LOAN PEDDLERS

When Kaye Thomas Talks...South Bay Home Buyers Listen

Here's Kaye Thomas, one of the finest real estate brokers in South Bay Los Angeles, discussing how one of her customers used this website:

They tried Internet brokers and traditional bank sites.  Ultimately they kept coming back to Brian Brady's blog as the best source for the information they were seeking.  About three weeks before they found the right property I managed to convince them they needed to be totally pre-approved to make an offer.  They finally chose Brian as their lender.

This transaction was a short sale.  It is now documented that I have a short fuse for the inefficiency of banks loss mitigation departments:

After being in escrow for over 2 months with almost no communication from the lender and a seller who really didn't know what he was doing it was time for our side to get tough.  After threatening to walk from the transaction after a seller bluff I  managed to get the number for the person who was in charge of the file.  I passed the information along to Brian who began calling them every few hours.   I won't be able to "prove" Brian's calls were the catalyst to get this sale moving but about three days after he started calling we suddenly received a demand from the lender and could proceed.

This is what makes it all worth it:

I was incredibly impressed with Brian throughout the entire transaction.. he is a pro.  However my approval became complete adoration when Brian drove from San Diego to Redondo Beach to sign the loan docs with the Buyers.   WOW.... I haven't had a lender do that in 20 years.  As it turned out there was a glitch in the paperwork and we would have been in real trouble if Brian had not been at the signing.  As Brian and I were talking with the Buyers while waiting for paperwork... they told us that the reason they picked both of us was our blogs.  They were very impressed with the information we offered and how quickly we responded to their questions.

Brian's latest blog on AR is about Justifying Your Fees .  I can guarantee that after you work with Brian Brady  he doesn't have to "justify" anything.. he earns every cent of his fee.   Thanks Brian... I couldn't have done it without you!

Kaye's clients were a dream to help.  Sharp, knowledgeable, astute to market moves, and they asked all the right questions.  As challenging as transactions are, working with real estate brokers like Kaye Thomas make them worth it.  South Bay Los Angeles home buyers would do well to call her.

Kaye wrote this some ten months ago and I hadn't seen it.  An endorsement from a professional like Kaye is music to my ears.

San Diego Mortgage Rates Report: January 21, 2009

Shopping for mortgage rates might have become easier but shopping for a mortgage is still quite difficult.  Did you know that half of the loan applications taken last month did NOT result in a funded loan?  The long desired 4.5% mortgage rate is hard to get.  We’ve been there twice and you received a 4.5% mortgage if you:

• Have impeccable credit
• Have lots of equity (many borrowers were surprised at how foreclosures stole their equity)
• Have plenty of documented income and were prudent in your use of debt.
• Only refinanced the loan amount you used to purchase the property (you didn’t extract any cash out from a previous refinance)
• Dealt with an originator who understood that mortgage rates were VERY volatile, gathered your information, picked a lender who wasn’t swamped with loans, and executed a rate lock at the appropriate time.

Have you seen what happened to mortgage rates this past week? They shot up from the mid 4’s to over 5%; that’s a half-percentage point rise in eight days.  The mortgage bonds market is skittish about our new President.  His Economic Recovery Plan relies on huge government borrowing and that is inflationary.

I have no comment about his plan; that’s far above my paygrade.  I do, however, think this massive government borrowing will drive rates into the 6’s within 12 months.  Still, there should be a pinprick of light through this dark cloud (in the form of a low mortgage rate)

Listen to this 3 minute podcast to find out when we should see that light.

Martin Luther King: Master Fear Through Courage

San Diego Mortgage Rates Report: January 14, 2009

The US Treasury Department has been supporting the mortgage bonds market, in order to keep mortgage rates under 5%.  I cited two reasons why sub-5% rates might not happen:

1- Capacity: Lenders don’t have the horses to ride since they laid off so many workers in 2008.

2- Greed:  Lenders typically made a loan at a rate and sold it for about a half a point profit.  The improvement in mortgage bonds allowed lenders to fatten up their margins and make as much as 3% of the loan when they sold it.

I think the real reason was more in line with my first guess; capacity.  What I didn’t realize was that the mortgage lenders were out of money.  Well, sort of.  To understand this concept you have to understand the “flow” of mortgage loans.  The big banks, like B of A, Citi, and Wells, loan direct or buy loans from other lenders and brokers.  We “commit” those loans to them and they sell the loans off to Wall Street.  If my company loans you $300,000, we’ll sell it to a bigger bank for $303,000, and they sell it to Wall Street for $306,000…except…

They don’t really get paid but once a quarter.  Loans made back in October have been COMMITTED to Wall Street, by those big lenders, but the transaction (sale of the loan) only happens every three months.  While they wait for that transaction day, their funding line gets filled up.  Imagine a funding line (sometimes called a warehouse line of credit) like a big credit card,  Normally, a big bank needs, say $100 Billion for its line.  The unexpected refinance volume filled up that line quickly.

