May 24, 2022

Why Won’t My Loan Officer Answer the Phone?

Anyone trying to refinance or get a mortgage to buy a house may wonder why it is so hard to reach their loan officer.  Numerous emails and voicemails ignored and cell phone numbers not in service are annoying to any customer but at least the missing loan officer probably has a really good excuse – he just got fired!

The mortgage industry has always been a boom and bust business but the current environment is more brutal than anything ever seen.  According to the Mortgage Bankers Association (MBA), both purchase and refinance mortgage activity have seen a stunning decline from a year ago.

The Refinance Index decreased 8 percent from the previous week and was 68 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 14 percent lower than the same week one year ago.

For the average loan officer working strictly on a commission basis and doing mostly refinances, driving to the office costs more in gas than what he gets paid.  The response from the nonbank mortgage companies has been swift and brutal.

Why you shouldn't close your business to carry out a stocktake | Stocktaking.ie

Better.com, a major mortgage banker, which clumsily fired 900 people in December via a Zoom meeting and a further 3,000 employees in March, announced that another round of cuts will eliminate an undisclosed further number of employees.

Will things get better soon?  Not soon enough for those loan officers who were abruptly fired and even the MBA which usually spins optimism, seems to have a bleak outlook going forward.

The 30-year rate has increased 70 basis points over the past month and is 2 full percentage points higher than a year ago. The recent surge in mortgage rates has shut most borrowers out of rate/term refinances, causing the refinance index to fall for the sixth consecutive week. In a housing market facing affordability challenges and low inventory, higher rates are causing a pullback or delay in home purchase demand as well. Home purchase activity has been volatile in recent weeks and has yet to see the typical pick up for this time of the year.

Many mortgage companies facing a drastic drop in revenue from their only source of revenue face a serious risk of having to close their doors.  It may be time to approach your local FDIC insured bank for a mortgage going forward instead of a nonbank mortgage lender.  Banks are strictly regulated in terms of capital requirements whereas the regulations on “nonbank mortgage” companies are much more lenient.

Home Equity Line of Credit (HELOC) is a Better Option than a Mortgage Refinance

Savings – A Lost American Virtue

In an uncertain world it is important that everyone has at least six months’ worth of savings available.  It might not be possible to save this much for the average person.  The best option to establish a readily available and reasonably priced source of funds is to take out a home equity line of credit (HELOC).

Here are some of the basic things to know about a HELOC.

A home equity line of credit (HELOC) can provide emergency funds at a fraction of the cost of a credit card advance or personal loan and there are no monthly fees.

A HELOC is a mortgage on your home which means that you are using the collateral in your home as security for the loan.  If the borrower already has a first mortgage, then the HELOC would be a second mortgage lien.

The application process with a bank is very easy and usually there are no upfront costs. The borrower may be responsible for paying the fees associated with setting up the HELOC if the line of credit is cancelled within five years. Keep in mind that the bank must incur costs for underwriting, credit report fees, processing, title search, appraisal and closing costs. A HELOC is a much lower cost option for obtaining cash than doing a fee laden cash out refinance of a first mortgage.

The application process is similar but less stringent than applying for a first mortgage. The borrower’s income is verified, and the credit score must meet the bank’s standards. Most banks will lend up to 80% or more of the home’s value minus any first mortgage balance.  At the time of application, the borrower puts in a request for a specified loan amount.

Once the HELOC is approved, the borrower is given a check book to access the approved credit line.  There is no requirement to borrow any funds.  The money is quickly available when needed which can be a lifeline in the case of job loss or unexpected expenses.

The interest rate of a HELOC is variable and is typically based on the prime rate or other short-term index plus a specified margin.  The rate and payment on any advances will therefore change monthly. Interest rates on personal loans and credit cards can easily be more than triple the rate on a HELOC.

The monthly payment on a HELOC is interest only which keeps the payment low. Borrowers have the option of paying more than the minimum payment due and can pay off the loan in full at any time.  The interest on a HELOC is tax deductible which lowers the cost of the loan.

The biggest risk of a HELOC is that if a default occurs, the bank may initiate a foreclosure proceeding.  If you are comfortable with the concept of using your home equity as collateral, a HELOC is the lowest cost and most flexible option for borrowing money.

