Brian Martucci's Blog

Shopping For A Mortgage, part 2

GetLoans.com — Fri, 23 Apr 2010 18:13:42 -0700

Is there a free lunch, or isn’t there? My last post about mortgage shopping suggested that interest rates are only a slight bit different (1/8%) from lender to lender, and that the consumer needs to focus on performance, customer service and execution more than price. But no one does, do they? And we create our own customer service problems by seeking the lowest price, and expecting the best service. It happens with mortgages, movers, furniture, contractors…you name it. We have been creating our own service and product hassles since the dawn of time.

And the reason I have chosen to write about this again is a recent client who asked me to serve a piping hot free lunch. How you ask? Read on…

These were the same clients who I was introduced to in 2003 when they bought a new house and ended up using another lender, they said the lender did a poor job, and was unable to get them qualified for as high a loan amount as he said he could. I was more accurate in what I told them they could qualify for, which is why they want to another lender who over-promised on what loan amount he could get, and also offered a lower rate. Hmmm…

In 2004 they wanted to refinance, I quoted a rate, and they of course found a better deal. If you look hard enough you can always find a better deal. One month into their refinance transaction with this other lender they told me that they were not having luck with the lender, that he had been flaky, and was not returning most calls, and they were worried if their transaction would even close. Hmmm…

Then when they got their settlement documents the loan was not what was discussed originally. Hmmm….

The lender then was not returning any calls, and they wanted to shift their business to me. As I took steps to start their loan application, they called back and said the lender finally called back and said he was sorry and had some family problems. And they wanted to give him a chance again! You might wonder how I maintained my professionalism at this point, but I did. I wished them luck.

Fast forward to 2009 and they are buying a new house, the house of their dreams in which they will spend a long time, maybe forever. This is a big deal. For the several weeks prior to signing a contract on their new home, they would call and email me on the weekend, late at night, and early in the morning. And every time I would perform and execute flawlessly, and answer questions, crunch numbers, prepare a Good Faith Estimate, prepare a Pre-Approval letter for their offer, etc. They said they loved me and they were excited to work with me on this deal. Once we were ready to proceed, I quoted a very attractive rate for a Jumbo mortgage, but they called the 800# of the lender that held their current mortgage, and got quoted 1/8% lower rate than I was offering. Hmmm…of course they did.

Now let’s stop the story. What would you do? What do you think about these people? Are they creating their own problems, again? Have they done this before, and has it gotten them into trouble before? I won’t tell you how the story ends, you create your own ending, just like in the Soprano’s!

But I think this clearly illustrates the trouble people get themselves in when they ONLY SHOP PRICE in determining their mortgage lender. STOP IT! Think about the horror stories you hear about buying a certain good or service, want to know why those horror stories happen? It’s because the providers of that service or the seller of that product are trying to cut corners and compete on price, so the service and/or product quality suffers. That is it, period, there is no other answer.

So when you call some movers to move you into your new house, after shopping all over the internet for your mortgage and suffering a delay in settlement and paying closing costs that were not what you expected; and you hear someone can move you for $1,800 when everyone else was quoting around $2,300…stop. Think, and realize your move will be a nightmare if you use the movers at $1,800. It is a certainty.

Shopping For A Mortgage

GetLoans.com — Wed, 21 Apr 2010 07:21:05 -0700

Whether a consumer is calling a bank, a mortgage banker or a mortgage broker; all mortgage providers fund their mortgages through the same sources. Because of this, mortgage rates are very close from one lender to another. I broker to over 60 banks, and have never seen rates vary by more than 1/8%.

The purpose of “advertised” rates is to get the phone to ring. I am sure no one is surprised to find out that the ad for the cheap Mercedes is not real, and that if you want all the options, powerful engine, wheels and goodies you see on the picture in the ad, the cost goes up quite a bit. But for some reason, consumers do not use the same skepticism when mortgage shopping. Somehow they believe they can get a 4.5% 30 Year Fixed Rate while the rest of the marketplace seems to be at 5% without paying anything extra or suffering from poor service. Mortgage consumers seem to want the rock bottom rate, the best service, and they want it all ASAP! I believe that the majority of the mortgage horror stories we hear about are self-inflicted and are due to the consumer “shopping” for the “lowest rate”. But did you get the best deal if your real estate settlement is delayed because the bank is not ready on time, or if the fees went up just prior to closing, or if the rate changed “because your credit score did not fit the minimum requirements”, or if you do not get your calls returned, or if the bank goes out of business prior to closing?

Mortgages are priced based on a number of variables. An accurate mortgage rate quote has to take into account your specific situation and your individual needs. There are numerous variables I will discuss, that a consumer needs to realize, when pricing a mortgage loan. There is no one-size-fits-all mortgage.

There are differences in mortgage firm business models but the net costs of processing and funding a loan are similar with all lenders. In the real world (as opposed to the world of interest rates that exists online) rates should be close to the same from one company to the next. It is pretty exceptional for a lender to be much more than 1/8% or ¼ of a discount point better than other lenders.

So how do the lenders in the newspaper or online offer rates that are below the current market rates? Some of it comes to twisting the facts, and some of it is good old fashioned SALES. Do not ever forget that when you talk to someone in the mortgage business you are talking to a SALESPERSON, not some high finance professional who is heavily regulated with a PhD and 100% integrity.

If a mortgage lender is relying on advertising to bring in prospects, they needs to have a reason for a potential buyer to call or click on their ad instead of any of the other sources to get a loan. Because mortgage ads all focus on rate, the one with the lowest posted rate will get the most phone calls. Hence the spin job known as mortgage advertising.

