Tag: mortgage

Is Yield Spread Premium (YSP) Illegal?

~ Carolyn Warren ~ Leave a comment

YSPHome buyers have been asking me, “Is YSP illegal now with the new lending laws?”

My answer is, “No, not always; but in some instances, yes.” I’ll explain.

YSP (Yield Spread Premium) is extra money (a premium) that the wholesale lender gives to the mortgage broker for selling you a higher interest rate than par rate. That difference between par and the rate you get is the “yield spread.” Par rate is the lowest rate you can get without paying extra in points to buy down the rate. If you don’t want to pay any points, then you want par rate.

Back in the Wild West days of mortgage lending (pre-2010), mortgage brokers could make extra commissions by selling borrowers a higher interest rate than par rate. The higher the rate they were able to sell, the bigger their premium commission was. Thus, it became the goal of greedy loan officers to sell you as high a rate as they could, and a lot of smooth double-talk ensued.

This led a lot of folks — after they realized they had been taken advantage of — to ask, “How can they sleep at night?”

And their answer was, “I sleep very well at night, because I’m making a ton of money, thanks to naive people like you.”

Of course, the savvy borrowers who took the time to read Mortgage Rip-Offs and Money Savers could not be taken advantage of.

So back to the question, “Is YSP illegal now?”

To answer, I refer to the Press Release by the U.S. Federal Reserve in regard to the law enacted April 1, 2011. In short, it says:

* Individual loan officers cannot be paid a higher commission by the lender they work for if they sell a higher interest rate to the borrower. (This takes away the incentive to sell higher priced loans.)

* A mortgage broker cannot collect both an origination fee and YSP. (If the lender charges you an administration fee, application fee, underwriting fee, processing fee, origination fee, or any other lender fees, then it is illegal to collect YSP. Any YSP would therefore have to be given to you, the borrower, as a credit.)

* If the mortgage broker is not charging any origination fee or lender fees whatsoever, then there is nothing in the law that prohibits them from making YSP.

In this last case, YSP is not illegal, according to the interpretation accepted by most lenders.

Mortgage brokers have a choice: get paid by lender fees or YSP, but no more “double dipping” like before.

BUT WAIT, THERE’S MORE TO THE STORY!

Banks and direct lenders love to say, “We are a bank; we don’t have YSP.” True enough, but that is also deceptive. Instead of having YSP, they have SRP!

SRP stands for Service Release Premium. It is money the bank or direct lender gets paid when they sell your loan after closing. Federal law does not require them to disclose it, and they never will. If you ask, the loan officer will say, “I don’t know what it is.” Which may or may not be true, depending on the bank and the loan officer.

Mortgage brokers say the law isn’t fair. It targets them, forcing them to disclose and credit their YSP whereas banks and direct lenders get to deny and keep their extra profit hidden.

Another question people ask me is, “Is there still par rate?”

My answer is, “Yes. If you don’t need money credited to you by the lender to help pay closing costs, then ask for par rate. Also, if you don’t want to pay points (or a partial point) to buy down your rate, then ask for par rate.”

Where to Get More Information

For more information on YSP, how it is directly tied to the interest rate you get, and charts showing actual rates with YSP, see Homebuyers Beware. Also, you will read the one thing you should never say to a loan officer, how to ask for a cost estimate upfront without giving out your social security number, and how to negotiate the best priced loan.

Home buyer Ilya A. Mazo said, “I feel empowered after reading this book.” As the saying goes, knowledge is power.

Thank you for reading my blog. My purpose in writing is to help people avoid rip-offs and get the best loan possible.

Will the New Mortgage Rule Force Your Favorite Local Lender Out of Business?

~ Carolyn Warren ~ 1 Comment

bank closedIt’s a shame. Another nice local community credit union is being forced out of the mortgage business. Linda Sweet, president and CEO of Big Valley Credit Union in Sacramento announced the sad news:

“The burden of trying to comply with the (new) regulation is just overwhelmingly costly for a small financial institution,” she said.*

Her credit union is not the only one who is being strangled to death by the new laws. Last Friday, the government agency set up by the White House — ironically called the Consumer Financial Protection Bureau — enacted yet another new rule that favors the Big Banks and forces more little guys out of the mortgage business. These are the small, local, squeaky-clean lenders that are honest, efficient, competitively priced, and help keep their communities employed.

