Your Mortgage Matters Blog

Did you happen to see the recent article on www.msnbc.com regarding GMAC and their scare tactics? It was a really great article that explained the tactics that GMAC is using in their desperation to obtain business.  Frankly, given the false and misleading content in the letters they recently distributed, GMAC should be banned from originating mortgages. 

Their letters were addressed to WaMu clients and implied that WaMu may be experiencing financial difficulties and that their mortgage may be in jeopardy.  That is absolutely absurd.  Even if WaMu was in financial trouble, it would in no way affect the borrower's whose mortgages they hold.  The fact of the matter is GMAC holds substantially more subprime paper than WaMu.

Clearly this is just an attempt by GMAC to entice consumers to refinance their mortgage when there is absolutely no reason to do so.  So why the  letter, well it's simply a "scare tactics" to entice borrower's to refinance their mortgage so GMAC can reap larger profits.

Over the last few months a barrage of articles have been published damning mortgage brokers for their lack of integrity.  Granted, there are many shady mortgage brokers in the industry, but there are also many great brokers.  The recent action by GMAC is downright misleading, and their excuse that the letter was a "test marketing" piece is absolutely absurd!

When it comes time to evaluate whether you should refinance your mortgage, work with a broker you know and trust, and one that will look out for your best interest.  There are many great brokers in our country, and one would be far better working with a reputable broker than GMAC!

We’ve all seen news reports regarding the fallout from the recent meltdown in the sub-prime market, but will this spill over into the conforming market as well? While there is certainly the potential for increased delinquencies, the fundamental differences in borrowers will prevent a crash in the conforming market. Let’s take a look at these differences.

Credit Scores

One of the largest differences between conforming and non-conforming borrowers is credit scores. The credit score is a primary factor in determining the borrower’s credit worthiness. Credit scores are calculated based on five different characteristics of the borrowers’ credit habits. Below is a summary of these five factors:

1. Payment History – This accounts for 35% of the borrowers total score, and is based on you payment habits – that is, whether you pay your debts on time.
2. Amounts Owed – This accounts for 30% of the total score, and is based on the amount of the borrower’s available credit to total credit. Credit scores drop when a borrower is close to being maxed out on a particular credit line.
3. Length of Credit History – This account for 15% of the total score and is based on the length of the borrowers credit history.
4. New Credit – This accounts for 10% of the total score and is affected by the number of recently opened credit account
5. Types of Credit In Use – This accounts for 10% of the total score and is based on the mix of the various types of credit in use.

As you might assume, borrowers in the non-conforming market have lower credit scores and are therefore a greater credit risk for lenders. Additionally, as sub-prime lenders have relaxed their guidelines and lowered the minimum score required for 100% financing, they have assumed much greater risks – the effects of which are rapidly surfacing.

While mortgage delinquencies have risen slightly in the conforming market, they are nowhere near the staggering delinquency rates currently being experienced in the sub-prime market.

Products

Another significant difference between the conforming and non-conforming market is products. Many sub-prime borrowers end up in a 2 or 3 year adjustable rate mortgage, with the hope of improving their credit so they can refinance into a fixed rate product by time their rate resets.  While even the initial rate on these ARMs can be quite high, the maximum interest rate cap can be staggering.

The sad reality is most sub-prime borrowers have great intentions, but they lack the ability to execute their plan, and therefore never improve their credit scores. When their rate resets, their new payment becomes so large that they can only manage it for a short period of time.  Many of these borrowers eventually fall behind in their payments and ultimately end up in forclosure.

Reserves

Reserves is the term used to describe liquid assets such as savings accounts, stocks, bonds, or other investments that can be liquidated in the event the borrower needs funds to cover their mortgage payment. Reserves are stated in number of months. For example, if a borrower’s monthly mortgage payment is $1,200, and the borrower has $6,000 in a money market account, they would have 5 months of reserves (5 x $1,200 = $6,000).

Historically, conforming borrowers typically have larger reserves than most sub-prime borrowers, and therefore have the ability to continue to make their monthly mortgage payments during the times they experience financial challenges. Unlike conforming borrowers, sub-prime clients generally have smaller, if any, reserves, and do not have the ability to weather financial challenges for extended periods of time.

