The Mortgage Guy Blog

I think we may have seen the best of mortgage interest rates for the foreseeable future. It’s very possible that we have already visited this year’s lows on fixed rate mortgages. Keep in mind of late, the foreseeable future is about as far away as tomorrow.

Normally in a recession, mortgage rates respond to the Federal Reserve cutting the federal funds rate. This time around, it’s very different. Instead of mortgage rates dropping with the Fed lowering the target rate, mortgage rates are going the other way.

There are reasons behind this anomaly. First of all, mortgage rates never mirror the fed funds’ rate moves. However for the past fifteen years, fixed rates more often than not, moved in the same general direction as the fed funds rate. Presently the rates are going in opposite directions. This by the way, is telling us a lot about the economy.

One reason long term mortgage rates are moving upward is because inflation is raging out of control. It doesn’t matter what the government numbers say, everything is more expensive and some commodities have have skyrocketed in price and I’m not just referring to oil. Long term rates have a history of going up in response to inflation because inflation directly erodes the value of long term debt. In essence, the higher rate is supposed to offset the ravages of inflation.

The dollar’s weakness is also adding to the inflation picture. The dollar buys less of everything we import, which is more fuel for the inflation fire that long term mortgage rates are responding to. Keep in mind, in order to strengthen the dollar, long terms rates would have to go up from their current level or foreign currencies would have to weaken.

That could happen, perhaps due to the recessionary environment spreading globally or some other reason. However, there is little reason to think foreign economies won’t deteriorate because they too are affected by the credit crisis and the implosion of the largest economy on the face of the earth.

The U.S. credit markets are broken. The mortgage debt markets are at the vanguard of the market’s destruction, malfunctioning and ongoing deterioration. Hundreds of billions of dollars in mortgage debt value has evaporated into thin air. Mortgage paper (debt securities) is toxic and no one wants to buy it. This is reflected in the trend and level of current mortgage rates.

Not only are mortgage rates struggling against a steepening yield curve, they are also fighting additional risk of default primarily due to irresponsible underwriting and historic declines in real estate values. Consequently mortgage securities are responding to the additional risk of default with higher interest rates.

Adding to the forces pushing mortgage rates up, the United States banking is system is essentially insolvent. Banks are borrowing heavily from the Federal Reserve to meet their required capital reserve levels. In an attempt to shore up their balance sheets, the banks are dumping mortgage backed securities at fire sale prices. The lower mortgage backed securities prices brings with it higher mortgage interest rates. This price/interest rate pressure would play out even if inflation weren’t a factor, which it clearly is.

Banks have yet to even quantify how much mortgage backed debt they own or the value of it. I don’t know how they do it, but the toxic debt securities are being kept off their balance sheets. Even more discouraging is the regulators know it and don’t seem to care. Right or wrong, perhaps the regulators understand the fragility of our banking system and don’t want to break it by enforcing rules.

I have every reason to believe the conditions causing mortgage interest rates to rise, will only get worse for the foreseeable future. Therefore it is my view that at best, the mortgage rate trend will be flat to higher from this point on. This trend will continue until the credit markets regain their integrity. Unfortunately there is no sign that will happen. The Federal Reserve’s main weapon is influence over short term interest rates. It has nothing in it’s arsenal to fix the systemic problems of the debt markets.

The same holds true for the Federal government’s fiscal policy measures aimed at the crisis. Their use of the tax rebate checks, even for people who didn’t pay taxes, is fighting the last economic war. It won’t work in the “new” economy. Dropping checks from helicopters won’t fix the debt markets. At best that will fuel inflation, thus putting more pressure on long term interest rates which in turn will further exacerbate economic woe.

The heart of the crisis is the broken debt markets. Credit is the oil of the modern economy. There is no way any economy can function without ample credit being available. Lenders are not lending, credit is drying up. Right now the economy’s oil (credit) level is dangerously low and falling. This will lead to the economic engine seizing up completely unless something puts the oil/credit back in. That “something” is not apparent to anyone.

