The Mortgage Guy Blog

I find it troubling that regulators seek to bury wholesale origination (brokers) in new regulation while retail origination is being painted as the good guy in the mortgage meltdown. The only difference between wholesale origination and retail origination is the lobbying power of the latter dwarfs that of the former.

Regulators, through their proposed legislation and regulatory changes, would have you believe that fraud only exists in the wholesale origination end of the business. Nothing could be further from the truth. Retail lenders are equally prone to fraudulent lending activities as are the wholesale originators. Apparently, the regulators haven’t recognized this.

In the current environment of massive lending changes and industry scrutiny, fraudulent origination practices have been uncovered at Citigroup. Essentially they have been misrepresenting, to their adjustable rate mortgage clients, that their rate resets will be higher than their present mortgage rates, therefore they should refinance to a fixed rate mortgage.

This would be beneficial to their clients if in fact the resets were higher than current rates. However, they are not higher and in fact are lower. Consider this post at Mish’s Global Economic Trend Analysis. Emphasis is mine.

Question 1. What happens to our loan on the anniversary? Will it go down?
Answer: It is very unlikely that it will go down. Would you like to refinance?

By the way the existing rate on the loan in the Email above is 6.00%. That rate is based on the one-year treasury rate plus an index of 2.75. On March 17, the one-year T-Bill rate was 1.53 as quoted during the conference call. Let’s do the math. 1.53 + 2.75 = 4.28 (rounded to the nearest higher 1/8 would be 4.375). Citigroup told the client the new rate would be above 6.00%

The above conversation, in conjunction with the documented hard evidence above, suggests a pattern deceit by Citigroup. I am wondering how many Citigroup customers have refinanced to a higher rate and payment based on inaccurate rate quotes from Citigroup mortgage specialists.

I am not a lawyer. I do not know if any of this violates truth in lending laws, fair lending practices laws, or any other laws. However, I do know this is a mess, and if I was a customer of Citigroup I would be questioning whether or not I could believe anything they say.

In the sake of fairness, if Citigroup has a different explanation for the above examples, I will post it.

Interestingly, nothing new from Citigroup has been posted on the site. Also here is another snippet from a lawyer who responded to the post.

I received an Email from a lawyer who writes:

I am a lawyer. And, you don’t need to be a lawyer to KNOW fraud when you see it, and I’d say that what you describe – deliberately misquoting rates, etc. is fraud (there are two types of fraud – fraud in fact and fraud in the inducement, but we don’t have to get in to that, and you may well know the difference (and I suspect you do)).

Most law is “common sense” and if something screams “fraud” it most likely is – under whatever particular law – whether statutory law or common law.

If Citi KNOWS the rate is going lower, but says “it is most likely to go higher” and doesn’t give a straight answer, and is stupid enough to have third party witnesses listen to the misrepresentations and/or put them in writing and or have them recorded (and I assume Citi records a lot of stuff by law or company policy), then they deserve to be sued by a lot people.

I encourage you to visit the post on Mish’s blog as it is well documented and easy to understand. There is no question that Citi’s activity is fraudulent in my opinion. I would fire any loan officer in my employ for doing anything that resembled this practice. Institutionalized mortgage fraud, you have got to love it.

I can identify a significant number of retail originators whose ethics are far from above questioning. The above example is not unique even though the regulators would like you to believe so.

When new regulations emerge from this lending crisis, they should be applied fairly to ALL originators and not just wholesale origination. The act of over regulating one type of originator over another stinks of cronyism and unfairness. More importantly, applying regulation on a favoritism basis does little if anything in providing more protections for the consumer.

The regulators aren’t doing the right things, they are just doing things. It makes them look like they are doing something constructive but that clearly is not the case.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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For a while now the Mortgage Guy has been posting that our product shelf is about 20% of what it used to be. Further we’ve stated that underwriting requirements (credit standards) have been tightening on all types of mortgages and that this trend was spreading to credit cards and consumer debt. The Fed released a survey yesterday that documents these very disturbing trends.

Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed’s quarterly survey of senior bank loan officers, the Fed said.

Plain-vanilla business loans were also much harder to obtain, the Fed said. Banks expect more delinquencies and charge offs for most types of loans to consumers and businesses, the survey said. Banks said they were tightening their lending standards in response to weaker economy, reduced tolerance of risk, and decreased liquidity in secondary markets.

Consequently, we’ve been urging our clients, both current and prospective, not to delay any financing activity that they have been contemplating. Such as refinancing to make budgets more manageable for the rough times ahead.

One of the biggest reasons for the current procrastination on borrower’s parts, is the prospect for even lower interest rates in the future. We feel this could be a trap. By waiting for lower rates, home values continue to decline and credit standards continue to tightened dramatically.

