Diane Gerdes's Blog

What is Truth In Lending?

Diane Gerdes (The Mortgage Advantage, Inc.) — Thu, 10 Feb 2011 19:29:46 -0800

Question: What is Truth In Lending?

Answer: In our office it is also called the "Oh, my goodness statement!"

Regulation Z or The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to protect consumers in credit transactions, by requiring Clear Disclosure of key terms of the lending arrangement and all costs. It was actually implemented for auto purchases and later modified for home mortgages.

Clear Disclosure is defined by the following: Is it assumable? Does it have a prepayment penalty? How much interest is paid in a dollar amount over the course of the loan?

And the clearest of all is the APR or annual percentage rate. That is, if you consider mud transparent. The APR expresses the mortgage rate as an annual rate, rather than just a monthly rate. Think of it as your note rate with a bunch of stuff that is piled on to it. The additions could include the following: Monthly mortgage insurance (MIP) for FHA or conventional loans (PMI), upfront mortgage insurance for FHA or USDA and the upfront VA funding fee.

And that is before the closing costs: origination fee, discount points (if applicable), title escrow fees, title courier-e-mail fees, underwriting, document preparation, processing fees, interest from the date closing until the end of the month and other costs determined by the Fed.

For example, on a thirty year FHA mortgage at a 5.00 percent interest rate, after adding the upfront mortgage insurance and the monthly mortgage insurance and an origination fee, and title fees, it could bump the APR over the 5.750 percent range. And no, your lender is not trying to stick it to you.

July 30, 2009 was the first of the recent changes to the TIL. Without getting into all the gory details behind these changes it now means if the TIL is incorrect (higher or lower) by more than .125, the transaction stops until the client is re-disclosed. Some lenders may feel like they have been tasered by the Fed police.

On January 31, 2011 the TIL was updated again. The new form is two pages, and now the note rate is disclosed on the front page (finally) along with the APR. But as with all disclosures, the customer needs to read them and the documents needs to be explained. And that is the truth.

FYI: Seller paid or lender paid closing costs do not affect the TIL. If the seller or lender is paying some or all of the closing costs, it is ignored in the APR calculation.

Fannie Mae and Foreclosures

Diane Gerdes (The Mortgage Advantage, Inc.) — Mon, 17 Jan 2011 13:49:49 -0800

Arizona neighborhoods are filled with foreclosed properties touted as Bank Owned. But that foreclosed property may be owned by Fannie Mae, not a bank. Why is Fannie Mae responsible for some foreclosures instead of the banks?

The short answer is because they lost a bet.

The longer answer is a little more complicated. FNMA is the Federal National Mortgage Association, a corporation created by Congress to support the secondary mortgage market. It purchases Federal Home Administration (FHA), Veterans Affairs (VA) and Conventional mortgages (loan amounts under $417,000 in Arizona) from primary lenders and sells them to investors.

By purchasing mortgages, Fannie Mae and Freddie Mac provide banks and lenders with replacement cash to make new loans. The banks collect the monthly payments, and along with their own investors, shoulders partial recourse of the loans.

Before 2006, Fannie Mae did not purchase mortgages with a loan-to-value over 80%, unless there was mortgage insurance or a repurchase agreement from the lender. The pit bosses on Wall Street insisted Fannie Mae join the debt frenzy and ease their restrictions. Along with mirror-fogging underwriting guidelines, Fannie also began purchasing subprime loans as investments.

Fannie Mae concocted another money-making angle by collecting additional bucks for assuming the credit risk on some of their mortgage loans. Investors, or purchasers of Fannie Mae Mortgage Backed Securities (MBS), were willing to pay Fannie Mae additional funds. In exchange for the supplementary compensation, Fannie guaranteed the investors would be paid if the borrower defaulted. What could possibly go wrong?

Fannie Mae and Freddie Mac purchased $1,116 billion (you are reading correctly) in mortgages from Countrywide alone, between 2004 and 2008. Today, $559 billion remain outstanding.

Any bets of how many of those loans will end up back with Fannie Mae? After all, what's there to lose?

The Grinch Who Stole Our Interest Rates

Diane Gerdes (The Mortgage Advantage, Inc.) — Thu, 16 Dec 2010 15:01:10 -0800

All we want for Christmas, other than peace on Earth and the Cardinals to have a winning season in 2011 is for the interest rates to come back down and the economy to improve. Except.....the two don't necessarily go together.

At the Federal Reserve meeting on Tuesday, the conversation was focused on the Money Santa, Fed Chair Ben Bernanke, and the effects of the first round of quantitative easing or QE2 program. One month ago the fear was deflation: our economy appeared to be in a downward spiral and the only Christmas cheer was to print money and buy bonds to keep our interest rates low to support growth.

So why then have our interest rates spiked up? The confident answer is the first round of QE2, combined with the positive economic news, is stimulating our economy. Therefore our rates would actually be higher if not for their intervention.

Another response is the surprising sell off of the ten year treasury bonds. The ten year's yields, determine our 30 year fixed mortgage rates. Investors are abandoning the once safe haven and running back to the glitzier returns of the stock market. Dow Jones is having its strongest show in two years, a sign that consumers and investors believe 2011 will be the year for the recovery we have been promised.

The elves working it on the stock market are giddy over the news that November retail sales and growth in October business inventories exceeded forecasts.

Santa's helpers must have eaten too many iced sugar cookies and in their exuberant state overlooked one or two factors that may continue to affect the spirit of our economy.

Did they crack their little noggins when they slipped on ice while bundling the sleigh with printed money and completely forget about the job market? Almost 10% of Americans are out of work; and in some areas it is closer to 20%.

And if interest rates continue to climb, today we are bumping the 5% mark; it may take a toll on our housing market.

The economic crisis came without ribbons. It came without tags. It came without packages, boxes, or bags. Our economy will get well, we all have to believe. Only time will tell what our leaders achieve.