In fact, the entire crisis crept up on everyone responsible for avoiding one, ahem. Yet a regular guy working on Main Street, USA, saw this coming nine months ago. It’s just within days that I am hearing admission as to just how bad things really are and are going to get. What is even more disconcerting, is what is just coming to light now, is the tip of the iceberg. We aren’t but two months into what will most likely be a multi year economic downturn.

Not in my lifetime or my thirty years in the financial industry, have I seen a more dangerous economic environment. There is a real possibility that we are facing something on the scale of the Great Depression of the 1930’s. Which is why I asked, “are the best of mortgage rates as well as the best of times behind us”?

Tags: Current Events, Finance & Economy, Mortgages, Tips & Tricks by The Mortgage Guy
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The credit bureaus, Trans Union, Experian and Equifax, sell a certain kind of data called trigger data. When a borrower applies for a mortgage, a credit report is ordered for the sake of qualifying and underwriting the loan. Naturally, your credit report request is directed to the credit bureaus who notate all of the people who are having their credit pulled for the sake of getting a mortgage.

What the bureaus do with this refined data, is sell it to mortgage origination companies or middlemen in the consumer data arena. Here is a sales pitch for such data from mortgage triggers dot com.

FAQ Answers

Where do triggers come from?
A: Trigger Leads come directly to us from the three major credit bureaus. A mortgage trigger is simply a credit bureau derived lead based on live credit attributes triggered by the actual credit behavior of your prospect. It is highly specialized and targeted for individual client.

Can I specify the lead parameters?
A: Yes. You can select the FICO scores, mortgage amounts, LTV ratios, geography, and revolving debt balances that make up your ideal candidate. When they apply for a mortgage, we send you the borrower’s information within 24 hours.

How is a mortgage trigger lead generated?
A: Once you have established your ideal criteria the bureau creates a “watch” list of all homeowners that fit the exact criteria you desire. When they have a mortgage inquiry which is generated when their credit is pulled, we send you the lead.

If you have ever applied for a mortgage and wondered why you are getting scores of mortgage offers over the telephone, via mail or email, it is probably due to the credit bureaus selling your trigger data to whomever wants it (the releasing of the hounds). I don’t know about you, I’m in the mortgage origination business and I find this tactic disturbing from a consumer point of view. I also don’t like it from the origination perspective either.

I have no problem with the bureaus providing my credit information to prospective lenders. That is their function. However, it is a different story when the bureaus take note of my credit actions, such as having a credit report pulled for the sake of getting a loan, and then selling my activity as opposed to my credit history. This is why I feel this is an invasion of privacy.

Apparently I’m not the only one who doesn’t like it. Consider this snippet from a realtytimes.com article.

Home mortgage lenders themselves are angry about the new hot leads programs. Dan Hughes, a loan officer for Summit Mortgage Corp. in Edina, Minn., told Realty Times that “as a traditional loan officer who gets most of my business from referrals from Realtors and past customers, I take a dim view of anyone who buys leads from any source” — but worst of all from “overnight” data purveyors “who are feeding off my own clients’ personal information.”

Pat Barney, another Summit Mortgage loan officer, recalls recently applying for a home equity credit line from a large New York-based bank. Within a day or two, he got a call from a competing lender trying to persuade him to cancel his application with the New York bank and switch to her company. A day later, he got another call, this time from a lender who claimed that “I’ve been notified by your lender that you’re looking for a home equity line.”

Note the deception in the sales pitch. It’s not uncommon for this particular type of data. I mean what is the sales person supposed to say when the truth is the sales organization is so desperate for business that it pays to be notified whenever someone is applying for a mortgage with another company. Heck if we can’t originate loans by the virtue of our reputation and marketing savvy, we’ll try to steal the business from companies that enjoy these qualities.

This type of sales lead plays on consumer greed. After all of the preliminary hard work has been completed, the mortgage trigger lead buying companies then inundate the consumer with counter offers that are based on pure speculation. The incentive for leaving the initial company contacted is invariably a promise of a lower price. Whether it be a lower rate or closing costs or both.