Certainly there are other factors to be considered, but credit history,  product, and reserves are key elements in determining a borrower's ability to keep their mortgage current.  The fact that conforming borrowers are well positioned to weather most financial challenges will mitigate any risks of a crash in the conforming market. 

As rates began to fall at the beginning our our last real estatate boom many homeowners were scrambling to find a lender who could refinace their home.  Backlogs were substantial and homeowners found themselves having to wait to find a mortgage counsultant to help them.

Although those days are long gone, the remnants of those times still remain.  If you don't believe me just take a look in your local newspaper in the real estate foreclosure section.  You will find countless numbers of homes in foreclosure. 

Most folks would assume that the forclosures are just the result of folks who lost their jobs and can no longer afford to make their payments.  While that is partly true, the majority of the foreclosures are the result of folks who got in to a mortgage that they did not fully understand.

Now, several year later, their payments are balooning and they are no longer able to make their payments. Was this a poor loan choice on the part of the buyer.  Most likely not.  The probable reason is their loan officer did not fully disclose the the type and term of the loan they were getting -- and many of those were adjustable rate mortgages, also known as ARMS.   

As a result, many homeowners now find themselves with a monthly payment spiraling upward, far beyond their means of repayment.

This is not the result of a loan officer who mistakenly placed the client in a product that was not suitable for them.  Most likely, this was the result of a loan officer who was desperate to close a loan and earn a commission, and therefore placed their own self interest before the interest of their client. 

Unfortunately, most of these loan officers, having collected their commission, are long gone, and the client-victim is now left to deal with this matter on their own.  For some, they will be able to refinance into a fixed rate product, although at a higher interest rate, but fixed none the less.  For others, there is no way out, so they will simple lose their home to foreclosure. 

Working with a competent professional who can help you make wise decisions is priceless.  And the value of their services far outweigh the costs they charge.  Remember, the cheapest initial rate may not always be the best product.

As the meltdown in the subprime market continues to grow, SouthStar Funding, an Atlanta based non-conforming lender, announced the closing of their company.  On Friday, March 30th, SouthStar contacted their settlement agents and informed them that they were shutting down their operation. 

Settlement agents were instructed not to close any SouthStar loans they currently had inhouse, and to wire any SouthStar funds currently being held in their escrow accounts back to SouthStar.  Although they had experienced problems earlier in the year, many thought the brunt of their troubles were over.

Their recent troubles stemmed from purchase commitments that their investors failed to honor.  SouthStar had recently negotiated purchase agreements with a new investor and was in the process of tendering the loans to the new investor when they unexpectedly backed out.

Although SouthStar had hope to resolve this issue through ongoing negotiations, they were unable to reach an agreement, and their existing warehouse lines were frozen.

Over the last few weeks as subprime lenders have been unable to find investors for their loans, many thought these were isolated incidences.  The continued closing announcements indicate this is actually a much larger problem that originally thought, and the worst is certainly not over yet. 

For consumers, this is even more troubling.  Many non-conforming borrowers who once could have purchased a home with 100% financing, are now finding their dreams of home ownership vanishing before their eyes. 

Likewise, lower end home builders will also feel the brunt of the fallout.  Many are sitting on a large inventory of completed homes, with little prospect of seeing them sell soon, and new construction of these homes have all but come to a halt.

As if all this is not enough, consider the plight of homeowner's in this market who are wanting to "move up" to a larger home.  With new home sales suffering, and builders offering substantial purchase incentives, the market for resales has all but dried up.

Finally, let's not forget the "flip-that-house" crowd.  With housing prices somewhere from flat to declining, the value of these homes is falling and investors are watching hopelessly as their equity continues to decline.  Not only that, but when you consider the additional interest expense for several  months, some investors will be lucky to squeeze even a slight profit.   

Why is it not surprising that Beazer Homes Investigation is the headline in today's business section of The Atlanta Journal-Constitution?  We've all known for years that some builders offer phantom incentives to buyers who use their affiliated lender.  Although regulators and other authorities never seemed to care, it appears as though they now have a keen interest in such business practices. 

Many folks don't give a second thought about using the builder's affiliated lender, but the implications can be significant.  Typically the builder will offer free upgrades to the buyer if they use their in house lender.  Sure, it sounds great, and who doesn't like getting something for free?  But is it really free?  Most of the time it isn't!