Investment vs. Second Home

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 13 Nov 2010 13:18:28 -0800

Question: My client purchased a house as a second home. When he read the "second home" rider attached to the deed, he almost did not close. He said it was nobody's business what he does with his property. What is the big deal?

Answer: Congrats on the closing but.... Is your client really purchasing the house as a second home, solely for his use and enjoyment? Or is your client planning to lease the property? If it is to be used as a rental, but he states it is a second home on his loan application, he is committing, (pardon me for being indelicate and using the "f" word), fraud by signing the second home rider.

For future clients the following, is verbiage from Fannie Mae's second home rider:

(Please skip over, if legal stuff bores you)

7. Occupancy Borrower shall keep the Property available for Borrower's exclusive use and enjoyment at all times, and shall not subject the Property to any timesharing or other shared ownership arrangement or to any rental pool or agreement that requires Borrower either to rent the Property or give a management firm or any other person any control over the occupancy or use of the Property.

8. Borrower's Loan Application. Borrower shall be in default if, during the Loan application process, Borrower or any persons or entities acting at the direction of Borrower or with Borrower's knowledge or consent gave materially false, misleading, or inaccurate information or statements to Lender (or failed to provide Lender with material information) in connection with the Loan. Material representations include, but are not limited to, representations concerning Borrower's occupancy of the Property as Borrower's second home.

Borrowers justify their purchases with the following: I'm buying the home for a family member, or my best friend that lost their house, or my personal favorite: I don't think it is fair that I have to pay a higher interest rate for a rental property.

What is the penalty for mortgage fraud? One billion dollars. Actually, I couldn't find info on the exact penalty. All I could find is jail time up to 30 years and a million dollar fine for various loan crimes.

But like robbing a bank (excuse the pun) or speeding on Interstate 10, it's all fun and games until we get caught.

FYI: If you are financing a home, it belongs to the lender until the loan is paid off. Unless, of course, they lose the original deed.

Don't Worry, Be Happy... Economic Update

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 13 Nov 2010 13:13:57 -0800

Yesterday, I went to the Bank of Just Say No to apply for a loan. The soothsayers on the news report the institutions have more money to lend due to Quantum Easing 2 (QE2) and at a cheap interest rate. After all, my Chihuahua, Diego needs a new fall collar and my husband is tired of painting my toenails. It was going well until the employment portion of the application and it said "Mortgage Loan Officer." They had me escorted out of the building.

Last week, Fed Chair Ben Bernanke gave the nation a Zoloft lift by throwing $600 billion into the economy. QE2 has brought out hostile reactions from China, Germany and Sara Palin. Economists throughout the world have derisive opinions varying from it's the end of our world as we know it, to, the Fed should have taken action six months ago.

Why did Uncle Bernanke dispense an anti-depressant to the American Economy? We have stumbled into the doldrums and can't seem to find our way out. There is fear that our economy's painfully slow growth will take a dive into Japanese territory. In the 1990's Japan suffered from deflation: their economy did not grow. It was paralyzed as it suffered through a housing crash, high unemployment, and slashed prices on goods. The well-heeled citizens hoarded their yen and no one was buying discounted items.

With the money from QE 2, the Fed will buy securities, sold by investors, mostly commercial banks, in the open market, paying with newly minted government cash. In theory, the sellers then deposit the funds into their banks. The banks turn the deposits to loans to consumers and businesses. Then we spend the money and the money comes back to the bank. And the money supply multiplies and expands and, in turn, so does the economy.

If successful, the action could kick the housing prices higher with even lower interest rates,(who knew 4% was a high interest rate?) lure businesses to go ahead with projects (that is, if the banks will lend to them) and push the stock market higher. We would go back to our happy place.

If QE2 is too successful, the economy could shift towards the dreaded "I" word or inflation and the cost of everything could sky rocket.

For now a portion of the happy pill has been administered. Let just hope the cure is not worse than the symptoms.

Short Sales and PMI

Diane Gerdes (The Mortgage Advantage, Inc.) — Thu, 30 Sep 2010 17:49:36 -0700

Question: I am trying to close a short sale for my seller. She purchased her home with an 80 percent loan to value first mortgage and a 20 percent second. Now we are told the 20 percent second has private mortgage insurance. How did this happen?

Answer: Private Mortgage Insurance (PMI) is provided by mortgage insurance companies to protect lenders from losses due to default on mortgages. It is for conventional loans only. Fannie Mae and Freddie Mac purchase loans at an 80% loan to value (LTV). Anything more than an 80% LTV require mortgage insurance for the loan to be eligible for purchase.

Guidelines changed in 2005 establishing 100% financing either with 80/20 loans, allegedly to eliminate the mortgage insurance; or 100% LTV's with PMI, allowing credit scores as low as 580.

Banks decided they were not comfortable with the risk on a few of these loans. So they asked their good buddies, the PMI companies, to help them out. They gladly slapped policies on the these loans, cause their BFF's (the banks) were, well, their BFF's. What could possibly go wrong? Oh yeah, the mortgage meltdown. And does anyone else think that not informing the borrower, stinks?

It is all about protecting the bank's interests, not the clients.

Fast forward to today and agents working short sales with private mortgage insurance, now have another entity involved. The seller may not even know they have PMI and the listing agent may not be made aware of the PMI involvement. Banks are not in any hurry to get a short sale approved because they are guaranteed a monetary bonus from the PMI company if the seller defaults. And we wonder, why do some short sales take so long?

FYI 1: If a PMI company is involved, they may want a portion of what they are going to pay the bank supplemented by the seller in the form of a promissory note.

FYI 2: Today's private mortgage insurance companies will insure loans up to 95% LTV's in Arizona. The minimum credit score is 720 and ratios of debt-to-income are between 41% to 45%, depending on the program. (Non-negotiable, because the very nice person key was removed from the loan applications in 2008.) The credit score and loan to value, determine the level of risk or rate the mortgage insurance company will charge.