While the trigger lead buying company has some credit information about you, perhaps your credit score range and amount of revolving, installment and mortgage debt you carry, the lead buying company in no way has enough information to determine you qualify for a lower rate or closing costs.

Instead the process of fact finding and providing solutions therein, need to start all over again. Your credit will need to be re-pulled, which may result in a lower score than initially pulled. However, the biggest issue is time, as the process is started all over again.

In the current lending environment, this could lead to losing a locked rate that is no longer available, possibly a lower appraised value on the home or degraded loan terms due to tightening credit requirements. All this for the promise of a rate that is reduced .25%. A promise and not a guarantee.

There is good news though. You can prevent the hounds from being released in the first place,as you have the right of “opting out” with the credit bureaus. By filling out a simple online form, you can save yourself the aggravation of being a consumer punching bag for up to five years. To be removed from opt in offers, go to OptOutPrescreen dot com. In addition to the online opt out form, you will also have the option of submitting a written request that will remove you from opt in offers permanently.

Don’t you just love the assumption that if you haven’t opted out, then you’ve opted in. Not too many businesses can get away with such tactics. If you would like to voice your opinion on trigger data, you can write the FTC or Federal Trade Commission, as they are the regulatory entity for the credit bureaus.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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For those homeowners who still can, now is the time to take defensive measures. Home values are dropping at historic rates, lenders are tightening up underwriting requirements for the minority of mortgage products still left in the market place. Unemployment is rising. The stock market is falling.

Now is the time, before witnessing further deterioration, to make household budgets as affordable as possible to weather the coming perfect storm of financial woe.

Adjustable rate mortgages should be refinanced to the current low fixed rates. First and second mortgages could be consolidated. Consumer credit, credit cards and installment loans, should be looked at for consolidations. Overall, the household budget should be scrutinized and made as manageable as possible.

Why this needs to be done now

The United States economy is entering what is shaping up to be the worst recession of my lifetime. To offer perspective, I entered the work force under the Carter Administration. This recession is firming up to be worse than any economic downturn including and since the stagflation era under Carter.

Here are some tell tale signs of the severity of the coming recession.

• The largest residential lender in the country, Countrywide is number 214 on the lender implode list. They were bailed out via a buy out, courtesy of Bank of America for a total of six billion dollars.
• Citigroup, the nation’s largest bank is reeling. Citi cut it’s dividend by 41% after losing $9.83 billion dollars and were forced to write down 18 billion dollars in bad debt. I’ve seen estimates Citi’s exposure to bad debt to be as high as 100 billion dollars. The quarter was so bad for them that they had to sell a 6.81 billion dollar stake of the company to an investment consortium consisting of primarily foreign investors.
• Lenders are refusing to lend. Even to each other.
• Foreclosures are running at a historical pace. The pace is expected to pick up in 2008. No doubt this is putting downward pressure on all home values.
• The supply of real estate is historically high and the demand is historically low. There is very little money available to fuel real estate purchases. An entire segment of the market, those with little or no down payments and dinged credit is no more.
• It is estimated that real estate prices need to fall 30% for the market to reach an equilibrium necessary for the market to recover. At best, recovery is estimated to be a year and a half to two years away.
• The consumer, which accounts for 70% of gross domestic product (GDP) is completely tapped out. They can’t spend from savings because they don’t have any to speak of and their credit cards are maxing out. There is no cash out refinance available to release the credit card pressure on budgets.
• As consumers stop spending, layoffs will increase.
• The credit markets are broken. No one is buying mortgage securities and consequently, lenders aren’t lending. There is evidence that the mortgage credit squeeze is spreading to credit cards and installment loans. Without credit, households and business won’t/can’t spend money to fuel the economy.
• The Federal Reserve and the government is responding to the crisis with liquidity and lowering interest rates. However, with lenders refusing to lend, these actions will prove to be ineffective. Without lenders lending, there is no way for the cheap money to get into the hands of those who need and want it.
• The Fed itself is taking aggressive measures to avoid a recession that is unavoidable. When cheerleaders get scared, you should be too.
• Don’t expect the global economy to save us as they are experiencing the same debacle as we are.