Any potential gain from lower interest rates can be more than offset by falling home values and tighter credit policies. Waiting for lower rates not only can make refinancing more expensive, it may make it impossible.

This is also from the Fed survey…

For consumers, banks are tightening up on all types of mortgages, not just subprime loans. And banks are less willing to approve consumer installment loans.

More than 80% of banks - the largest percentage ever — said they had tightened lending standards for commercial real estate loans in response to a weaker economy. Nearly 60% of the banks reported falling demand for commercial real estate loans, and 87% expect the quality of such loans already made to worsen.

Clearly the United States is entering a very severe and equally dangerous credit crunch. It started in subprime mortgages and spread to all types of mortgages and now it’s spreading to installment loans and credit cards. Credit card issuers have tightened their standards just like the mortgage lenders as evidenced by this article in the Wall Street Journal.

Big card issuers such as Citigroup Inc. are requiring higher credit scores before issuing new cards, particularly in states that have been hit hard by the housing downturn, including California, Arizona and Florida. Some lenders, including Bank of America Corp., are offering lower initial credit lines. Other lenders, such as Capital One Financial Corp., are limiting credit-line increases or reducing credit lines for existing customers if they see signs that they are suddenly applying for more credit or are having trouble paying down their balances. And many card issuers are raising late fees and other charges to help offset what they see as higher risk.

Also from the article, this synopsis of various credit card lender initiatives.

Naturally, for an economy that is already reaching recessionary levels, these developments prove to be quite serious. John Mauldin at Minyanville states the following about recessions and depressions.

I have long contended that a recession is a normal part of the business cycle, but it takes a major policy mistake by a government or central bank to create a depression.

The Mortgage Guy has maintained that this recession is due to systemic causes rather than cyclical causes. In our view this recession is being brought on by debt markets that are not functioning properly or at all.

We have criticized the Fed, the Treasury Department and politicians for focusing on monetary policy and stimulus packages as opposed to focusing on the dysfunctional credit markets. Lenders, at this point in time, cannot effectively securitize the loans they are originating thus they are cutting back and refusing to lend.

Monetary policy won’t work in this environment because with failing debt markets and banks refusing to lend, there is no way to get the cheap money that a loose monetary policy provides, to the people who need it most.

Could this be the “major policy mistake” that morphs this recession into a depression? We think it could be and history is our guide. Consider this snippet from Wiki on the Great Depression.

In the face of bad loans and worsening future prospects, banks became more conservative in lending money. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed, and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.

These parallels are much too close for comfort. What is even more disturbing, is that as I write this today, there is still a lack of attention to our malfunctioning credit markets. All of the initiatives put forth so far by Congress, the Fed and Treasury Department all focus elsewhere and we think this is a major mistake. Perhaps the mistake that transforms the current recession into a future depression.

We have a lot of rough sledding ahead. Will you be prepared or will you become a victim? Now is the time to take a hard look at your financial situation and to make adjustments accordingly. Your financial alternatives are shrinking everyday.

Just because you might be the proverbial AAA rated borrower, doesn’t mean you won’t be affected by this credit squeeze. I’ll close this post with how the Fed Survey illustrates this tightening of credit standards affects all borrowers.

More than half of the banks tightened their standards for prime mortgages, by far the highest percentage in the 17-year history of the survey. Seventy percent expected the quality of prime mortgages to worsen.

More than 80% of the banks tightened their standards for nontraditional loans, including jumbo loans and other loans that do not conform to standards set by Fannie Mae and Freddie Mac. A similar percentage expected more delinquencies.

For subprime mortgages, about 70% of banks that offer such loans had tightened their lending standards, but more than 90% of the banks responding to the survey said they do not offer any subprime loans.

About 60% of banks tightened their standards for home equity lines of credit.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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As I surf the blogosphere, I occasionally come across misconceptions that just need to be addressed. I had to respond to a post made on an article on MarketWatch’s site pertaining to the upturn in refinance activity.

Here is the comment I responded to…

by BobP863 2 hours ago

The obvious question is why not wait till the FED is through lowering interest rates? Unless there are no closing costs, i don’t understand the urgency. Unless, of course, those irresponsible mortgage lenders are desperate and have to oversell their products in order to survive.

Apparently in need of some guidance, I responded…

While you are waiting for the fed to finish lowering rates, house values are declining. Lack of adequate home value can make refinancing more expensive (pmi) or in some cases, not possible at all.

Further, lending guidelines are being tightened everyday. You can qualify yesterday and may not be qualified today.