And those 580 credit scores in 2005-2006? Some families were paying over $300.00 a month in PMI.

Are Appraisal Guidelines Changing?

Diane Gerdes (The Mortgage Advantage, Inc.) — Sun, 12 Sep 2010 21:27:36 -0700

The weapon of mass property devaluation is finally getting shot down a notch or two. Effective September 1st, Fannie Mae (conventional loans) issued a new directive to lenders addressing concerns on today's appraisals. Fannie Mae issued announcement SEL-2010-09, "Selling Guide Updates and Additional Guidance on Appraisal-Related Policies."

The following are the highlights:

· Short Sales and Foreclosures cannot randomly be shoved into a report without stating the condition of the properties. The trashed foreclosure down the street will no longer hold the same merit as a seller's well-kept property. "The appraiser must conduct the proper research in order to complete the assignment and provide an accurate opinion of market value." Although, if the neighborhood is a composite of foreclosures and short sales, the value of the awesome home will still be compromised.

· Underwriters cannot alter the appraised value. Corrections or additional changes are required to be made by the appraiser. If the opinion of value is still fuzzy, another appraisal can be ordered. Although there was no directive on whether the lender can take the value of the second appraisal if it were to come in higher.

· Fannie Mae added verbiage that will apply to investors purchasing properties and immediately selling them for a quick buck. "Lenders must pay particular attention and institute extra due diligence for those loans in where the value of the property has experienced significant appreciation in a short time period since the prior sale." Please call your investors and ask them to take a chill pill. If they are refusing FHA buyers because of the "two appraisal rule," take heart in knowing conventional financing may require the same.

· "Appraisers must provide the sales and financing concession information that was available and verified for the comparable sales." Translation: concessions come straight off the top of value. That home comp for $200,000 with a $6,000 seller concession is actually only a $194,000 comp.

· Fannie Mae is backing away from demanding the use of Appraisal Management Companies. This is hysterically funny because Lindsay Lohan will have a better chance of staying out of a bar than a loan being purchased by Fannie that does not use an Appraisal Management Company. At least for today.

Unfortunately, Fannie Mae does not rate the year old appraisal process or HVCC (home valuation code of conduct). Until that time comes, homeowners are stuck with appraisal roulette determining our property values.

FHA and the coming changes

Diane Gerdes (The Mortgage Advantage, Inc.) — Mon, 30 Aug 2010 22:16:03 -0700

FHA, home buyer's go to mortgage of choice in today's lending environment, is changing their mortgage insurance effective October 4th. FHA was formed in 1934 by the government to help stabilize the housing market during the great depression.

One of the reasons for the adjustment is that year to date, FHA insured over the half of the loans nationwide, compared to only 2% of home loans in 2006. In Arizona, it is estimated that more than 70% of homes financed utilize FHA.

FHA managed to circumvent the mortgage debauchery of 2004 to 2006 (Remember when sellers, you know, real sellers, not banks refused to accept offers from FHA borrowers?) only to re-emerge as the knight in shining armor for our current housing market. But it's proving to be a big drain on their coffers due to foreclosures. If the market continues to decline, housing could see another round of strategic walk-always. With only 3.5% down, there is little skin in the game to entice home owners to stay in their homes. Therefore, FHA is planning for the future rainy day that may or may not come.

The new changes may make loan qualifying a little spicier. The monthly insurance premium will increase and monthly payments could increase from $35.00 a month to $65.00 a month depending on the loan amount. With higher payments it could mean fewer borrowers will qualify for a loan.

When will the changes stop coming from FHA? Not for awhile. The powers in charge are trying to balance profitability without trashing the battered housing market.

Other considerations may be forth coming. One is lowering the seller's contributions towards closing costs from 6% to 3%. Home builders have been accused of inflating home prices to cover these fees. If this is implemented the buyers of lower priced homes will also feel the sting. The other and, brace yourself, FHA may raise the down payment to 5%. An increase in the down payment could again alter the Arizona's mortgage landscape and not for the better. Stay tuned.

Five Ways for Fannie Mae and the Banks to help the Housing Market

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 26 Jun 2010 12:35:35 -0700

Five Ways for Fannie Mae and the Banks to help the housing market*

*without stimulus money

Fannie Mae's directive to freeze out home owners for seven years, who bail on their current mortgage, brought tears to the eyes of Arizona home owners with their tender concern for current customers.

If Fannie thinks that this mandate will help the housing market and deter current borrowers from bailing, she should get her head out of the clouds or "wherever "she has placed it.

Instead of doling out ultimatums, possibly she should consider the following:

    1.      Allow current home owners to refinance their homes at today's appraised value utilizing the HVCC, Home Valuation Code of Conduct. (Or are they just plain chicken to utilize their own weapon of mass property value destruction)

     2.      Let us refinance at today's market rate. What good does it do to have awesome rates when we can't lower our payments because of negative equity position?     Think about the money it would bring into the economy if we had a few extra bucks to spend on something other than our house payment.   I could buy wine in a bottle instead of a box.

     3.      Bring back the stated income program for high credit score, 20% down, asset-heavy borrowers. Don't punish these potential golden home buyers for Fannie's 100 percent stated income, low credit score programs of past years. (Burger King cashiers making $6,000 a month, Really?)

     4.       The banks should keep a sizable share of mortgage loans on their own "shelf" instead of leaning on Fannie Mae or FHA to replenish their coffers. The Big Boys have billions of dollars in profits. Invest in communities instead of derivatives.

     5.      The Big Boy banks should admit they contributed to the market meltdown instead of placing blame elsewhere. Get booked on Conan, write a memoir and start making amends by giving away a few billion dollars to home owners by giving incentives to those that make their payments on time.   For instance, give cash back at the end of the year or bonus miles. (Yes, I know mortgages are not credit cards, but if Southwest can do it why can't they?)