The reasons for taking action right now are numerous. The case for an economic tsunami is real and frightening. But now is not the time to be the proverbial “deer in the headlights”. Negative developments are coming at us at break neck speed. Like a linebacker, homeowners need to read the play and react to it immediately.

Fairfield County, in Connecticut, is already on FreddieMac’s official “Declining Markets List“. That means prices in Fairfield county are declining measurably. Which also means homeowners in this county have already seen their ability to refinance impacted in a very negative way.

We have seen firsthand, clients and friends who have been negatively impacted by the rapidly evolving negative state of the lending industry. We had one client who is currently months down on their mortgage payments, see several approvals go into the trash can due to lenders going out of business or taking programs off the table.

I cannot stress strongly enough that time is of the essence. Prices are falling and loans are harder to qualify for by the hour.

Thirty year fixed rates are hovering around a very sensible 5.25%. Don’t wait for rates to go lower. Even though they may go lower, falling home values and tighter qualification requirements can sabotage your ability to refinance, either making it more costly or perhaps impossible.

If you have visited the links in this article, you can plainly see we are in for the roughest economic environment since the Great Depression of the 1930’s. In light of this, it’s time for homeowners to become as defensive as possible. Meaning homeowners should shrink and fix their housing costs and perhaps, overall budgets.

The perfect storm is here. Are you prepared to weather it?

Tags: Current Events, Finance & Economy, Mortgages, Real Estate, Tips & Tricks by The Mortgage Guy
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The sales pitch goes something like this. “Raise your credit score by fifty to one hundred points immediately”. You may have received the spam or have seen the banner ads. I consider it fraud and Fair Isaac, the creator of the Fico Score, is ending the party.

First off, there is very little that is immediate with credit scores. Everything takes time to filter through. Thats true for on time payments, late payments, credit increases, usage, etc. This “instant gratification element” alone should serve as a warning that something is amiss.

It works like this. The scam artists find people with good credit and credit lines that they are willing to rent. These people are hooked up, for a fee paid by the latter party, with people looking to raise their credit score.

The people looking to raise their score are added to the good credit person’s credit card as an “authorized user”. By adding a credit line that is paid on time and has at least 50% of the credit line available, a credit score can indeed be raised.

With the proliferation of scam artists and fraud, Fair Isaac has decided to change their scoring model to end the scams. In other words, authorized user rentals won’t work any longer.

Authorized user abuse is addressed on the Fair Isaac website as follows:

June 5, 2007 - (Minneapolis, Minnesota, USA) - Fair Isaac Corporation (NYSE:FIC) today announced that it will adjust its FICO scoring formula to ensure the continued reliability and predictive power of FICO scores. This action is intended to protect lenders and FICO scores from abuse of authorized user credit card accounts by a new kind of credit repair service that sells consumer credit card histories to credit applicants in order to purposefully misrepresent the applicants’ own credit history to lenders and other businesses.

The adjustment removes authorized user accounts from consideration by the scoring model in FICO 08, the newest version of the Classic FICO credit score which Fair Isaac expects to become available to lenders starting in September.

Fair Isaac will work closely with lenders to help them implement and benefit from the FICO 08 score as it becomes available.

As a consumer, don’t be taken in by the fraudulent manipulation of authorized user accounts. Save your money and time and take the traditional steps to improving your credit scores.

In light of today’s mortgage meltdown, fraud accusations are being pointed at everyone from the borrower to the credit rating agencies. It would be interesting to know to what extent authorized user manipulation was involved. Knowing their data capabilities, I am sure the credit reporting agencies could easily provide us with this information.

Tags: Current Events, Mortgages, Tips & Tricks by The Mortgage Guy
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You may have heard the commercials “we’re the lender, we write the checks”. Lenders like to make a big deal out of the fact that they are lenders and not brokers. Why? I don’t know, as it makes little or no difference from the borrower’s perspective.

Both can rip you off and both can give you the best interest rate and closing costs. Both can make the financing experience fruitful and pleasant or resemble a root canal. Neither has a distinct advantage in providing a loan for you. How do I know? My company is licensed as both a broker and a lender.