The fed doesn’t control mortgage rates. Further deterioration in the Mortgage Backed Securities market could widen the spread between treasuries and mortgage rates. It’s possible to see treasuries move down in yield and mortgages move up in yield, especially in the current environment.

These are reasons for urgency. Maybe now you can understand. But I doubt you will ever understand that it’s not just a subprime issue anymore and that the most blame for the debacle is to be placed on Wall Street and the ratings agencies.

They (Wall Street) enabled every player in the chain. Without Wall Street lying about credit quality and spreading their fraudent securities around the world, we wouldn’t be in this mess. The lenders would not have lent and the buyers would not have bought unaffordable homes.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate 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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Some are handicapping the odds of recession at sixty five percent. Today consumer sentiment came in at a fifteen year low. The highly suspect and often revised jobs creation number came in at 94,000 jobs created in November, while the outlook was for 84,000.

Many have already determined that the Bush/Paulson mortgage bailout will do more harm than good. We are facing massive amounts of foreclosures next year and the year after that. The Fed is expected to ease rates next week. The only question is by how much.

So looking at all of this, it’s apparent that things aren’t going so well for the economy, which usually bodes well for bond yields. Well due to an extra ten thousand jobs being created, the ten year treasury bond added twelve basis points (.12%) to it’s yield. The ten year treasury sits at 4.12% as I write this. Go figure.

I expect a modest downward trend in treasury rates. I expect mortgage rates to follow suit. However we can be surprised with weakness in the U.S. dollar, which could cause rates to rise. Additionally, lenders might tighten up even more on lending, which could widen the spread among treasuries and mortgages. If the spread widens, you could see treasury yields go down while mortgage rates remain level or go up.

The bottom line is we should see decent rates but don’t get greedy because there are influences at work that can sabotage this scenario. If it makes sense and it’s a good rate, grab it. Pigs get fed and hogs get slaughtered.

Tags: Finance & Economy, Mortgages by The Mortgage Guy
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The mortgage payment/interest rate freeze plan is contrary to the well being of competent homeowners, the rules of nature and our gene pool.

In nature, the strong and intelligent survive and the weak and stupid get pruned from the gene pool. Thus perpetuating a stronger species over time.

In modern America, the strong and intelligent get pushed aside (often times on their very own dime) and the weak are given artificial life support. The strong wither and the weak thrive, perpetuating a much weaker and problem prone species. Evidently, it’s compassionate to destroy the future of the species.

The Common Sense Forecaster did some homework on the proposed freeze plan. Who it helps, who it doesn’t and what are the likely affects of the plan. It’s plain to see that the mortgage payment freeze plan is nothing more than a public relations stunt that will cost billions, delay the inevitable and destroy the mortgage industry.

From CNNMoney:

. . . .U.S. Treasury Secretary Henry Paulson began to address efforts to stave off a foreclosure epidemic by lenders, those who service loans, and investors who hold mortgage debt.

Despite much speculation that Paulson is close to helping coordinate a rescue plan that would broadly freeze levels on adjustable mortgages before they reset to higher rates, Paulson gave few details on how such a plan would work.

He did however say who the plan would help, and it would probably leave out a large number of homeowners stretched by their mortgage payments.

Paulson divided subprime borrowers into four groups. The plan would be most geared toward those who can afford the mortgage now but won’t be able to after the adjustment.

The other three groups are largely left out: Borrowers who can afford an adjustment; those who are already behind on their payments; and those who can refinance into a fixed-rate loan.

According to the Mortgage Bankers Association, 5.12% of outstanding loans were in default in the second quarter, a rate about 17% higher than a year ago.

The plan would also seemingly exclude borrowers who hold option-ARMs that aren’t subprime. These are loans that start with extremely low “teaser” rates before rising dramatically a few years into the loan.

It has also been reported that homes that were bought as investments - as opposed to for the purpose of living in - would be excluded.

More than 50% of the increase in delinquent mortgages are actually investor-related, said Wachovia senior economist Mark Vitner. “It’s hard to conceive how many people are actually going to meet this criteria. There’s nothing at all in there that addresses investors,” said Vitner, who added he doesn’t support an investor bailout.

So by Paulsen’s own admission, the plan will only help a small portion of the homeowners afflicted by the mortgage and real estate meltdown.

Clearly it won’t solve the problem and it’s obvious to me that it will only make it worse by leaving the mortgage backed securities investors holding the bag, so to speak. By putting the screws to the mortgage investor, they are killing the life blood of the mortgage industry.

Paul Krugman of the New York Times writes…

Credit — lending between market players — is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.

But liquidity has been drying up. Some credit markets have effectively closed up shop. Interest rates in other markets — like the London market, in which banks lend to each other — have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged.