Look at Michigan Mutual, a company that employes 300 citizens. They, too, are feeling the squeeze. “There are going to be loans that we did in 2013 that we are not going to be able to do in 2014,” said chief executive Mark Walker. “We’re going to be very conservative just to make sure that we’re in compliance and don’t get into trouble.”

I’ll explain what he’s talking about.

Under the brand new “qualified mortgage” standards, approval guidelines will be more strict. The debt-to-income ratio is being lowered, which will negatively impact the following types of borrowers:

— Self-employed people.
— People who rely on tips for income.
— People with income from Internet sales, such as eBay and Etsy.
— People who do side jobs, such as child care, fixing cars, and yard work.
— People who do home party type of sales.
— and others who have income outside the W-2 box.

So forget what you’ve read about underwriting guidelines becoming more reasonable. They’re actually going in the other direction now. The new rules have got lenders scared that their loans won’t be accepted by Fannie Mae and Freddie Mac, even if the borrowers have excellent credit and a history of paying what they owe.

The new standards — not set by people who are experienced in mortgage lending, but by the CFPB committee — make it more difficult for lenders to sell loans to investors such as Fannie Mae and Freddie Mac. The wealthy Big Banks, such as Wells Fargo and Bank of America, can afford to keep a portion of their loans for 30 years on their own books without selling them in order to free up money to make more loans. In fact, those two banks have already said they plan to continue to issue loans outside of the new CFPB standards and keep them in-house. But the little guys cannot afford to do that. Therefore, making loans has just become riskier for them. So risky, that some are quitting mortgage loans altogether and others are significantly cutting down on the loans they will do.

Why is the government agency favoring the Big Banks over small lenders who, by the way, have a cleaner history of mortgage lending with fewer foreclosures?

Peter Carroll, CFPB’s assistant direction for mortgage markets had this to say about the new “qualified mortgage” rule: “I think we got the rule right.”

Really? That’s what you think, Mr. Carroll? Perhaps you should talk with Linda Sweet and Mark Walker and then think again.

* Big Valley Federal Credit Union of Sacramento, CA, is not closing for all business. President Linda Sweet said they will mostly stop making mortgage loans in 2014.

Source for quotes: REALTOR Magazine

Mortgage Loans to Get More Expensive

~ Carolyn Warren ~ Leave a comment

money purseIf you’re waiting till after the holiday season to button down a deal for a home purchase, you might want to rethink that strategy, because mortgage loans are rapidly becoming more expensive.

As I wrote December 3rd, interest rates are trending upward, and that trend continues. Today, we’re seeing 4.625% to 4.75% for the conventional 30-year fixed rate. But in addition, fees are also increasing.

In the near future, I will dedicate a post to explaining the mortgage loan fee increase and what you need to do in order to pay the least possible in fees. For now, be forewarned that if you want to bring less cash to closing and get the lowest rate for the lowest monthly payment, the time to sign the contract and lock in your interest rate is now.

Remember, you cannot lock in your rate/fee without a purchase contract, because locks are tied to a specific property address.

You can have your real estate agent write the contract for you now, lock in your rate now, but write the closing date for the end of January when you have more time to pack and move. Waiting to choose could cost you financially.

Please feel free to pass on this information/blog link to folks who might be affected. You’ll be doing them a favor by helping them save significant money on their upcoming mortgage.

Interest Rates Trending Upward

~ Carolyn Warren ~ Leave a comment

rates up sign Mortgage interest rates have moved upward again. Last week, the 30-year fixed rate was 4.375% and today it is at 4.5%.

Will we reach the 4.75% that rates were at on September 18th? Will we go even higher, into the 5% range and beyond? One economist brave enough to forecast the future says yes. In fact, he expects mid-2014 to see 5.5%, at the least.

As we receive good news about the U.S. economy, rates continue to rise. Of course, the chart looks like a zigzag, because rates do not increase in a straight line upward. But looking at the overall trend, we do see an upward track.