In fact, many times it's just another way to milk more money from the borrower.  How does it work?  Well, it's quite simple really.  Let me give you a common scenario.

A potential buyer walks into a new development and tours the model homes.  They identify a home plan they really like, and decide to make an offer.  During the process of making the offer, the builder's representative tells the buyer about the free upgrades they will receive if they use the builder's affiliated lender. 

Many times the stated value of the upgrades is significantly higher than the actual cost of the updgrades.  Additionally, the buyer is almost always quoted a higher interest rate that will pay back a premium that is more than sufficient to cover the costs of the upgrades. Essentially what happens is the borrower ends up paying for the entire cost of the "free" upgrades.

If the buyer is savy enough to get quotes from other lenders, they will find that the rate from the builder's affiliated lender is not competitive.  In those cases, the builder's sales representative usually tells the buyer that the other lender will be unable to honor their rate.  I've seen this happen many times.

The time has come for builder's and real estate company's to get out of the financing business.  They would be better served if they spent their time focusing on their core competancies.  Their only motive for having an affiliated lender is to put more cash in their pockets, and that, at the expense of their clients.

Thankfully these types of schemes are being exposed for what they are.  In the coming months, the federal and state governments should enact legislation to protect consumers from these types of predators.  Today's article in The Atlanta Journal-Constitution is the first step in the right direction. 

The recent woes in the subprime market clearly indicates the need for loan officers to be licensed.  Granted, some borrowers were simply poor credit risks and never should have been approved for a loan.  However, it's important to step back and understand the dynamics of the demise.

As loan officers we should be experts in our field.  After all, our clients come to us not only to get a loan, but also to get sound professional advice.  They look to us to provide guidance, explain product features (even the bad features), and help them made a decision as to which product is most suitable for their particular situation. 

You may be wondering how licensing will help.  Consider this, the majority of loan officers have no substantial financial education or background.  Many are just simply sales associates, and their primary objective is to close the loan, regardless of whether the product is suitable for the client.

Recently I was speaking with an account executive with one of the large national conforming wholesale lenders.  During our conversation she indicated that some of the subprime brokers have contacted her to establish a relationship with her company because their subprime investors have closed up, and the broker has no place to send their conforming loans.

These brokers revealed that they have pushed their conforming borrowers into subprime products simply because the broker did not know how to use Fannie Mae or Freddie Mac's automated underwriting systems.  That means these borrowers interest rates were substantially higher that they should have been.  I call that negligence and gross incompetence! 

Just take a look at some other similar professions such as attorneys, CPAs, financial planners, insurance agents, and realtors.  When clients meet with these professionals, they expect to receive sound professional advice from a competent advisor.  And these professionals must all pass an examination to obtain their license to conduct business. 

Why should it be different for loan officers?  It shouldn't!  Our clients expect the same level of professional advice that they would receive from their CPA or financial planner, and they deserve it.  It's about time for loan officers to become the experts they should be, and it's about time we implement educational and licensing requirements to make that happen. 

The crash of the subprime market should come as no surprise. For the last several years subprime lenders have extended credit to non-creditworthy borrowers. Consumers with low credit scores have low scores for a reason – they are not creditworthy. When lenders ease their guidelines and provide 100% LTV (loan-to-value) financing to this class of borrowers, they should expect staggering losses.

More importantly though is the role of the loan officer. Part of their responsibility includes providing sound advice to their clients. Unfortunately, most loan officers see themselves as salespeople, so their primary goal is to close the loan so they can get paid.

The mortgage industry must address the roles and responsibilities of loan officers, and focus on the long term financial health of their business. What does that mean? Well, it means providing better training and education to loan officers to enable them to become consultants instead of salespersons.

Many consumers are somewhat lost when it comes to understanding the characteristics and features of the various mortgage products available in the marketplace today. Loan officers have a responsibility to make their clients aware that the loan amount for which they qualify may be substantially higher than their comfort level.

Additionally, lenders must redirect their primary focus from their bottom line to product suitability. Over the short term their financials may not be as rosy as they have been, but over the long term they will not experience massive foreclosures and staggering buy backs.

In short, loan officers must provide value to their clients. They must focus on the overall suitability of the product(s) they are recommending to the client, instead of selling on rate or monthly payment. This will require a change in culture for many mortgage companies, but over time it improve their reputation and set them apart for their competitors.