“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”

So why is Paulsen and company pushing forth remedies that clearly miss the mark and cause further damage to our already broken mortgage securities market? Especially when the real problem is so severe that if left untreated, we are facing very dire financial times.

More from Krugman… As before, the emphasis is mine.

The freezing up of the financial markets will, if it goes on much longer, lead to a severe reduction in overall lending, causing business investment to go the way of home construction — and that will mean a recession, possibly a nasty one.

Behind the disappearance of liquidity lies a collapse of trust: market players don’t want to lend to each other, because they’re not sure they’ll be repaid.

Paulsen, the politicians like Barney Frank and Chuck Schumer, the mainstream media and even some mortgage industry executives are pushing socialistic initiatives that won’t help the majority affected by the mortgage crisis.

If they are not helping the majority of homeowners or the mortgage industry, which is a vital component to the health of the American economy, why are they doing it?

The only thing politicians and government regulators are committed to is keeping their jobs. Plain and simple. Look at the current state of American politics for verification. To some extent, the same holds true for industry CEO’s.

So instead of studying the problem and putting forth potential solutions that will really fix the issues, they take the easy way out. Easy because it is good press.

It’s great public relations fodder to be able to say “awww, the government is going help people who should have never been able to buy a house in the first place, keep their house”. This at the expense of the American public and the American economic system. Good public relations helps one to keep their jobs, incompetent or not.

Shame on them. They are worse than the mortgage brokers that they so fondly vilify.

Tags: Current Events, Finance & Economy, Mortgages 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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One can hear the cries loud and clear. Homeowners looking for relief from upwardly adjusting mortgages and the politician’s cries that they must be helped. While I agree the home owners should be helped, I do so for different reasons. My main reason is to save the mortgage and real estate industries and probably the American economy as well.

Even if there were the political and financial will to assist these home owners by freezing or lowering their payments, chances are it cannot be done. Imposing a modification of debt notes on note holders, in such a way that it depreciates their value, is a dangerous endeavor. Such an initiative can destroy our debt markets and perhaps the securities market in general.

If payment freezes or reductions were imposed, the value of the mortgage security would be negatively impacted. As it stands now, a dollar of an adjustable rate mortgage security yields “x” in interest. Furthermore, the adjustable feature is a hedge against interest rate movements, the yield is determined by the spread, which remains constant.

Lowering the payment lowers the yield thus lowering the value of the mortgage security. Freezing the payment removes the hedge aspect of the mortgage security and that too can depreciate the value of the mortgage note.

Forcing note holders into either or both of these scenarios is unfair and destroys the integrity of the mortgage security. In my opinion, the only way to accomplish either freezing or lowering payments is to do so in such a way whereby the mortgage security/note maintains it current and future values. That is to say in exchange for freezing or lowering the payment schedule, the note holder must receive something of parity.

Equity Sharing

That something of parity can be sharing in future appreciation of the borrower’s home. The potential for a return on capital in the form of sharing home appreciation could offset the affects of lowering or freezing payments.

It could work something like this. At the time the mortgage note modifications are agreed upon, the property is appraised to establish a base line value. At some point in the future, either when the loan is refinanced or the property is sold, the note holder would receive a portion of the home’s appreciation.

As long as the home doesn’t appreciate in value, it cannot be refinanced. It can only be sold either at a loss or break even. In this case, the note holder wouldn’t receive any compensation for modifying the note. Except the benefit of keeping the note current and the receipt of current yield. Additionally, the expenses of foreclosure and a short sale are also avoided.

Because there is little on the table for the note holder if the property doesn’t appreciate, some incentive needs to be added here. That something can be some type of agreement on the borrowers part to agree to a streamlined and discounted foreclosure process should a worse case scenario evolve.

Thousands of dollars in expenses are incurred during the foreclosure process. This diminishes the net benefit to the note holder. By agreeing to a streamlined process, thousands in fees and expenses can be avoided.

Problem Solved

The home owner wins because they get to continue to afford to stay in their home. The note holder gets something of parity for modifying the note. The debt securities market maintains it’s integrity because the note holders aren’t left holding the bag. Confidence returns to the mortgage securitization process and the industry is saved thereby saving the real estate industry and the American economy.

Politicians get to make themselves look good, oop I mean help, by making the proper legislative adjustments to facilitate the modifications. They can even throw a finite and defensible amount of money at the problem if needed.

I’m not a securities analyst. I cannot provide the details of what would be necessary to satisfy the parity needs of the note holder. None the less, this is a scenario that has the potential of working. It’s far better than any plan that I have heard floated so far. That’s because to date, there are no plans to fix our very broken system.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate 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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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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