The Pros and Cons of an Adjustable-Rate Mortgages (ARM)

A mortgage payment is usually the biggest monthly expense for most people.  Since an adjustable-rate mortgage (ARM) will always start off with a lower rate than a fixed rate mortgage, it is useful to understand the pros and cons of an ARM.  Depending on the trends of future interest rates, an ARM can be a money saver or a money pit.

The interest rate on an ARM can change over the life of the loan at various time intervals depending on the type of mortgage product you select.  An ARM product is more challenging to understand than a fixed rate mortgage so dealing with a knowledgeable mortgage loan officer is essential.  The rate on an ARM is the sum of an index rate plus a fixed margin.  The index rate will vary but the fixed margin will not.  Most banks use a short-term index rate such as the yield on a one year Treasury bill.  The index rate plus the margin is called the fully indexed rate.  The ARM will never have a rate less than the fixed margin.  For example, if the fixed margin is 3% and the yield on the one year treasury is 0%, the ARM will have a rate of 3%.

The typical ARM rate will change yearly. The date of the first-rate change on an ARM depends on the type of ARM that the borrower initially selected. The four most common ARMs are the 3/1 ARM, the 5/1 ARM, the 7/1 ARM, and the 10/1 ARM.  These ARM products are called hybrid ARMS since they have a fixed rate for the time specified and afterwards convert to an adjustable rate which can change once a year.  For example, the 3/1 ARM will have a fixed rate for three years and the rate might change starting in year four.  The starting rate on loans with a longer initial fixed interest rate will start off higher.  For example, the rate on a 5/1 ARM might start off one percentage point lower than the start rate on a 10/1 ARM.

ARM products have lifetime and yearly rate caps.  Although the rate change on an ARM can be substantial over the life of the loan, lenders have a cap on the yearly rate increase to avoid payment shock to borrowers, but the lifetime rate increase can result in much higher payments.  Most ARMs cannot increase by more than 2 percent after the initial fixed rate period and the lifetime rate is usually capped at 5 percent above the start rate.  For example, in a worst case basis a borrower with a 5/1 ARM at a 2.75% start rate might see an increase to 4.75% in year six, 6.75% in year seven, and reach the lifetime cap of 7.75% in year eight.

The risk involved with an ARM should be carefully considered.  An initial interest rate that is lower than a 30-year fixed rate is a bet that future interest rates will not dramatically increase.  This has been the case for the past 14 years and the ARM borrower automatically shifted to a lower rate without the large expenses involved in a refinance.  However, even if rates do increase in the future, savings from a low start rate could more than offset higher rates in later years.

No one can predict future interest rates but in a declining or stable interest rate environment, ARM borrowers will save money over time compared to a fixed rate mortgage which almost always has a higher rate than the start rate of an ARM.

An ARM will make sense for a borrower who expects to sell his home within 10 years which is the average number of years a person lives in his home before selling it.

Bank of America Refinance Offer Raises Questions On Wealth Accumulation

A client of mine recently received a mortgage refinance offer by mail from Bank of America (BAC).  The offer showed that a savings of $2,225 per year was possible by refinancing to a new 30 year fixed rate mortgage.

My client called me to discuss whether or not a refinance made sense since her rate was only dropping by .375% to 4.75%.  Conventional analysis of a mortgage refinance usually assumes that a refinance only makes sense if the rate is dropping by at least 1 or 2 percentage points.  Other factors used in evaluating a refinance involve the period of time required to recoup closing costs, how many years the borrower intends to remain in the home and a review of the forecasts for future interest rate changes.

In my customer’s case, not only was the rate decrease small, there was also $5,706 in closing costs which included 2 points.  In addition, the savings that Bank of America projected were based on a 30 year fixed rate mortgage.  Since my customer only had 22 years left on her current 30 year fixed rate mortgage, this meant 8 years of additional payments.

The monthly savings of $185.42 ($2,225 yearly) for a refinance came at the cost of adding 8 more years to the mortgage term.  Despite the monthly savings, the total additional payments over 30 years for the new lower rate mortgage amounted to $48,048, including the financed closing costs.

Was Bank of America trying to fatten their bottom line with a refinance that made no sense?  Depends on your perspective and financial status.  For some households on very tight budgets, reducing the mortgage payment by $185 per month can make life a lot easier.

For other households, the $185 monthly savings can help increase long term wealth using a concept that most consumers have either never heard of or don’t understand.  It’s called compound interest, allegedly described by Albert Einstein as “the most powerful force in the universe”.

