Navigating Through the Mortgage Morass

Roger Schlesinger
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Posted: Oct 08, 2009 2:40 PM
Applying for and obtaining a mortgage loan used to be a routine matter. Not any more. The politicians have chimed in and turned the process into something akin to the struggle between good and evil. Now you need a guide to get you through the loan process.

There used to be a selection of mortgage products, along with plenty of rules and regulations, but Wall Street wanted more. More products would translate into more money -- profits and bonuses for everyone. Loan officers talked to their clients, who liked what they heard. Clients were happy, loan officers were happy, banks were happy, and Wall Street was simply ecstatic. The politicians urged Fannie Mae and Freddie Mac to join the party, and the beat went on. All this didn't cause the financial crisis that rained down on this nation and half the free world, but it did contribute to it needlessly.

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Nevertheless, over 90% of the mortgages in the U.S.A. are intact. In my opinion, the new rules designed to reign in abuses will cause far more problems than they solve. Some are especially problematic:

Exorbitant Charges by Fannie Mae and Freddie Mac

Fannie and Freddie Mac are penalizing borrowers whose loans amortize longer than 15 years if a) loan to value is high (over 60%), or b) credit score is relatively low (under 740). These include interest only ARMS, which amortize longer than 15 years once the interest only period is added in. If you have a 700 credit score and a loan to value over 75.1%, Fannie or Freddie will charge you 3/4 of a point (.75%) just to get the loan. On a $400,000 loan, that's $3,000. If your credit score is 679 and your loan to value is over 60.1% they'll charge you a point (1%). On $400,000, that's $4,000. If your credit score is 645, you'll pay 2½ points (2.5%) for a loan with 70.1% loan to value. Lastly, if your credit score is 635 and loan to value is 70.1%, you'll pay 3 points (3%) just to get the loan. On $400,000, that's a whopping $12,000! These charges do not include any points paid for cash out or buying down the rate.

Furthermore, if the property is a duplex, triplex or fourplex, Freddie and Fannie charge an additional point (1%). Cash out loans, including refinances of first and second trust deeds that weren't taken out at the purchase into one loan, have charges of 1/4 of a point (.25%) for a 740 score at 60.1% loan to value to 2¾ points (2.75%) for a 620 credit score paying and 75.1% loan to value.

If the property is a rental, the charge is 1¾ points (1.75%) if loan to value is under 75% and 3 points (3.00%) if over 75%. If your credit score is 679 and you want a 30 year fixed of $400,000 including $50,000 cash out on a house worth $500,000, you will pay 4 points (4%) or $16,000. If the property is a rental, you'll pay 3 additional points (over 75% loan to value) for a total of 7 points, or $28,000! Can you understand why rentals aren't popular and why someone who has a 679 credit score, which used to be considered good, is considered a poor risk today? Quick answer: Fannie and Freddie went under and are now owned by the government.

Low Appraisals Under the Home Value Code of Conduct (HVCC) Courtesy of Andrew Cuomo, HVCC is killing many transactions. Under HVCC, the appraiser doesn't know the nature of the transaction -- cash out, refinance, combining a first and a second, etc. -- and assigns the lowest possible value to the property to avoid any problems with the lender or those who oversee the industry. A quick reminder that low appraisals continue to drive prices lower, which doesn't seem to bother anyone until they need a loan. Most people do not realize the bank that is making the loan has the right to obtain a second appraisal if the bank feels the first one is too high. In the boom period, most banks didn't bother to do so. Now everyone is paying the price as values continue to decrease.

Restrictions on Loans to Self-Employed People

Self-employed people, who have a multitude of business-related write-offs, and, therefore, usually don't show much in the way of earnings, have had the rules changed in the middle of the game. They used to be able to validate income by showing the cash flow from a year's deposits in the bank. Not now! They used to be able to show reserves reflecting twice the amount of the loan, but no more! They used to be able to demonstrate the ability to make over 3 years of payments from their savings, and, thus, prove to be a good risk, but not any longer. Even with a loan with a value of under 50% and a credit score of 780, self-employed people need not apply... (without tax returns with enough income to qualify).

Fewer Jumbo Loans Available

Wall Street and the banks have increased their capital positions through the sale of their stock, liquidation of investment positions, and the receipt of government money (TARP). However, instead of extending credit for jumbo loans (those over $417,000), the banks appear to be investing the money in Treasuries so as to get a very safe (?) return, even if it isn't all that large.

I conclude with a question for you to ponder. With politicians overreacting to the crisis (yes, the same politicians who were talking very differently prior to the meltdown), who is going to stand up and advocate common sense rules so desperately needed by the mortgage industry? An industry that is rudderless can only end up at the bottom, over a cliff, or stuck on the shore. None of that seems awfully appealing. Over two-thirds of Americans own their own homes and thus have a vested stake in the future of real estate in this country. For the vast majority, their homes are their largest assets; and for many, their homes constitute their retirement accounts. We all should be concerned about what is happening. It's time to pay attention and to let your elected representatives know you aren't happy with what is going on. After all, they just found out this summer that they actually work for us!