The depressed housing market's layers are deep and far reaching.   It effects all corners of our economy.   But until there is an intervention other than from the government, an entry position at Burger King may start looking pretty darn good. (I have dibs on the fryer)

Don't let the threat of Deflation keep us from being Champions

Diane Gerdes (The Mortgage Advantage, Inc.) — Sun, 20 Jun 2010 13:11:12 -0700

Last Saturday we watched the U. S. tie England in the World Cup Soccer match at a local bar. Skill and a lot of luck enabled the Americans to play for another day.

The U. S. Economy is suffering from a type of malaise. We just can't get things started. This week's Consumer Price Index report shocked the soothsayers with virtually no change. The CPI tracks inflation by gauging the increase in the cost of goods from food to autos. The double whammy was the disappointing May's retail sales, indicating that we are not going to the mall to buy the stuff we don't need.

Why isn't this good thing? Prices aren't going up. So what, if we decide to save a few bucks for a rainy day, instead of buying that new Swarovski dog collar for our Chihuahua?

Avoiding the malls or lowering prices to entice buyers, present the potential for stagnant growth in our economy. With the decrease in business, or profits, companies are forced to lay-off.

Inflation has typically been the focus of the global governments. They work very hard to prevent the "overheating" of economies to avoid out of control increases in the goods we purchase.

Deflation is the silent evil twin of inflation. The criteria for lending becomes harder, less money is loaned, therefore spent. Prices fall on the stuff we buy. Wages take a hair-cut or are reduced.

There is a psychological effect that accompanies deflation. How many times have you heard someone say they're going to wait to buy a home because they are sure the housing prices have yet to hit bottom?

What should we do? Most of us can't afford for our wages to go down any more or we will be forced to drink water instead of our favorite adult beverage. Not to mention giving up our visit to bars, restaurants, and malls.

We all need to get inspired. We live in the greatest country in the world. So get out your vuvuzelas, stop listening to our referees, (who are deaf and blind) and make things happen. We need to get back in the game. We've got the skills, but we need to make our own luck.

FYI: With today's interest rates, waiting for housing prices to fall further may not be a good bet. A lesser price home, at an increased rate will equate to higher payment.

FYI 2: Soccer is watched world-wide by 715 million people. It can be played anywhere, anytime, by both genders and all age groups. The Super Bowl, by comparison is watched by 115 million people.

Why is there a Limit on the Number of Financed Properties?

Diane Gerdes (The Mortgage Advantage, Inc.) — Sun, 20 Jun 2010 12:45:54 -0700

Question: My client would like to finance two investment properties.   He owns three properties. But there is a fourth property his ex-wife received in the divorce and his name is still on the mortgage.   He is having a hard time finding a lender? Why?

Answer:   In 2008 Fannie Mae reduced the number of financed properties from ten to five, only to reverse it a year later. Unfortunately, a majority of the lenders have refused to change back to the ten mortgage cap.   Banks are licking their wounds from the amount of investment properties financed back in the day that have since gone into foreclosure.   Remember the 100% stated, investment property program?

Every bank is different.   Most banks will only allow up to four mortgages, maybe five, as long as the fifth property is a primary residence. The lenders allowing financing for up to ten properties typically do not have the best brother-in-law rates and may only loan on one property, limiting their investment exposure.

The issue with the property in the ex-wife's name is tricky. Fannie Mae's guidelines state that if you have a court order (such as divorce decree); the lender is not required to evaluate the payment history.     Conventional Wisdom tells you that as long as there is a divorce decree that spells out the transfer of title to the ex-wife and she can provide bank statements and/or cancelled checks proving she has been making the payments out of her own checking account, that would be cool with the lender. But lender's don't think that way in today's market.    The bank's will have their own interpretation.

FYI: Some lenders gauge the number of mortgages NOT properties. So, if your client has three investment loans, and a first and second on his primary, that may be considered 5 mortgages.

Yes It Is True: One bank will not allow out of state borrowers to finance investment properties. It is gonna hurt if the loan officer is not aware of that cute nuance until underwriting.

Why is the Lender asking for a Home Inspection?

Diane Gerdes (The Mortgage Advantage, Inc.) — Wed, 26 May 2010 15:40:34 -0700

Question: My FHA buyer's close of escrow is delayed because the lender is asking for the home inspection and information on the seller's LLC. Why?

Answer:  We will assume the contract was executed within the 90 days of the seller acquiring the property.

In February of this year, The Waiver of Requirements of 24 CFR 203.37 amended the FHA 90 day flipping rule, or flopping as it is now called by some underwriters. To keep things spicy, it was not amended in a mandated FHA mortgagee letter. Therefore some of the lenders are not as excited about originating financing within the 90 days.

Keep in mind this is brand spanking new, and the banks that embraced it early on, are getting their hands slapped from HUD.   In April, second appraisals were rare. But today, more often than not, it will be required.

If the sales price is 20 percent or more over the seller's acquisition cost, the lender is required to get a property inspection.   The thought process behind this guideline is that the home was purchased at a deep discount, therefore the seller should spend some bucks to gussie it up. And it better be darn next to perfect.   The lender may require any and all repairs, including minor cosmetic items to be completed before close of escrow, even if your buyer could care less, and the appraisal did not mention anything about a stove and tip-over protection.   A second appraisal is typical to cover the Bank's "you know what" to validate the purchase price.

The second part of question can make you cross-eyed.   FHA is scrutinizing the "Identity of Interest," between the buyer, seller and other parties participating in the sales transaction. And we aren't talking about being personally related.   One bank informed us that if the property is owned by an investor, an LLC, and the selling real estate brokerage is an LLC, and if there is any ownership between the two, then FHA will not do the loan until after the 90 days is up. So, just to be clear, it is not okay during the first 90 days but the 91st day it becomes acceptable. This is one bank's interpretation of the ruling.