In the case cited above, if the homeowner saved the $185 per month from a refinance and achieved a 4.75% return over 30 years, the result would be a nest egg of $141,634.  The power of compounded gains over 30 years far exceeds the additional payments of $48,048 at 4.75% interest paid on the declining balance of a 30 year mortgage.  The homeowner winds up with a net gain of $93,586

A 6% return on the $185 per month savings over 30 years would yield $175,904 and a gain of 8% would yield $252,055.

A refinance that did not look compellingly attractive could actually increase long term wealth for those with the discipline to save.  After considering the options, my client decided to refinance and increased her 401k savings by $185 per month.

Disclosure: No position in Bank of America stock

Long Overdue Mortgage Regulations To Curb Lending Abuses

Feds React To Mortgage Lending Fiasco

In a move that can only be described as better late than never, various new Federal laws that restrict certain lending practices become effective on or after October 1, 2009.  Other regulations that mandate improved disclosures and early disclosures of loan costs and terms became effective on July 30, 2009.    Additional HUD regulations requiring the use of a standardized good faith estimate form and HUD-1 settlement statement will become law effective January 1, 2010.

The intention of the new regulations is to protect the consumer from unfair  and abusive lending practices and to ensure that the mortgage borrower is provided the necessary information to fully understand the costs and terms of a loan.  In general, the rules are a positive for both borrowers and lenders but are likely to add considerably to the time it takes to close on a mortgage loan.

If these lending regulations had been in effect during the late great mortgage mania boom of the early part of this decade, it is very likely that the current foreclosure and banking crises would have been a far less serious adverse economic event.   Borrowers would have been prevented from borrowing money that couldn’t be repaid and lenders would have been forced to make more intelligent underwriting decisions.

Lending Prohibitions Effective October 1, 2009 – Federal Reserve Board

  1. Mortgage lenders and brokers are prohibited from coercing or encouraging real estate appraisers to misrepresent the value of a home.   Per Glenn Gimble, FDIC Senior Policy Analyst, “That’s intended to ensure the integrity and accuracy of an appraisal, so that a consumer is not overpaying for a home or borrowing more money than the home is worth.
  2. Mortgage loan servicers must credit payments on the date received and must inform the borrower of an late-payment fees.
  3. For those applicants considered a subprime credit risk, a lender is prohibited from making a higher priced loan without regard to the borrower’s ability to repay the loan from income or assets (other than the home’s value).  All income and assets used to qualify for loan approval must be verified.

Several points of interest on the new regulations.  Although there has been vociferous industry objections to the new appraisal restrictions under the Home Valuation Code of Conduct (HVCC), it is interesting to note that the HVCC rules do not apply to FHA mortgages.  Thus, for FHA loans, the lender or broker can still communicate directly with the appraiser and is also allowed to chose whatever appraiser is likely to “bring in” the highest value.

Self employed borrowers who have the income to make mortgage payments but who chose to evade taxes by not reporting their full income for tax purposes are going to have a very difficult time obtaining any type of mortgage financing.  Furthermore, tax evaders may chose to rent in the future, since the IRS is now matching mortgage payments to reported income to catch obvious tax evaders.

Wage earners without sufficient income will also be required to “borrow within their means”.  The only option now available for previous “stated income, no income” borrowers will be the local “unregulated” loan shark.

New Fed Rules On Costs And Terms Of Loan – Effective July 30, 2009

These new rules require earlier disclosures on purchases and refinances, a minimum waiting period of 7 days  between disclosure and closing, resending disclosures if the APR changes and restriction on charging any fees (except for a credit report) prior to receipt of loan disclosure documents.

New HUD rules effective January 1, 2010 require all brokers and lenders to use the same good faith estimate forms and a new uniform HUD-1 settlement statement.

Advertising Restrictions

Deceptive or misleading advertising regarding payments or teaser rates is prohibited.

Mortgage Loan Originators Subject To Federal Regulation

All loan officers at financial institutions and mortgage brokers will be required to register with the government and disclose information about their background and disciplinary history.  The information will be in a database available to consumers.  In addition, the law will require state governments to establish licensing and minimum educational requirements for loan originators.

The new background checks and educational requirements for loan originators is another long overdue reform.  During the height of the mortgage mania boom, it was common to see “loan originators” who should never have been allowed to work  in the mortgage industry.

