wasted a golden chance to make a ton of money. I have no use for chicken littles.

I suspect Chris is a lender.  Dave is.  I am.  We seem to know when the dung's about to hit the blades and when the world is so bleak that upside is around the corner.  It's bleak- time to find some bargains in SoCal.

San Diego Mortgage Rates Report: April 14, 2008

I'm still floating mortgage rates, unless my clients are closing within 14 days.  I"m cautiously floating because of the volatility in the market.  Fundamentally, mortgage rates shouldn't have a whole lot more room to come down; the Fed cuts are probably coming to an end.  Something much more drastic than the Fed open market activities will be needed to pull us out of the recession. 

Yep.  I said the R word and have been since last fall.  I'm not scared of the recession; I welcome it.  Here's the trick for mortgage rates.  The weak dollar has world investors believing that the Fed's easy money policy is inflationary...

UNTIL...

the recession hits them.  Make no mistake about it, the economic slowdown is a global phenomenon.  Canada and the UK are following suit by cutting rates.  I think the world wide recession will lower oil prices and provide some much needed relief to the American consumer.

Nothing says it like pictures.   I'll show you some charts, to see how I'm thinking. 

One Month FHLMC 5/1 ARM Mortgage Rates

Look at the one-month rate chart (linked above).  We were at 5.5%, on March 13, 2008.  We rose to 5.7%, on March 30, 2008, and declined to 5.6%, today.

Something's wrong! 

Look at the one month mortgage-backed securities market!  It doesn't look like a mirror.  The bond prices have advanced but the mortgage rates haven't come down.   The mortgage rate (for the 5/1 ARM) should be down to 5.3% (or lower).

That's signaling one of two things:  lower bond prices, this week, or lower mortgage rates, this week.  I think the recessionary fears will keep mortgage bond prices high, so I'm opting for lower mortgage rates.

This is what an experienced mortgage planner does on the weekend.  Why?  To get you the best rate execution, of course.  The value of an experienced mortgage planner can save you thousands of dollars by knowing WHEN to lock and when NOT to lock your mortgage rate.  Call me at 858-777-9751 to find out how it can benefit you.

Hey Matt Vasgersian ! I Got Your Back, As Well

I'm watching the Padres- Dodgers game, this Sunday afternoon.  Matt Vasgersian, of Channel 4 (Official Padres station), started his mid-inning station promotions, in the second inning. 

MATT: Tonight on 4SD, a former exotic dancer...oh, I can't believe this... 
Tonight, a former exotic dancer talks about how she is recruiting for "The Body Shopp"

Screenshot cuts to a strip club

MATT:  I'm not reading this...nice...
a Sunday afternoon family show...nice

A 15 second, weighty caesura

MATT:  Watch this.  I'll be the one that gets in trouble.

MARK GRANT:  Not at all. I got your back

So do I, Matt.  In fact, I'm linking this and sending it to the Padres, Voice of San Diego, San Diego U-T, and San Diego Traveler.

I met both Matt and Mark, last year, in a Phoenix airport.  We shared a plane ride back to San Diego, mid morning.  There were 5 middle-aged guys, headed to Pacific Beach, for a "guys" weekend.  Mark and Matt were yukking it up with all of us. 

These guys aren't prudes; they're gentlemen.  Gentlemen know that there is a time and place for everything.  Strip club promotions, during a Sunday afternoon Padres game, are inappropriate.

Thanks, Matt.  I'm no prude but I have a 7-year old daughter.  I appreciate your judicious conduct.

Oceanside Investment Properties: Foreclosure Tours ?

I'm bullish, long-term, on coastal California real estate- that's no secret.  The underlying demographics are still positive for California; more people will be moving in than moving out, over the next 20 years.  Aging baby boomers yearn for warm climes in retirement.  While California has its share of problems, it is still the "promised land" for many Americans.

Southern California is getting hammered.  Housing prices in San Diego County have dropped like a ball off a table.  While tony communities like La Jolla and Rancho Santa Fe have held up, towns like Oceanside have experienced severe declines.  Two "beach towns" we like, in San Diego County, are Oceanside and Imperial Beach.  We're "value investors" and have been since our days on Wall Street.  Benjamin Graham and Warren Buffett "speak" to us.  We regard California beach towns as "blue chip" stocks.  Today, thos "blue chips" are becoming affordable.

My daughter's theatrical debut, at The Star Theater, affords me a Saturday afternoon in Oceanside.  As I looked out the window of the Jitters Cafe (free wireless), I saw THIS sign.    I had to snap a picture of it!

While Hollywood HIlls offers a "tour of the stars' homes", Oceanside offers a tour of foreclosed homes.  I don't begrudge the REALTOR a little creative marketing; in this market, a "foreclosure tour" is appealing to value investors. 

The waters are clearing as we apply the financials, to some of the offered homes, in Oceanside.

San Diego Mortgage Rates Report- April 2, 2008

Mortgage rates should decline, in the near term.  I'm changing my recommendation from lock all loans to float all mortgage applications, if the loan is closing more than 14 days out.  That means that if you're scheduled to close on your mortgage, before April 15, 2008, you should lock your mortgage rate.