Regardless, documentation on the LLC will be required.

HUD is closely analyzing the purchases of these flopped properties. Be prepared for additional documentation and second appraisals.

FYI: If your seller purchased the property under his name, then transferred it to an LLC at a later time, the date of the deed transfer, not the purchase, could start the clock for the 90 day flipping/flopping guidelines.

Run to The Border.........Economic Update

Diane Gerdes (The Mortgage Advantage, Inc.) — Mon, 03 May 2010 16:19:37 -0700

Diego and his best friend were making their weekly run to the wine store to stock up on boxed wine when they were stopped. It turns out the five pound Chihuahua did not have the proper documentation. He had jumped into the car without bringing it with him. They would have carted him away, but became more concerned with the copious amounts of wine in the back seat and demanded a liquor license. His friend showed them her gun and they decided Diego was good. You gotta love Arizona!

Governor Jan Brewer signed the Arizona Immigration Law just as the Arizona economy was beginning to show signs of life. The resorts and restaurants glowed of renewed activity and added 5,600 jobs for the month of March.

Yes, you could feel the excitement in the air. Our state has the base to expand into mega centers for several fields of corporate growth including solar energy, medical, scientific technology, aerospace, software and sports. Conventions and events were coming back to Arizona to share our sun and hospitality.

There are so many governmental acts that would have received positive national attention. For instance, our legislators could have mandated banks pay a fee to the state coffers for every home they foreclosed. Arizona could have mirrored the state of Massachusetts, to file its own lawsuit against the lenders that originated pay option arms for our bilked home owners. Or limit the building of new homes so that when our economy does recover, we do not have another builder-fueled boom.

Our monetary resources, critically limited due to this historic economic downturn, could have been used to entice businesses to become permanent residences of our great state. But instead we will be utilizing our precious funds to pay attorneys to ward off the multitude of lawsuits slamming against our State Capital's rented doors.

All for a misguided photo op. No doubt we need immigration reform; starting with our borders.

Now that they have put our 18.5 billion dollar tourism industry at risk, our legislators should take a closer look at all of the nationalities that visit our state. Are they also of the opinion that we really don't need another Super Bowl? Or corporations from other countries?

Maybe their well thought-out plan was to lose the income. Then we could short sale our state to the Chinese. Just make sure you have your papers in order before you leave home.

The Scary Truth about Goldman Sachs

Diane Gerdes (The Mortgage Advantage, Inc.) — Mon, 19 Apr 2010 08:22:02 -0700

The once blind sheriff of our financial markets, the Security Exchanges Commission, or SEC slapped handcuffs on Goldman Sacs for investor fraud. The crime was selling instruments of mass financial destruction named collateralized debt obligations and betting that they would go bad.

Except there was no collateral to back it. Oh, at one time it was backed by mortgage subprime loans, but when subprime loans went away in 2007, the masters of financial evil continued with mortgage bonds that already existed. (Ponzai anyone?)

So, what's the big deal? It is just big boys shenanigans and someone got burned. But it was with our money. Pension funds for police and teachers to retirees on fixed incomes have been affected. The unprecedented collapse of the housing market can be traced back to these types of funds.

Credit derivatives were invented by a team at J. P. Morgan Chase in the mid 1990's. CDO's hold hands with credit default swaps. CDS's are insurance or bets that pays out if the CDO's go bad. Both are perfectly legal since 1999, when it was successfully argued that we did not need protection from our banks and the Glass Steagall Act was repealed.

Twelve years ago Brooksley Born, the then chairman of the Commodity Futures Trading Commission, tried to sober up the financial markets by warning that credit derivatives, should be regulated or a monetary calamity would be imminent. Watch the PBS show: Front Line: the Warning and you will be stunned to see that the players at that time are still playing in our current white house.

With the need to feed the money monster, Wall Street, the ratings companies gave these funds triple A ratings. The investors thought there was little risk.

These funds bet on both sides. Compare it to going your local Dr. Jekyll prescribing medicine to cure your ills. You buy the medicine because you are told it will make you better. But the mad doctor is betting you will die a horrid death.

The architects of theses creative instruments bet that the housing market would take a dive. And Goldman Sachs made billions.

But like any scary movie, you have to wonder what else is lurking in the dark, murky, unregulated financial basement. Our money guru's are hesitating to use silver bullets, krypton, wooden stakes, or legislation to eliminate these creative destructive devises that nearly destroyed our economy. Timothy Geithner, our current Secretary of Treasury, doesn't want to outlaw them completely because the bucks are still rolling in.

After all, we managed to live without a few billion dollars before they were invented. Didn't we?

Dear Bank of America,

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 27 Mar 2010 18:07:16 -0700

Dear Bank of America,

Oh, my goodness! Three and a half years after the housing meltdown you are boldly going where no bank as gone before by finally allowing principal balance reduction on modified loans targeting specific programs. Your name and picture (logo) made the headlines. Television and radio talked about you for days. Why, you had more hits than Jesse James.

Would you mind taking a minute to explain exactly who this particular Bank of America program will help? To modify, homeowners must be 60 days late on their payments and have a hardship. Drowning in negative equity is not a qualification. And of course, rentals and second homes are not eligible.

After reading the small print, the principal reduction modification is only for Countrywide borrowers. And only the following mortgages are eligible: subprime loans, specific two year adjustable rate mortgages and option ARMs.

Golly, Mr. Bank of America, are you stuck in some kind of time warp? The subprime home owners bailed two years ago, maybe it was three. The two year ARM's mortgages jumped ship after the first adjustment, again probably a couple of years ago. And the option ARMs? Didn't most of the note holders give their keys back when you stopped taking their interest only payments in 2007?
.
On behalf of the three families that this program may help, we thank you.