Those big lenders were “at their credit limit”…until today.

Today was this past quarter’s settlement day, which means, the big lenders sold off all of the loans to Wall Street and paid off their “super-sized credit card”. From Mortgage News Daily:

Tomorrow brings us the final day of Class A settlement, in which sellers of MBS deliver the loans in pools to satisfy the executed sale trades made over the last 3 months.  When this occurs, sellers will finally receive payment for the most action-packed month of originations in recent memory.  Up until now, the cost to originate these loans has been borne by MBS sellers, aka originators.  We have surmised that one of the several components that is causing a much-larger-than-welcome margin of MBS prices to lenders’ rate sheets is the funding constraint created by the gradual exhaustion of money to satisfy a rapidly increasing originationd demand.  As this money has dried up, it stands to reason that lenders must artificially raise rates to deter incoming business in order to avoid exceeding their funding sources.

Lenders have lots of cash to lend again. NOW is when we should see the lenders start pricing in line with the mortgage bonds market.  Mortgage rates should drop to 4.5% …IF the mortgage-backed securities market remains strong.

This is what the Treasury Department was waiting for.  Expect the Government to support mortgage bonds, so that lenders can lend out all this cheap money they have and still make a healthy profit.  It might take a few days and I don’t expect mortgage rates to stay this low for too long.

Listen to how this phenomenon might get you a mortgage rate as low as 4.5% on Radio Mortgage.

At the risk of sounding alarmist, you should be getting your ducks lined up and talking to a mortgage adviser….NOW…not later.  I’m not selling you, I’m TELLING you to…

…take action now.

 

The phone is the most effective way to contact me.

What's The Point Of Paying Points?

Discount Points and/or origination fees are just a cost of credit.  There is an inverse relationship between the retail rate a consumer receives and the upfront costs she pays.  Let's look at today's mortgage rates and compare the costs associated with a $200,000 loan amount.  We'll assume that the third-party closing costs are about $2,000.

1. A borrower could get a 4.875% rate for 1 point ($2,000) or a total of $4,000 in closing costs.  Let's assume those costs will be added to the remaining loan balance and that the new loan balance will be $204,000.
2. A borrower could get a 5.250% rate for 0 points ($0) or a total of $2,000 in closing costs.  Let's assume those costs will be added to the remaining loan balance and that the new loan balance will be $202,000.

Which loan solution makes more sense?  The answer lies in the expected hold time of the home.  This particular borrower announced that she would own the home "forever".  I consider "forever" to be a 7-year hold.  Seven years because the kids grow, neighborhoods change, houses become too big or too small, or a change in employment might promulgate a move.

The proper way to compare these two loan solutions is to run amortization tables for each one.

• Solution #1 is a $204,000 loan, for 30 years, at 4.875%.  When we run the amortization schedule, we see that the payment is $1,080 and the remaining loan balance, in February, 2016, will be $178,595.
• Solution #2 is a $202,000 loan, for 30 years, at 5.250%.  When we run the amortization schedule, we see that the payment is $1,131, and the remaining loan balance, in February, 2016, will be $178,540.

A wash, huh?  In this case, it seems like accepting the higher interest rate makes sense...ONLY if you plan on moving in the next 7 years.  Let's take it out to twelve years.

• Solution #1:  Loan balance is $154,595
• Solution #2:  Loan balance is $155,657

Still a wash.

Is the current rate/points relationship always a good rule of thumb?  Hardly.  Rate tables change 2-3 times a day in this volatile mortgage market.  The best advice is to find a mortgage adviser who follows the mortgage-backed securities market like a hawk so that you can try to lock-in your refinance rate when rates are low and lay off the market as rates rise.

A sharp loan adviser will perform this snap analysis for you BEFORE he calls you to lock-in the rate.  Sometimes, the market rewards those who pays the discount point, sometimes it doesn't.  That changes 2-3 times daily, as well.

MORAL:  There is no rule-of-thumb in this volatile market.  Rate/Cost/Benefit analysis is dynamic.  If your bank rep isn't discussing this with you, you're talking to the wrong guy.

San Diego Mortgage Rates Report: January 6, 2008

San Diego mortgage rates are 4.75%…No, wait a minute.  They shot back up !

Welcome to January, 2009.  It looks to be a rocky ride through Inauguration Day.  After that, all bets are off.  Here’s the good news, though; mortgage rates, while just over 5% this afternoon (up from 4.75% this morning) are still excellent.