Fed Chairman Bernanke spoke to Congress this morning.  I'm one of those weird people that actually watch the Fed Chairman's testimony.  I look for a twitch, a nervous tic, or a tenuous posture, in addition to the text of his testimony.  I'm as screwed up as the bond traders on Wall Street.  That was my world; I can't change who I am now.  Well, Bernanke thinks a "contraction" is underway. In Southern California, we call that a recession but we're awfully dramatic in Southern California.  Anyway, recessions contractions lead to lower mortgage rates.

Want to see how effective my lock/float recommendations are?  It looks like I'm always a tad early:

Let's see:

1- I came into the new year, floating rates. 
2-  On January 8, I advised to lock.  I was early, you could have improved your rate by an eighth.
3-  I floated on January 17- bonds improved a full point, then dropped a half a point
4-   Pulled the trigger to lock, on January 24- bonds deteriorated- rates went up.
5-  Stayed locked (but pointed out the ten-year ARM value) throughout February
6-  Went to float, on March 6- bonds improved 3 points, and mortgage rates fell .5%, during that time
7- Have had all loans locked, since March 21-

I'm not bragging, I'm doing my job.  The value of a mortgage planner, who watches the CORRECT influencing factors, can save you an eight to a quarter point, on the rate of  your mortgage.  This means that my advice can save you THOUSANDS of dollars, over the life of the loan.

If you're watching the "points", a stronger bond market can save you a lot of money, on closing costs.  Clients who made an application, on March 8, received a 2% rebate, from the lender, because of my prowess, by waiting until March 21 to lock.  Even worse, those loan applicants that didn't engage me, in February, may have paid as much as 2% MORE, in closing costs, than my clients.

Advice and execution is the value of a skilled mortgage planner.  Ask originators to prove the value of their fee before you hire them.  I'll gladly do just that.

YOU ! Magazine: March 2008 Issue

How to Shop for a Mortgage Today By Mertz Esswein The troubles in the subprime mortgage market have led to tighter standards for all borrowers. Buyers and refinancers with sterling credit records won't feel the pinch. But lenders have reined in their underwriting rules for borrowers with less-than-perfect credit and for those seeking nontraditional loans that require a low initial payment or little verification of income. Now, rising home prices can no longer serve as the ultimate guarantor of a home loan. Keep Reading »
FW: Forward Thinking Simple Email Etiquette By Tim Sanders Welcome to my first article on email and how to use it more effectively in your life. I call it The Dirty Dozen Rules Of Email Etiquette. I’m the former Chief Solutions Officer at Yahoo!® I also wrote the book, The Likeability Factor. And for the last year my team and I have been doing research on how people just like you feel about email and how it's used in your culture and in your life. It can be your biggest tool or your Achilles' heel. It just depends on what you know. Keep Reading »
Teeth Whitening Making the Most of Your Smile It serves as both an involuntary reflex and an intended gesture. Unique to human physiology, most people view it as a highly positive signal. To say it is integral to conducting business is a bit of an understatement. As for our personal lives, let’s just say that without it most relationships would never get off the ground. If you haven’t guessed, we're talking about our ability to smile. Keep Reading »
10 Credit Card Myths That Put Your Scores At Risk! By Linda Ferrari, President, Credit Resource Corp. Managing your credit is a long and sometimes confusing process. It seems everywhere you look, some program or web site offers credit fixes, offers and deals that make it seem so easy to consolidate debt or, worse, get "easy credit" to buy the things you need. They offer "free credit analysis" - many of which will most likely lead you down a path of credit destruction. Most of what is out there is just plain misinformation and contradicts the steps you are taking to improve and maintain your credit scores. The best defense against making a credit blunder is to better educate yourself about credit and ways to manage it. Keep Reading »
Discover the New Trends in Home Flooring If you're moving into a new house or just want to change the look of your current living space, a good place to begin is with your floors. The reason is simple. There are many new flooring options available, enabling homeowners to pick and choose the right surface to best suit their needs and desires. Keep Reading »
Ensure Your Family's Future Happiness and Success We all want the best for our children. This is a worthwhile sentiment despite its sometimes paradoxical nature. Here's an example. Most parents believe in teaching their kids the virtue of manners, as well as the concept of respecting authority. The same parent may simultaneously teach about verbalizing one's feelings or standing up for a belief. For a child, this can result in a mixed message that translates to, "Don't speak unless spoken to - except, of course, if it's about something really important or you believe in what you're doing." Keep Reading »
March Madness: High-Scoring Snacks By Kirk Leins Football season is over, but there's still another title to crown – NCAA College Basketball Champions. For fans of college hoops, there's nothing quite like the month of March. Nicknamed March Madness, it's a month-long, single-elimination tournament featuring the NCAA's 64 most-celebrated Division 1 teams. For those who can't relate, let's put it into culinary terms. Take one-part shocking upset, throw in a healthy dose of nail-biting excitement, top off with a splash of fear – and you've got March Madness. Keep Reading »