Sincerely,

Arizona Home Owners

P.S. On Thursday, The Office of the Comptroller of Currency reported that the re-default rate of modified loans, originated in the first quarter of 2009, climbed to 51.5 percent by December. It is apparent that the modification program needs a major overhaul to keep homeowners in their home.

So, the Obama administration announced yesterday more bold changes. FHA may step in and refinance homes up to 96.5% of the appraised value, if the original note holder will forgive the remainder of the principal balance. Again, this is a suggestion rather than a mandate. The "who really owns my mortgage" is really pesky. We may make our payments to Wells Fargo, but an investor in Europe may actually own the note. And the investor may not care what our government suggests

Dear Bank of America,

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 27 Mar 2010 15:32:14 -0700

Dear Bank of America,

Oh, my goodness! Three and a half years after the housing meltdown you are boldly going where no bank as gone before by finally allowing principal balance reduction on modified loans targeting specific programs. Your name and picture (logo) made the headlines. Television and radio talked about you for days. Why, you had more hits than Jesse James.

Would you mind taking a minute to explain exactly who this particular Bank of America program will help? To modify, homeowners must be 60 days late on their payments and have a hardship. Drowning in negative equity is not a qualification. And of course, rentals and second homes are not eligible.

After reading the small print, the principal reduction modification is only for Countrywide borrowers. And only the following mortgages are eligible: subprime loans, specific two year adjustable rate mortgages and option ARMs.

Golly, Mr. Bank of America, are you stuck in some kind of time warp? The subprime home owners bailed two years ago, maybe it was three. The two year ARM's mortgages jumped ship after the first adjustment, again probably a couple of years ago. And the option ARMs? Didn't most of the note holders give their keys back when you stopped taking their interest only payments in 2007?

On behalf of the three families that this program may help, we thank you.

Sincerely,

Arizona Home Owners

P.S. On Thursday, The Office of the Comptroller of Currency reported that the re-default rate of modified loans, originated in the first quarter of 2009, climbed to 51.5 percent by December. It is apparent that the modification program needs a major overhaul to keep homeowners in their home.

So, the Obama administration announced yesterday more bold changes. FHA may step in and refinance homes up to 96.5% of the appraised value, if the original note holder will forgive the remainder of the principal balance. Again, this is a suggestion rather than a mandate. The "who really owns my mortgage" is really pesky. We may make our payments to Wells Fargo, but an investor in Europe may actually own the note. And the investor may not care what our government suggests.

Can a Leprechaun Buy a Home?

Diane Gerdes (The Mortgage Advantage, Inc.) — Wed, 17 Mar 2010 10:58:49 -0700

Question: Can a Leprechaun buy a home?

Answer: Yes and No. The Equal Credit Opportunity Act of 1974 prohibits discrimination in granting credit to individuals based on race, color, age, religion or national origin. Stature, mode of dress and jig dancing cannot be a reason to deny a home loan.

The guidelines state that our small cloverleaf carrying friend from Ireland establish residency with a lender approved work visa. The type of documentation has changed so be sure to check with the bank or lender on what they will allow. He must also build a credit history that spans two years. A good credit score is required. Student and other limited visitation visas are not considered adequate documentation for mortgage financing.

There are some "foreign national" programs available for individuals. Keep in mind the down payment is hefty and the documentation required will build a small country.

Unfortunately having a pot of gold does not qualify for down payment or closing costs unless it has been put in a bank and seasoned for over 60 days. "At the end of the rainbow" is not an appropriate paper trail.

Work history is important. If Leprechauns follow the tradition of conducting mischief for profit, they will need a two year income history disclosed on American tax returns.

It's not easy being green or in real estate. That's why we have Guinness.

FYI: Harris Bank in Scottsdale is owned by the Bank of Montreal and extends competitive programs for our Canadian Neighbors.

Exception: A green card or permanent residence extends all of the same benefits as a U.S. citizen when financing homes.

Stop! In the name of the Economy

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 27 Feb 2010 12:11:33 -0800

This past week the administration serenaded the American housing market with the same old songs and repetitive lyrics.

The HAMP loan modification program or the banks refuse to reduce the principal balance program because it would hurt their bottom line planis blowing in the wind by reporting a much lower percentage of modifications than expected. Also, the rigid guidelines for income qualifications are kicking a lot of candidates into foreclosure.

The unveiling of the much anticipated new short sale assistance program HAFA, was presented in a cross country conference call Tuesday. It included Wells Fargo, Bank of America and Freddie Mac. They charged per line if you wanted to listen in. Because the banks can't give information for free. That would be, well, fair. And if you want fair go to a fairground, not a bank. The participation was massive. And after the call if you were scratching your head in a purple haze, you're not alone.

The speakers mentioned "portfolio" and "investor" several times during the conversation but did not take the time to define. Portfolio loans are mortgages kept in house, or on their own shelf, so to speak. But the majority of loans are mortgagees purchased by various investors from the bank on the secondary market. Investor approval is required before any short sale or modification can be implemented. Therefore, the massive delays in receiving answers. Portfolio loans are much easier to process because the approval comes directly from inside the bank.

CNN reported the whispers of a secret program. It would target states that are severely underwater: Arizona, California, Nevada, Michigan and Florida. This initiative would throw a few billion dollars at homeowners to help make their payments if they lost their jobs. (Although Arizona may be carved out of this plan because the unemployment rate is 9.2 under the national average of 9.7)

The London based FT Times reported that the number of people giving up their homes to foreclosure strictly for financial satisfaction is growing exponentially. Home owners in negative equity positions, capable of making their payments, are making the business decision to walk away.

The Obama administration is dancing in the dark by ignoring the brutal signs of a diminishing housing market. Money can't buy you love or a housing recovery.