So what are the differences between lenders and brokers?

Technically a broker doesn’t lend the borrower the money. Only a lender can make a loan. They do so through brokers or direct borrower solicitation. A loan never closes in the broker’s name. The broker will not be mentioned on the mortgage note and mortgage or first trust deed. The lender executes those documents. The primary difference between broker and lender is whose name the loan closes in.

This is why brokers cannot issue a commitment letter. They are not lending the money, therefore they cannot commit to making a loan. A broker can however, obtain a commitment letter from a lender and pass it on to the borrower.

The same holds true for interest rate locks. A broker cannot issue a rate lock, not verbally or in writing. The money lent doesn’t belong to the broker, they cannot rate lock someone else’s money. The proper way to handle a rate lock is for the broker to request a rate lock from the wholesale lender and pass it on to the borrower.

Tip:

Broker issued, as opposed to lender issued, commitment letters and rate locks have no value at all. If you ever receive a commitment letter or interest rate lock issued by a mortgage broker, you probably don,t want to do business with that company.

The company is breaking the law. Consider reporting them to the appropriate regulatory bodies. In Connecticut, that would the Banking Department. A report can also be filed on the federal level by contacting the Department of Housing and Urban Development, HUD.

I cannot tell you how many times clients, potential clients and wholesale reps have told me about brokers issuing commitment letters and/or rate locks. As a consumer, you want both in writing. You have nothing unless it is in writing.

Underwriting the Loan

When it comes to underwriting (validating the borrower’s loan file) there are no discernible differences between mortgage broker and lender. If we are brokering a loan we underwrite according to the lender’s guidelines. If we close the loan in our name and act as a lender, the same guidelines apply. Even the largest of lenders have to answer to underwriting guidelines. The only difference is who dictates the guidelines.

The lender makes the rules for the broker and the investors make the rules for the lender. Lenders can sell loans to other lenders for subsequent resale or they can sell the loans directly to investors, either one at a time or in “bulk”. Brokers only “sell” their loans to lenders and one at a time. The consumer gains no advantage dealing with a broker or a lender in the context of underwriting the loan.

Loan Pricing

Whether a loan is brokered or a loan is made, the product is the same as is the pricing (interest rate). Selling loans in bulk can garner a pricing advantage for the lender but that advantage is rarely passed on to the borrower. The consumer doesn’t gain a pricing advantage dealing with either entity.

Consumer Disclosure

Disclosure requirements differ among lender and broker. Lenders are required to make certain written disclosures to borrowers that brokers are not required to make. The same is true for brokers. Again, from the consumer’s perspective, there is no advantage here for the broker or lender. The borrower will still sign a bunch of forms and be afforded certain consumer protections.

Yield Spread Premium

There is a distinct difference in disclosure requirements when it comes to yield spread premium. Yield spread premium is much like selling a bond at a premium. Both mortgages and bonds generate revenue by being sold at a rate higher than the “going” or par rate at the time of the sale. This is how no point loans and no cost loans are offered.

Instead of requiring the borrower to pay points for loan at a given interest rate, for accepting a higher interest rate, the borrower can have the fees covered by yield spread premium. Brokers must disclose this premium to the borrower. Lenders do not have to disclose their premium to the borrower.

I bring this up because there has been a lot press about yield spread premium. Certain politicians who are attempting to demonize brokers and the lending industry, are labeling this premium as a kick-back. Nothing can be further from the truth. Premium is a natural occurrence in the debt markets. If it’s a kick back to brokers, it’s a kick back for lenders and investors as well.

However, it’s not a kick-back.

kick-back: noun

1. a percentage of income given to a person in a position of power or influence as payment for having made the income possible: usually considered improper or unethical.
2. a rebate, usually given secretively by a seller to a buyer or to one who influenced the buyer.
3. the practice of an employer or a person in a supervisory position of taking back a portion of the wages due workers.

from dictionary dot com.