All eyes will be on the Employment Situation Report to be released later this week. If you have a loan in progress that is not locked in yet, you are taking a big gamble, because the trend is not your friend at the moment.

How Locking In Your Rate Works

Locking in your rate secures a specific rate and protects you if rates go up. To lock in your rate, you must have a fully executed purchase contract, because a rate lock is tied to a specific address. If you are still house shopping, you cannot lock, unless your lender offers the rare “lock and shop” program.

Get It in Writing

When you ask your loan officer to lock in your rate, you must also ask for a written confirmation of the lock. An email confirmation is sufficient. Keep this confirmation! Too many home buyers have been burned when a lock officer failed to honor their rate lock request.

Verbal promises mean nothing in the land of mortgage loans. Only what is it writing stands. So make sure you receive confirmation of your rate lock, the expiration date, and any points (dollar amount) you’re paying. If you’re getting a no-point loan, the lock should state a zero fee.

If you have friends or colleagues who are interested in buying a house or refinancing, please feel free to refer them to this blog information.

Disclaimer

This post is not a prediction of interest rates, only a commentary on the apparent trend. It is not advice to lock or float. You and only you are in charge of deciding what interest rate you want to accept and lock.

Higher Loan Limits Set to End This Year

~ Carolyn Warren ~ Leave a comment

house beautiful 2In neighborhoods where the median price of homes is higher than the national average, loan limits are higher as well. This enables buyers to purchase a home in a higher priced area of the country (such as coastal cities) without having to take a high priced jumbo loan.

The current limit for a high cost area is a loan of $729,750. However, that is set to end December 31, 2013.

The loan limit would then lower to $625,500.

Will Congress act to extend the high loan limits?

Since there are no crystal balls for mortgage, no one knows for sure. What we do know is that December 31 is not that far away, so if you’d like to purchase a home with a loan in the higher range, you might want to act now just to be safe. Contact your local Realtor who will act as your buyer’s agent to preview homes and negotiate a contract for you.

When taking a large loan, it’s more important than ever to get the best rate and terms. Recently, I helped a home buyer save over $2,000 in upfront fees when he used my Review and Coaching Service. For information on how you can have me review your cost estimate or Good Faith Estimate with a telephone consultation, click on the page above that says “Review My Estimate.” Because I do not do loans myself, I am an unbiased expert source, working on your behalf.

How Much House Can You Afford?

~ Carolyn Warren ~ Leave a comment

house beautifulEven though any loan officer can pre-qualify you for a loan amount, ultimately, it is your responsibility to decide how much house you can afford. I once heard a mortgage sales manager tell his staff of loan officers to qualify their people for a higher mortgage than what they’d originally asked for.

He said, “If they buy a more expensive house, they will be happier.” Of course, his real motivation was for bringing in larger loans, not for their happiness.

But here’s the thing. Even if the home buyers were happier at first with their larger, fancier houses, how happy were they later when they discovered that their house payment was preventing them from going out to dinner and a movie? It’s not fun being a slave to your mortgage.

A good loan officer who is your advocate will never push you to get a bigger loan than what you’re comfortable with.

Unfortunately, just as often it is the home buyer who is pushing the loan officer to get them qualified for more than they should. This happens after they tour dream houses that are slightly above their price range. They fall in love with a house and think there must be a way to get into it.

This is partly why the mortgage industry created bad loans, such as the 2/28 teaser loan that had a low payment for the first two years and then went up, and negative amortization “pick a payment” loan that turned toxic for so many. A large number of these loans became unaffordable, causing the people to go into foreclosure. And we all know how that affected the U.S. economy!

Even though printed guidelines say your debt-to-income ratio should be 28% for the mortgage and 38% for both mortgage and other credit obligations, in reality, most lenders do not follow those rules. It is common for debt ratios to be pushed to 45% and some will go to 49.99%.

If your debt ratio on paper is 49%, but your real debt ratio is much lower because you have income that the lender won’t include, then taking the higher payment might be justified. For example, some people have a side business selling on eBay, at swap meets, or other venue. The lender might not include that business income for various reasons, so the lender’s calculated debt ratio might be higher than your reality.