FYI:Before a client can be eligible for the new HAFA program, they are required to go through the HAMP program first for a loan modification. (see above) Also, investors do not qualify for this program.

Can My Self Empoyed Buyer get a Mortgage?

Diane Gerdes (The Mortgage Advantage, Inc.) — Thu, 25 Feb 2010 11:29:00 -0800

Question: My client heard that there are no loans for the self-employed. He owns his company and says he makes a lot of money. Is that true?

Answer: Our great country is based on entrepreneurs that made the gutsy decision to control their own financial destinies. The self employed encompasses the largest pool of jobs from real estate agents to owners of large corporations. All of the mortgage programs, FHA, VA, USDA, Conventional are available for the self-employed.

In the ancient times, two years ago, it was relatively easy for the self employed borrower to receive mortgage financing. The Russian sister's loans were popular: NINA, no income, no assets or SISA, stated income, stated assets. Those programs have been kicked off our shores probably never to return.

Income is calculated using the most recent two years of federal tax returns with all schedules. Therefore a two year self employment history is typically required. Income is derived from the adjusted gross, after all expenses are subtracted out and averaged over two years. If the borrower's company is an S Corp, LLC, Partnership or C Corp, the corporate returns may be asked to be viewed to validate the business trend is positive.

Exception: Doctors, Attorneys, Dentists that started their own practice after working as employees for a hospital or another doctor; one year, or less, of self employment only may be required.

Our Uncle Sam will not let us have it both ways. If your client makes a lot of money, but writes off the majority of income to avoid paying taxes, it could prevent him from qualifying for a home loan.

FYI: The government has documented that self employed borrowers have significant occurrences of (pardon the f word), fraud. Therefore all lenders require a signed 4506T and will pull the tax returns from the IRS to compare to the returns in the file.

Who is prettier FHA or Conventional?

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 20 Feb 2010 18:57:46 -0800

Question: Which is better option for my client a 3.5% down FHA loan or a 5% down conventional loan?

Answer: FHA loan limits in Arizona are $346,250. Conventional loans will go to $417,000. The FHA payment will come to about $65.00 less based on a comparison to the loan amounts of $346,250. And your client will only need to come in with 3.5% down payment instead of 5%. For loans with limited down payment, FHA is usually the better alternative.

For loan amounts above the FHA limits the only option is Conventional (if VA or USDA is not available). Conventional loans with mortgage insurance-anything less than 20% down-- will require extra scrutinization from the private mortgage insurance provider. (Because the loans aren't scrutinized enough already)

On a recent loan with 10 percent down, the bank's underwriter did not like the appraisal. The bank ordered another appraisal. The private mortgage insurance company did not like either of the appraisals and ordered their own. Three appraisals on one property. And yes, the property appraised at sales price. Strange but true! (Strange that the appraisal came in at sales price)

Also, Conventional loans with mortgage insurance 5% or 15% down have rigid income to debt and credit score requirements. Credit scores that were acceptable a year ago now are considered too great a risk. It doesn't matter how much the down payment. But FHA could step in and save the day. At least until their mission statement is changed by the government.

FYI: Beware of water concerns! FHA will not allow more than 4 properties to share a well. Conventional does not have a limitation on the number of houses on a "shared well." (Water documentation will be required) We see this on properties that were built in 2005 on acreage that sold for way above the FHA limits at the time. The builders never dreamed their custom properties would be in FHA territory.

We are the Olympians

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 20 Feb 2010 18:39:29 -0800

The American Economy should take lessons from our 2010 Olympic champions. The American athletes are playing with injuries that would put the rest of us in a hospital for an extended stay. At the very least you would find our battered bodies sequestered in our hot tubs (or in my case, a warm bath), easing the throbbing with our favorite adult beverage.

Lindsey Vonn, the first American female gold medalist for the downhill, skied with a severe bruised shin. It was rumored just days before the opening ceremony that she may not compete. In December Seth Wescott jammed his femur into his pelvic bone (everyone say eeww!), only to forge ahead winning the gold for the men's snowboard cross. Evan Lysacek surprised the world winning the gold in men's figure skating, although a past foot fracture left him unable to perform the quadruple jump. (Contrary to the reports on ESPN, watching figure skating does not compromise the man gene). And Shaun White has no injuries that I know of but, wow, his wings must be invisible. How else could anyone fly and twist at that height? His performance was awe-inspiring.

Our economy has been sick and diseased, leaving a trail of broken limbs and bruised egos. It is slowly getting better in spite of the housing market and anemic employment. The signs of improvement, although small, are in all aspects of business, from manufacturing to retail sales. We should be determined to work through our own financial injuries (some self-inflicted) enduring the pain as we move forward. For true inspiration we should mirror our Olympians for continued motivation so that we keep improving and changing as needed.

FYI: The Global markets feigned surprise Thursday when the Fed raised the rate charged to banks for direct loans by a quarter of a point, the first increase since June, 2006. Hand wringing and wailing is not necessary because the Fed is sending a baby signal that they are trying to get back to business as usual. It is the first step to wean the financial industry off of the historically cheap money.

It's Greek to....

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 13 Feb 2010 09:59:45 -0800

Bail outs are taking a whole different meaning in today's world. A few short years ago bail out meant contacting Dennis, the bail bondsman to borrow money to get my irresponsible brother out of jail. Now 15 members of the Euro Zone have gotten the call to bail out their financially reckless sister, Greece. So why would they bother?

The same reason I bailed out my brother. He never paid back the thousands of dollars he borrowed through the years. Greece already owes a ton of money to many members of the EU. The other countries need to protect their investment.

The two largest and healthiest members of the Euro Union, France and Germany have too much invested in Greece to let her fail. The nether-do-well sisters, Spain and Portugal are also reported close to faltering. How will the members swing the copious amounts of cash needed to prevent economic disasters? To bail out my brother I had to cancel my pretend trip to Europe. And like me, it will put a squeeze on their own economies to save the spend-thrift countries from going bankrupt.

