New Mortgage Rule Could Hurt Homebuyers

real estate Fannie Mae and Freddie Mac, the two government-sponsored mortgage enterprises, will stop providing money for the following types of loans, beginning January 10, 2014:

1) 40-year mortgages

2) Interest-only payment mortgages

3) Pick-a-Payment” negative amortization loans

4) Any loan with more than 3% in fees and points (total)

I’ll be the first to say, “Good riddance!” to the first three, but let’s look at limiting fees and points to 3%, no exceptions.

Previously, the law limited total fees and points at 7% –unless the borrower signed a waiver form three days before signing the loan documents. That little loophole–the waiver form–enabled lenders to reap a high profit on small loans. Now the pendulum is swinging in the opposite direction.

In states where home prices are high, most loans don’t have an excess of 3% in points and fees anyway, so the new law won’t make a difference.

On a $400,000 loan, 3% = $12,000. That is more than they need to make. (Although some disagree and do charge that much.)

But in states where you can get a decent house for only $50,000, this fee cap could cause a major problem. If total fees cannot exceed $1,500 and the title company charges half that, then $750 does not leave enough profit for the lender to pay the loan officer, loan processor, underwriter, doc draw person, and funder–let alone pay the rent, utilities and management.

Will this cause mortgage lenders put a lower limit on the loan size they’re willing to accept? Already, some limit their loan size to $100,000 or similar. What will happen when the new law cuts down profitability even more?

Homebuyers who want to purchase real estate in the low price range might find themselves hard pressed to locate a lender. They would then have to search for a lender that does not use Fannie Mae or Freddie Mac money. In other words, search for the two or three out of a hundred that have other sources for funds.

On the other hand, this could present an opportunity for more investors to provide private money for small real estate transactions. Private lenders are not subject to rules imposed by the FHFA committee.

Higher Rate, More Fees For “Service”?

money and houseWould you pay a higher interest or more lender fees if you thought you would receive better service during your loan process?

That is the question home buyers were asked in a survey by Carlisle & Gallagher Consulting. People in the 18 to 35 age group said yes, they would pay more for better service.

The two areas of most frustration were (1) slow loan processing, and (2) lack of communication for what was going on with the loan.

As a mortgage industry insider, here is what I’d like home buyers to know.

First, you do not have to pay more for better service. In fact, paying more will not buy you faster processing and more communication. To get better service, you need to choose a better lender.

Second, you will not find out who will give you the best service by asking the question, “Will you give me good service?” Or, “What is your service like?” All salespeople — including loan officers — are going to tell you what you want to hear. Promises of “great service” mean nothing.

Instead, ask specific questions and then listen to your gut instinct. For example, ask, “What is a realistic closing time?” If the answer is more than 30 days, you know this is a lender with slower service than others. If the answer is, “We do 60-day rate locks,” you know this is a lender with slow service who is trying to tell you slow service does not matter.

Another question you can ask: “What is your system for keeping meĀ  updated during the loan process?” The loan officer should give you a clear, specific answer and not dance around the subject. Pay attention to your gut instict.

Another good question: “Will you personally be handling my loan all the way through the process to closing, or do you hand it off to another team member?” If the loan officer tells you the loan is handed off, you know that no one individual is going to care about your overall service, because each team member is responsible for only a small segment. No one individual is responsible for making sure you’re happy. When a loan officer handles the loan from start to finish, that person has a greater incentive to provide timely communication and good service.

Personally, I would never work with an “assembly line” type of lender. Nor would I recommend one.

I am a fan of mid-size and small lenders — both banks and mortgage brokers. I find that on average they close loans faster. But to be fair, it’s not the lending institution but the individual loan officer that makes the most difference. There are also top-service loan officers at large banks, and loan officers who are lazy about service at smaller companies.

A great loan officer — the type I like to call Mortgage Stars in my books — will not charge more for providing the excellent service and communication you should receive.

As always, thank you for stopping by to read my blog. I welcome your opinion, and you’ll find the Comment link at the top of this post.