It’s capital gain on the instrument being sold, a profit if you will. Premium is an integral part of pricing debt obligations. Furthermore, in the case of the broker, it is fully disclosed on the settlement statement. A kick back is done without the knowledge of the consumer.

As with the other aspects of securing a mortage, there is no advantage going to the broker or lender.

Summary

In obtaining a mortgage, there is little or no difference working with a broker or lender considering the mechanics of the transaction, loan underwriting, pricing, product design, regulatory protections and yield spread premium.

Both can be upstanding and competent entities to work with or inept ripoffs. From the borrower’s point of view, what else is there? There is no consumer advantage to working with either a lender or a broker. Keep the focus on choosing the right product at a good price from people with a track record of competency and trustworthiness.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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In the course of a year, the mortgage industry has dramatically changed for the worst. Because Wall Street can no longer securitize mortgages efficiently, we have seen over 180 lenders go out of business and over 100,000 layoffs in the industry. It’s so bad, that even the strongest lenders are at the brink of failure.

Needless to say, this has negatively impacted the mortgage choices once available to home owners. Home owners looking to refinance now will find only a fraction of the programs that were once available to them. Many will not be able to refinance at all.

Now is not the time for procrastination. If you have decided to refinance, you are probably better off doing it right now. If you wait, only more lenders will go out of business and more mortgage programs taken off the shelf. It will be more difficult to qualify for any mortgage programs that are left.

Additionally, home values are falling daily. By waiting, the collateral used for the refinance will be worth less than today. This will affect the over all terms a borrower can get on the refinanced mortgage. Generally speaking, the higher the loan to value, the worse the terms. Value drops can be to the extent that PMI, or private mortgage insurance, could be necessary. Or worse, they can drop to the point where a refinance is no longer possible under any circumstances.

Even though the current interest rate environment might coerce home owners to wait for the coming lower rates, the value being lost in their homes can offset any benefit lower rates offer. If you get a rate that is a percentage point lower than today’s rate, but you have to take out PMI because your value dropped, what good is that? The cost for the PMI can more than offset the lower interest rate.

Besides, conventional rates are very attractive right now. It’s possible to get a sub 6% thirty year fixed rate mortgage as I write this. Fifteen year fixed rates are even lower. These are attractive rates by any standard.

The risk of not having viable refinancing options is too great. If you have a sensible loan scenario awaiting your approval, take advantage of it right now, while you still have equity and the mortgage programs still exist. If you are even thinking about doing anything with your mortgage in the next year or so, I encourage you to look at your options right now as you may not have them later.

Tags: Finance & Economy, Mortgages, Real Estate, Tips & Tricks by The Mortgage Guy
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Savvy mortgage professionals have been offering no closing cost refinances for years. It isn’t marketed heavily because the interest rates involved are not the lowest one could seek out. So to allocate a big part of a marketing budget to spread the word that your rates are higher than everyone else’s isn’t an attractive idea. So while no cost refinances exist, it’s a pretty well kept secret.

It’s important to understand that the refinance isn’t really free. There are lender fees, appraisal fees, title fees and closing agent fees incurred just like any other mortgage transaction. The difference is all of these costs are being paid by the originator while the borrower pays nothing. The originator can be a lender or broker, either can offer this type of loan transaction.

In order for a free refinance to work, the borrower needs to meet some basic criteria. First the borrower should have a good credit score. At least good enough to meet fannie mae’s or freddie mac’s guidelines. A credit score in the mid six
hundreds usually does the trick.

The borrower will usually have to be able to document employment and income although, in the past, no cost refinances could be done on a stated income (income is stated on the application but not verified) or no ratio basis (income is not disclosed at all on the applicaiton). Additionally, the size of the refinanced loan has to be large enough to cover the fixed and variable costs paid by the originator.

The biggest consideration in any refinance is the length of time it takes to recover the closing costs. This is a non issue with the no closing cost refinance. If you lower your rate by just a quarter percent and it cost you nothing to do so, you don’t have a break even point. The benefits of the transaction are immediate. This aspect of the free refinance makes it both unique and a no brainer.

Who Benefits From The No Closing Costs Refinance?