Sean Purcell and I discuss why the lenders are raising rates on Radio Mortgage.

Give this ten minute podcast a listen.

Understanding The VA Home Loan Approval Process: Active Military Service Members

CAUTION:  Reading this article will cause you to know more about VA home loans than most mortgage originators

The Pre-Approval Process:

Fax us your most recent LES, 2007 W-2 form and 2008 W-2 form (when you get it).  We'd also like to see a bank statement (all pages) with some of your assets. Our fax number is 858-605-4230.  It's a secure fax so no cover sheet is necessary.

READ:Mortgage Advice for San Diego Home Buyers and REALTORs

Underwriters look at three things: 

READ:  The Three C's Of Underwriting Approvals

Credit Reputation

• Credit Score
• Foreclosures, bankruptcies, liens and/or judgments
• Mortgage delinquencies
• Credit delinquencies, repossessions, collections, or charge-offs
• Credit accounts: type, age, limits, usage and status of revolving accounts
• Borrower's request for new credit in last 12 months

There is not a minimum credit score requirement, for VA Home Loans but a two-year good payment history is required.  A late payment on a credit card shouldn't hurt you but a pattern of late payments, in the past 24 months, might.

Capacity

• Debt ratios: Qualifying monthly housing expense-to-income ratio or monthly debt payment-to-income ratio
• Salaried versus self-employed borrower
• Cash reserves
• Number of borrowers
• Loan Characteristics:
  • Product: a 15 or 30 year fixed rate, , an adjustable rate mortgages,
  • Purpose of Loan: purchase or refinance (cash-out or no cash-out)

The VA also uses residual income analysis for determining "capacity".  From the VA website:

The primary method of evaluating a veteran's income is the residual income method.  Under this method, the underwriter determines that a veteran has sufficient income to cover day-to-day living expenses after paying housing expenses, taxes, and other debts such as car payments and credit card payments.

For example, if an 0-2 (with three years service) were receiving a base pay of $3484, a BAH of $2000 and BAS of $300, her total monthly income would be $5784.  We would deduct her taxes (on the base pay), of about $800.  She's single, without dependents so there are no childcare expenses.  This gives her contributory income of $5084.  If she had $1200 in monthly expenses (credit cards, car loans, etc), her contributory income is reduced to $3884.  The VA requires a residual income of $491.  In order to "trump" the debt-to-income ratio analysis, we would need residual income of 120% of that, or about $600; this would allow for a maximum housing expense of $3,200.

Using the "eight dollars per thousand" estimate, Lt (jg) Smith would be approved for a $400,000 VA home loan.

Collateral

• Borrower's total equity or down payment
• Property type: a 1-unit or 2- to 4- unit detached property, Condominium Unit or Manufactured Home
• Property use: Primary Residence Only

No down payment is required for a VA Home Loan because the VA insures 25% of the balance for the lender.  The VA charges the veteran a funding fee, which is added to the loan, to pay for that insurance.  Why does the VA charge a funding fee?

The VA funding fee is required by law. The fee is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers. The funding fee for second time users who do not make a down payment is slightly higher. The idea of a higher fee for second time use is based on the fact that these veterans have already had a chance to use the benefit once, and also that prior users have had time to accumulate equity or save money towards a down payment. Second time users who make a down payment of at least 5 percent pay a reduced funding fee of 1.5 percent, the same as first time users making the same down payment. For a 10 percent down payment, the fee drops to 1.25 percent.

How much is the funding fee?

The effect of the funding fee on a veteran's financial situation is minimized since the fee may be financed in the loan. National Guard and Reservist veterans pay a slightly higher funding fee percentage. To determine the exact funding fee percentage, please review the funding fee table.

Determining your monthly mortgage payment is based upon three components:

1- Principal and Interest- this is the amount needed to service the debt and retire the loan.You can determine that amount by using this calulator.  In Lt (jg) Smith's example, a $400,000 mortgage, for 30 years, at 5.25% would have a principal and interest payment of $2208.

2- Property Taxes- In California, we estimate 1.25% of the purchase price, for property taxes.  In Lt.(jg) Smith's example, The annual amount would be $5000 or $416 monthly.

3- Property Insurance- For single family homes, we would use the actual hazard insurance premium.  That would be about $65/month.  For condominiums, we would use the amount of the association fee because it includes the hazard insurance.  Let's assume that the amount is $300 monthly

Lt (jg) Smith's housing expense, then, would be $2,916, well under the "eight bucks per thousand" guesstimate.  She has monthly income of  $5784 and expected monthly debts of $4116.  She would fail the debt-to-income ratio test but be approved based upon the residual income analysis.