How to Calculate Debt Ratio

To calculating your debt-to-income ratio (dti), use your gross income, before any deductions. Include the new, proposed mortgage payment, including property taxes, insurance, and mortgage insurance (if applicable) along with auto loans, student loans, credit card payment minimums, and anything else that shows up on your credit report. In general, the max dti for all expenses should not exceed about 35% to 40%. Stay on the lower end if you have children to support or if you like to spend a lot of money on entertainment, shopping, etc. and need a higher disposable income available after your mortgage payment.

If you’re not sure how to do this, any loan officer can help you with this calculation.

By the way, if you like this type of information, please take a look at Mortgage Rip-Offs and Money Savers and Homebuyers Beware. 

Feds Plan Tougher Requirements for Home Ownership

~ Carolyn Warren ~ 3 Comments

OLYMPUS DIGITAL CAMERAJust when some lenders and real estate agents are saying underwriting is getting better, six Federal agencies are working to get tougher, stricter requirements for becoming a home owner passed into law. Here are three things they want:

1) Bigger down payment. They want you to make 30% down payment to get the best interest rate and best terms. Ouch! How many first-time home buyers have that kind of cash? This would force tens of thousands of borrowers to take a higher rate, even if they have great credit.

2) Stricter credit requirements. Even with the sub-prime loans far in the rear view mirror, they want even higher standards for credit. This will decrease home sales and home ownership, which is counter-productive to growing our economy.

3) Ban combo loans. They want to ban getting a second mortgage in combination with a first mortgage to avoid paying the monthly private mortgage insurance (PMI). So the strategy of putting 10% down, taking an 80% first mortgage with a 10% second mortgage to save money would become illegal. I have to ask, why are they trying to force everyone who doesn’t have 20% down into paying PMI?

The six agencies asking for this are the following:

1) The Federal Reserve

2) The Federal Deposit Insurance Corp.

3) The Federal Housing Finance Agency

4) The Dept. of Housing and Urban Development

5) The Office of the Comptroller of the Currency

6) The Securities and Exchange Commission

Who Does NOT Want Stricter Home Ownership Requirements:

1) The National Association of Realtors

2) The Mortgage Brokers Association

3) Builders

4) Mortgage Bankers Association

5) Private U.S. citizens

David H. Stevens, CEO of the Mortgage Bankers Association and a member of the coalition opposing the plan says, “We plan to be very clear and very vocal” in fighting this. I say, “You go, Mr. Stevens, and go strong!”

If you don’t want to see this 505-page proposal become law, please make your voice heard by contacting your state representation and saying you are against “QRM-Plus.” And please make others aware of this via Twitter, Facebook, email, and other means, because home ownership affects us all.

Gov. Shut-down Causing Loan Delays

~ Carolyn Warren ~ Leave a comment

gov shutdown Mr. White, a renter, is buying a house from the Greens. The Greens are buying a house from the Blacks. Mr. and Mrs. Black cannot move out, because their loan is not closing due to the government shutdown. Because the Blacks’ loan isn’t closing, the Greens and Mr.  White are also blocked from their home purchase transactions going through.

This is a true story, names changed. Because home buying is often a “domino effect,” the government shutdown is blocking more loan closings than it might appear on the surface. I’ll explain.

Lenders who sell their loans to Fannie Mae are required to verify the borrowers’ social security numbers and tax returns. The government agency that does the verifications is shut down. Some banks and mortgage companies are allowing their loans to close without the verification, with the stipulation that the verifications will be done as soon as the agency reopens. So even though the loans are closed, it still must be done. However, not all lenders want to take that chance.

If the verifications do not come back with satisfactory information, the lender must unfund the deal, which is a costly hassle. Lenders have their individual tolerance levels for taking such a risk.

In addition, the USDA loans (loans for certain neighborhoods with income limits) cannot close at all until the U.S. government reopens, so all those loans are in wait mode.

There is an even bigger financial domino effect on the economy when loans don’t close. The six real estate agents involved with the White, Green, and Black transactions are not receiving their commissions. The three loan officers do not receive their commissions. The three loan processors don’t receive their file bonuses. That is money they don’t have to spend on a celebratory dinner out, which affects the restaurant business.