• All homeowners with rates .25% above the current market rate
• All homeowners with adjustable rate mortgages that want the security of a fixed rate.
• All homeowners with second mortgages.
• All homeowners with a fixed term mortgage that would like to switch to a different term.
  (ie. 30 year to 15 year etc.)

How To Be Sure It’s a No Closing Cost Refinance Mortgage

It’s important to know the difference between a no closing cost refinance mortgage and a no points refinance mortgage. With a no points mortgage, you will still pay all of the other closing costs associated with the refinance. With a no points loan, the only costs waived are the points (origination or discount) or the origination fee. With a no closing costs refinance, none of these fees are paid by the borrower.

One way to tell if your mortgage company is providing you with a true no closing costs loan is to examine the Good Faith Estimate and the Truth in Lending disclosures. These disclosures are required to be sent to you within three business days of the mortgage company receiving your application.

If you are truly getting a no closing costs refinance, your Truth In Lending disclosure will have an APR (Annual Percentage Rate) that is the same as the interest rate being offered. When APR and Interest Rate are the same, that reflects there are no up front costs in obtaining the loan.

The Good Faith Estimate will list the usual closing costs but all of them will be paid by the originator and designated as such. There should be absolutely no costs payable by the borrower.

Another tip is to look at the loan amount on the disclosure forms. The loan amount should be within a thousand dollars or so of the original loan amount being refinanced. Having a big difference between existing loan balance and the new loan amount should raise a red flag. If additional cash wasn’t requested by the borrower, the amount over the existing loan amount may represent fees not disclosed by the lender.

Other Considerations

There are items that mortgage companies never cover in the no closing cost refinance. Generally speaking they are pre-paid items and the initial appraisal cost.

Pre-paid items are not closing costs per se. They are an outlay of items that need to be paid in order to complete the refinance transaction. Typically pre-paid items not covered by the mortgage company are “odd days interest” and escrows for taxes and insurance.

If the borrower cannot front the monies needed for these items, the new loan amount can be increased to cover the layout. If a loan being paid off currently has an escrow account, the unused monies will be reimbursed to the home owner usually within three weeks or those monies are applied to the final payoff. The most common method is a reimbursement after three weeks.

So even though some cash has to be laid out up front by the borrower, these monies are recouped after the old loan is paid off.

In order to protect the mortgage company from ordering and paying for needless appraisals, many mortgage companies will require the borrower to pay for the appraisal up front. If the borrower doesn’t complete the transaction, the appraisal fee becomes the responsibility of the applicant. When the loan closes however, the mortgage company reimburses the borrower.

How The Originating Mortgage Company Gets Paid

This brings up the subject of Yield Spread Premium or Premium (for lenders). A premium is paid to either a mortgage broker or lender for delivering a mortgage to the secondary market that is above the par rate. The par rate is the interest rate that costs an originator nothing and pays an originator nothing.

By delivering a rate higher than par, the mortgage originator is covering the borrowers costs for the transaction and anything left over represents the originator’s profit on the transaction. This is why no closing costs refinances always have rates higher than traditionally priced mortgages.

As long as the rate being delivered is lower than the borrower’s current rate, who cares? The rate reduction, no matter how small or large, was provided free, without any costs what so ever.

The free refinance mortgage can be done over and over again as the interest rate environment allows. It is a no cost way to lower housing and interest costs without risk. The no closing costs refinance should be in every frugal home owners arsenal of money saving techniques.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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Does it make sense to refinance or buy now or will you be better off waiting. The answer is it depends whether or not you are refinancing or buying a home.

If you are refinancing a home, you may be better off jumping in now. Sure there is a possibility rates will go lower if you wait. After all, the economy seems to be getting worse and the Federal Reserve is recognizing this fact and responding with rate cuts.

But while you wait for rates to go lower, home values are declining dramatically. In northern Fairfield County in Connecticut, we are seeing 10% to 15% declines in value. Value declines of this magnitude can eliminate any potential savings to be gained by waiting for lower rates.