Speaking of Greece, China rocked the global markets by demanding their own banks shore up their cash reserves to protect against financial overheating. They are doing exactly the opposite of what the western countries did during the bank fueled expansion of 2004-2007. It may slow down China investing in U. S. securities and treasury bonds, but may prevent a sharp downturn in their economy.

Arizona is trying to prevent their own financial meltdown by implementing sharp, decisive measures to curb spending. There is no Dennis the bail bondsman or big sister to bail them out.

New mortgage after a short sale?

Diane Gerdes (The Mortgage Advantage, Inc.) — Thu, 11 Feb 2010 10:20:57 -0800

Question: Is it true you can purchase a another home immediately after a short sale? I just received a flyer and it says my former short sale client can now buy another home.

Answer: Well, maybe. If your client sold his primary residence utilizing a short sale, the following are the FHA guidelines for a new purchase effective December 16, 2009:

•1. The lender on the short sale cannot have reported lates in the 12 months preceding the short sale. Reality Check: very few banks actually report zero lates on mortgages during the short sale process. We were told M&I either would not report lates or did not require delinquencies to approve a short sale. If you have had experience with other banks, let us know.

•2. All installment debt must be current and no lates in the 12 months preceding the short sale

•3. Cannot purchase a house in the same area as the short sale unless there is a darn good reason and documented. "My house was worth much less than the mortgage amount" will not fly with the underwriters.

If delinquencies were reported on the mortgage in the previous 12 months before the short sale, according to the guidelines, the timeout period before another purchase is 36 months.

Borrowers will need to be diligent in monitoring the credit reporting agencies. Some banks, I know you will find this hard to believe, report unsuspecting borrowers as foreclosed instead of a short sale.

AND, this is the part of our business that makes no sense --shocker!!-- the decision to lend on a new purchase will be at the whim of the bank doing the financing. Credit scores, money down, low debt -to- income ratios will all be put into the approval mix.

Please share your stories!

New Moon Rising

Diane Gerdes (The Mortgage Advantage, Inc.) — Sun, 07 Feb 2010 13:18:31 -0800

The new moon next week (no, not the one with beautiful blood sucking teenagers or ripped hairy guys) begins the Chinese New Year celebration of the Year of the Tiger. Fireworks are a tradition: a call for the Dragon to come ward off evil spirits. But the recent sparks between China and the United States are not from colorful explosives.

Our government has been feeding the big panda's appetite for American investments with 10 year treasury notes. The notes are the benchmark for our 30 year fixed mortgage rates. B.C., before the Chinese, when the economy slowed, investors purchased more notes sending the yields lower and therefore the mortgage rates went down. During strong economic growth investors would place their money in higher return investments, say the stock market, slowing down the enthusiasm for our bonds and effectively raising the interest rates. Until.... China began acquiring our treasuries in bulk in 2004. Their buying spree is one of the reasons the rates for mortgage loans were historically low during the boom of 2005 and 2006. As of November, 2009 China owns 789.6 billion dollars in treasuries.

China also purchased billions of dollars of mortgage backed securities. As soon as this once Holy Grail of profit became anointed as toxic, the investors fled to safer havens. Our government continued to purchase these mortgage backed securities that no one else wants: to keep a lid on our interest rates, to keep our housing market active and to protect the Chinese from losses.

Last week the FT times reported that Russia approached China during the 2008 Olympics in Beijing with a plan for both countries to sell their treasury securities, worth over a trillion dollars, with the intent to blast our economy into turmoil. The Chinese refused. Friday, a Chinese official dangled the treasuries as retaliation bait in response to President Obama's announcement of his intent to sell arms to Taiwan.

Unfortunately we invited the dragon to our party when it was a baby. Now it's all grown up, breathing fire. And it isn't a myth. Maybe next time we should check our guest list before we let strangers into our house. You never know who'll become family.

Running On Empty....

Diane Gerdes (The Mortgage Advantage, Inc.) — Sat, 30 Jan 2010 12:15:52 -0800

One day after President Obama's State of the Union address with the promise of adding more jobs, the City of Phoenix announced they are cutting 1379 positions including police officers and firefighters to offset the $242 million deficit. Instead of eliminating necessary personnel, the following are suggestions to offset the drain on our city's coffers:

1. Say goodbye to photo radar. The cost of maintaining the cameras, managing the photos, mailing the tickets and serving the good citizens with their very own picture would equate to more than a few bucks. We could sell the cameras to some unsuspecting state, say South Dakota, to recoup several mil. Besides, my kids are tired of going out through the back gate to meet their friends and are looking forward to the day they can answer the front door again. FYI: "The gas pedal is stuck" is not an acceptable excuse for speeding. All recent models of automobiles have a brake.

2. Arizona is becoming the "Green Capital" of the Universe focusing on solar and alternative fuels. Businesses are sprouting up throughout the state including the opening of the Chinese based Solar Tech in Goodyear. So, why keep the city buildings at a balmy 40 degrees during the summer? Or to keep every light on during the day or after dark?

3. According to a Stimulus Checkup report released in December by our own Senator John McCain and Tom Coburn of Oklahoma, a construction firm in Phoenix with a history of tax fraud is getting $21 million. Also two major universities in Arizona are receiving a combined $950,000 to study the division of labor in ant colonies. Hmm, ants vs. protecting our children against stranger danger?

4. Arizona should implement its own "bank tax". Every bank that files a foreclosure notice should pay the city $1500. You do the math. The big boy institutions are ground zero for our housing crisis, let them step up and help our communities.

Levying a sin tax against our vices whether it's alcohol, casinos, or bowling is not an option. We all need a diversion of the temporary kind. At least until those that serve can make us feel safe again.