Fly by night “mortgage companies” were hiring ex truck drivers, high school drop outs, ex waiters, etc. and putting them to work with little training or supervision.   Previously unemployable, uneducated individuals who would never have been hired anywhere else suddenly became “loan officers” during the mortgage boom.  Despite the low quality of applicants being hired by the mortgage industry, it was also common to hire loan originators without conducting basic financial or criminal background checks.

Too bad it took a major financial disaster before the Feds got around to figuring out that the mortgage industry was out of control.

High Risk Mortgage Lending Still Being Promoted By GSEs

Sufficient Income Key To Sound Home Ownership

In an effort to prevent delinquent home owners from losing their homes to foreclosure, the Department of the Treasury recently issued guidelines to lenders.  Under the Making Home Affordable mortgage modification program, the Treasury stated that the mortgage loans for at risk home owners should be modified to result in a front end debt ratio of 31%.   A front end debt ratio is the percentage of gross monthly income that is spent on housing costs, typically principal, interest, taxes and insurance.

Historically, a front end debt ratio of around 31% was considered to be an affordable portion of a borrowers gross income to allocate to housing.   A housing debt ratio in this range allowed the borrower sufficient remaining income to cover other living costs and debt payments.

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency, Joint Statement of June 23, 2009

On March 4, 2009, Treasury announced guidelines under the Program to promote sustainable loan modifications for homeowners at risk of losing their homes due to foreclosure.

Under the Program, Treasury will partner with lenders and loan servicers to offer at-risk homeowners loan modifications under which the homeowners may obtain more affordable monthly mortgage payments.

The Program guidelines require the lender to first reduce payments on eligible first-lien loans to an amount representing no greater than a 38 percent initial front-end debt-to-income ratio.6 Treasury then will match further reductions in monthly payments with the lender dollar-for-dollar to achieve a 31 percent front-end debt-to-income ratio. Borrowers whose back-end debt-to-income ratio exceeds 55 percent must agree to work with a foreclosure prevention counselor approved by the Department of Housing and Urban Development.

The OCC guidelines corresponded to comments by the Secretary of HUD, Shaun Donovan, who had previously supported lowering the debt ratios of at risk homeowners to 31%.  In response to the question as to why so many home owners re default after having a mortgaged modified, Mr. Donovan stated the obvious – if a mortgage payment was excessive compared to income, default was much more likely.

What it showed was that where there’s actually a reduction in payments, there’s long-term success for those homeowners. People do much better when you lower payments and make them affordable than these other so-called modifications, which actually keep payments the same or increase them.

So I saw it, and in fact, if you look at the report, some of the language in it directly supports the way that we’re setting up our plan to create a standard that is truly affordable for borrowers. 31 percent debt-to-income ratio is the right standard. It’s widely accepted, and if we can get to that level, as we do in our plan, we believe that that sets us up, based on the results of the study, for long-term success for homeowners.

Someone Should Tell The GSEs

The HUD Secretary’s comments make sense and reflect previous sound underwriting guidelines that existing prior to the housing lending mania of the bubble years.  If mortgage lenders had not abandoned traditional income requirements, borrowers would not have been approved at debt ratios that virtually guaranteed future defaults.   The Treasury and HUD are promoting sound lending policies when they recommend a conservative debt ratio.

The problem is that some one forgot to tell Fannie Mae (FNM), Freddie Mac (FRE) and especially the FHA what HUD and the OCC have proposed as a safe debt ratio.  (See Why Does The FHA Approve Loans That Borrowers Cannot Afford.)   We now have the absurdity of lenders being required (at taxpayer expense) to modify mortgages to a 31% debt ratio while it is extremely common to see new mortgages being approved at debt ratios of  50% or higher.   When a borrower is paying out half of pre tax income for housing expenses, there is usually barely enough left for other debt payments, living expenses, home repairs, etc.   A reduction in income, a major unexpected home repair bill or any other unexpected expense can be enough to tip the borrower into default.   Yet, the automated underwriting systems of Fannie, Freddie and the FHA are routinely approving  risky mortgage loans at debt ratios far in excess of 31%.

The government’s obsession with increasing housing sales and refinances has resulted in a bizarro world situation.    Mortgages are being approved with unaffordable payments, the borrower falls behind and then the payments are modified lower under the Making Home Affordable program.  It’s not surprising that the Federal Reserve has had to become the buyer of last resort of mortgage backed securities – who else would want to buy them?

Disclosures: No positions.