How so? In addition to credit grade and the type of income and asset documentation available, loan to value can have a significant impact on the rate you get on your mortgage. Loan to value is the ratio of your loan amount to the appraised value of your home. The closer you get to 100% loan to value, the worse your financing terms will be.

So while waiting for lower rates, if your home’s value is declining precipitously, you can easily negate the effects of lower rates by increasing your loan to value ratio. Based on this premise and the fact that currently rates are within a point of their all time lows (conventional 30, 20 and 15 year fixed rates), now is the time to refinance. This is especially true in light of what is happening to home values.

If on the other hand, you are a home buyer, by all means take your time. As stated previously, home values are declining so the longer one waits the better deal to be had. Furthermore, there is no bottom in real estate prices anywhere on the horizon.

Foreclosures are expected to at least continue on their current record pace and some say they may accelerate. I believe they will accelerate before the market gets any sound footing. I say this because there are trillions of dollars in adjustable rate mortgages out there getting ready to adjust upwards. This will make homes more unaffordable for people already struggling with their payments.

Many of these people bought their homes with very little or no down payments. These people won’t be able to refinance because the amounts they owe will be greater than value of the home due to severe price declines. They will need to tough it out or be foreclosed upon which will put even more downward pressure on home values.

It was also stated earlier that rates are declining. As the economy slows, which it will due the strain the housing market is putting on it, rates should continue to decline. This means not only will buyers get better prices by waiting but they should also have very good rates available to them when they seek purchase financing.

So if you are a homeowner and are considering refinancing, do it now. If you are considering buying a home, there is no sense of urgency to jump in from a price and interest rate perspective. For the time being, the longer you wait the better it gets.

If you are a homeowner looking to trade up or down, the current environment applies to you on both the sell side and the buy side. Meaning that while you will get less for your current home, you can expect to pay less for your next home. For people in this situation, there really is no need to rush or to wait.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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So you’ve finally decided it’s time to make an offer on that house or refinance the one you own. You heard the internet is a great place to shop for a mortgage. So you log on and pull up Google, Yahoo or MSN and you type in “mortgage”.

The first thing you notice on Google is that there are one hundred and forty seven million results for the term mortgage. So you try to narrow it down some by entering “mortgage Connecticut” (or whatever state you live in). Great now you have narrowed it down to 2.147 million results (as of 2005, Connecticut had a population of 3.5 million people). So you just forge ahead and examine the first 30 or so results.

Out of the first thirty results, only one link is to a mortgage company. The other twenty nine links are to mortgage portals that shoot your application to multilple lenders and informational sites like freddiemac and wikipedia. Over to the right you have paid listings. Out of the eight, five are mortgage portals.

So you have the choice of choosing the one lender listed in my search, it was Countrywide or you can try one of the mortgage portals. Of course you can always search more but internet mortgage shopping was supposed to be easy. And why not use a portal? What’s wrong with filling out one application online and have three or four lenders compete for your business?

These mortgage portal sites are in essence mortgage referral websites. The sites don’t provide the loan. The company or companies they forward your mortgage application to provides the loan. To make it worse, you don’t even know who they are going to refer you to. Which is the equivalent of opening the yellow pages and covering your eyes and pointing to the page to pick a company to call.

To me, that is not how I want to shop for anything, including a mortgage. When I shop for a car, I go to dealerships. When I buy clothes, I go to the mall or pull up a website like Landsend.com. If I’m buying groceries, I go to the supermarket. I don’t go to a website and seek out a shopping service. I go straight to the source. That is how shopping for a mortgage on the internet should be too.

I’m not knocking mortgage portals or informational websites. Sites like freddiemac’s and some of the better portals provide a ton of information resources. If you are really into convenience and so much so you are willing to give up control of the shopping experience, then a mortgage referral website is a great place to go.

I don’t know about you but when I shop, I want to deal directly with the entity that is actually providing the product or service I am seeking. When shopping for a mortgage on the internet, be aware of who you are dealing with. Is the website a mortgage referral site or is it the actual website of the mortgage company? Knowing the difference can save you a lot of time and aggravation.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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