Potentially, three moving companies lost income. New furniture and appliances will not be purchased. Pizza delivery for moving day is not happening. In turn, the people in the food and furniture industries do not have that income to spend on clothing and other things. On and on it goes with lost money to put into the economy. Experts say the U.S. economy has suffered by $2 billion so far due to the government shutdown, and the real estate industry is a part of that.

I don’t give political advice, but personally, I will not be voting for any incumbents at the next election. Let’s hope we get some good news from Washington D.C. soon.

Stupid and Illegal Requirements from Mortgage Underwriters

~ Carolyn Warren ~ 39 Comments

frustrationWhat is the worst request you’ve ever seen from a mortgage underwriter? What paperwork was asked for that was totally over-the-top ridiculous? More and more, home buyers and homeowners refinancing are being asked to provide documentation that makes no sense whatsoever. Some of the information they’re asking for has already been provided in two different forms already, so digging up yet a third verification seems downright stupid.

And then there are the underwriting requirements that are actually illegal.

That’s right. Some underwriters today are asking borrowers to give them paperwork they have no business asking for! It’s high time this come out in the open and that underwriting supervisors and mortgage managers put a stop to this madness. Can we have some common sense in the underwriting department, please?!

For example, yesterday I was talking with a self-employed chiropractor. When his purchase loan was in progress, the underwriter from the wholesale bank that his broker was going through asked him to submit all of the checks he had deposited into his business account in the last year. He had already provided three years’ income tax returns (which they verified with the IRS) and his bank statements. And now the underwriter wanted to see all the personal checks that each and every one of his patients had paid him as well? He told her, “No way, that is doctor-patient privileged information, and it would be illegal for me to give that out.”

Another home buyer (at a bank) was trying to get pre-approved. His application showed a gap in employment during a time when he was hospitalized. However, during that time he maintained his perfect credit; and now he was fully recovered and back to work. The underwriter asked him to provide a letter from his doctor stating he would not get ill again. Can you imagine any doctor guaranteeing someone would not get ill in the future? Talk about underwriting stupidity!

I am making a public call for common sense to come back into the underwriting department.

In the meantime, what is the worst underwriting requirement you’ve ever seen? Please either post a comment (you’ll see the comment tab at the top of this post) or send me an email by clicking on the Ask a Question page (see big blue tab at top).

“Can My Lender Raise My Rate or Increase the Points on My Loan After It’s Locked In?”

~ Carolyn Warren ~ 1 Comment

contract Heads up! Lenders are jacking up the interest rate or raising points–even after it is locked in. If you have a loan in progress, you need to know what’s going on so you can prevent it happening to you.

Today I received this email from T. Smith:

“I have a GFE (Good Faith Estimate) dated 13 September. Trying to close this week and they say our credit report has expired and want to increase the cost of our points. Is that legal?”

Yes, credit reports have a limited life; but moreover, a lender has the right to re-pull a credit report at any time, regardless of the date of the original report. Now more than ever before, lenders are re-pulling credit right at the end of the process in order to make sure no new negative information has popped. “Negative information” could include a new line of credit or an increase to a credit card balance.

If you purchased a car, opened a new line of credit for appliances or furniture for your new home, opened a new credit card, or increased the balance-to-limit ratio on a current card, then any one of those things could easily lower your credit score. And a lower score could place you smack dab in the middle of a higher risk category as a borrower.

Additionally, a new late payment would lower your score.

If a lender discovers that a borrower has a lower score than what they were previously approved at, then yes, they do have the right to raise your interest rate or increase your points in order to compensate for the higher risk they perceive you to be. (Increasing points is another way of charging more in interest. Points are interest paid up front in the form of a fee.)

This is why I have been warning people not to make any changes whatsoever–and not to purchase anything on credit at all–during the loan process. Patience is the name of the game while you have a loan in process. There will be plenty of time to shop after your new mortgage is funded and closed.

If you know someone who is refinancing or buying a house, please pass on this timely warning to them.