I’ll try and explain in a nutshell why you can’t scour the internet and expect mainstream lenders to match any rate quote you find. The list of reasons is long:

1). Most loans have so many variables, you can’t just view a rate quote online and be sure it applies to you. Rates are priced differently according to loan size, property type, credit score, occupancy type (primary residence versus investment property), how many days the rate is locked-in for (30, 45 and 60 days are common), purchase loan versus refinance loan versus cash out refinance loan, and more.

2). You have to know if the lender you are looking at is an internet lender, mortgage broker, mortgage banker, or bank. And you need to know how well staffed they are (or are not) and if they will have issue with closing the loan on time. Many mortgage providers are working with bare bones staff which will be certain to cause delay.

3). Does the loan have any prepayment penalty? Many banks will offer a lower rate, but have a prepayment penalty that they do not make clear.

4). Does the loan have any origination fee or discount points?

5). Are the quotes you are seeing current, to the day? Sometimes you even need to make sure the quote you are seeing is current to the minute. Interest rates can change daily, and usually do. Sometimes rates change 2 or 3 times daily. You cannot take the rate quote you got in line at your bank branch last week, then shop online today and find the lowest online quote, and then two days later expect the mortgage broker that your Realtor referred you to match all those quotes. Rates may have gone up, and the mortgage broker’s quote will “appear” high.

6). Did the ad give you APR rates (for a full explanation of APR see this blog: http://www.getloans.com/blog/?p=132#more-132)? Many times lenders will quote you low “rates”, but then have high APR’s, which indicates that they have higher than normal closing costs, and likely made up the low rate by charging extra fees. Most consumers are so focused on the interest rate, as if it were going to save them tens of thousands of dollars, that they take their eye off of the ball on other important details. In this case, a lender can lowball the rate by a 0.25% or so, and it seems like the best rate in town, but if they charge you an extra $500 to $1000 in fees they have easily made up the little bit of interest rate savings they have allegedly “given” you.

There is more, but its difficult to go over all the issues important to a mortgage
transaction, and all the games that a mortgage salesperson can play to quote what appears to be a lower rate. I would certainly ask for the best rate a mortgage provider can supply, but then also ask about the below, and get everything in writing:

-fees
-who will be working on your loan?
-can I directly contact everyone who works on my loan?
-number of years of experience each person working on my loan has
-turn around time for loan processing
-turn around time for underwriting
-turn around time for closing document preparation
-if any variable will change your rate quote down the line (your credit score, the state your property is in, down payment, or anything discussed in this blog post)

Reverse Mortgages, Good Idea?

GetLoans.com — Fri, 09 Apr 2010 19:46:16 -0700

A Reverse Mortgage is when your house pays you back, or that is how the commercial goes. But at what cost? And is it worth it?

I have been doing some more research on these Reverse Mortgages (RM). I have been trying to condense 80 pages of data down into something manageable. Here are a few important notes I came up with:

-You can get a more detailed over view on this website at: http://www.getloans.com/loanprograms/rm/

-You have to be 62 years of age or older.

-You have to own your home free and clear, or have a relatively low mortgage.

-You may have to attend a consumer education session.

-It seems most of the interest rates charged are charged at variable loan rates over the life of the loan, although there are some fixed rate loan products.

-The costs can be heavy, as much as 5% in closing costs! (this is more than the closing costs to “buy” a home).

-They say the best reason to take a RM is when you are going to take a large sum of principal up front, or you plan to take monthly withdrawals over a very long period of time. So you need to make sure that this is a home you plan to stay in for a long time, maybe forever. You can take the loan as a line of credit, a lump sum, or monthly withdrawals.

-I think taking out a RM needs to be an absolute financial necessity, otherwise, you are only taking away from your estate and your heirs, unless that is not important to you.

After learning more about this, I am not so sure I like it. You really have to be in financial need. It’s almost like taking out an equity line against the equity in your property, but they put some fancy name on it called “Reverse Mortgage”. And I would never stick myself with being subject to the winds of change in the interest-rate markets as I get older (unless you find a good fixed rate RM).

I think the best plan of attack for some people instead of getting a RM, as much as you may not want to hear it, would be to sell the place, realize the large again, and then rollover the gain into a smaller and more manageable home as you get older. Or if you need it, roll over the proceeds into the purchase of a place in an assisted living facility. You will have achieved two things in doing that. One, you will have downsized to a smaller physical space, which I really think we all need to do as we get older. Two, if you realize the large profit that should be coming from the sale of that place, you may be able to go out and pay cash for a smaller place. If you do not realize enough to pay cash for a smaller place, it will at least be enough to pay for most of a new place.

The above is my two cents anyway, let me know what you think after doing your own research. Feel free to contact me off of this website with questions or comments.

What Is Title Insurance? How Much Does It Cost When Buying A Home? Is It Needed On A Refi?

GetLoans.com — Mon, 05 Apr 2010 19:28:54 -0700

Title insurance is insurance against defects in title to real property. It is meant to protect an owner’s or lender’s financial interest in property against loss due to title defects, liens or other matter of public record. It will defend against a lawsuit attacking the title, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.

Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance to protect their interest in the collateral of loans secured by real estate.

Title insurance differs in several respects from other types of insurance. Where most insurance is a contract where the insurer guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance attempts to detect, prevent, and eliminate risks and losses caused by title problems which have their source in past events. Title companies attempt to achieve this by searching public records to develop and document the chain of title and to detect whether there are any adverse claims on the subject property. If liens or encumbrances are found, the insurer may take steps to fix them (for example, by obtaining a release of an old mortgage or deed of trust that has been paid off) before issuing the title policy.

Standardized forms of title insurance exist for owners, lenders, and for construction loans.

The owner’s policy insures a purchaser that the title to the property is free from defects (liens and encumbrances), except those which are listed as exceptions in the policy. It covers losses and damages suffered if the title is unmarketable (i.e., if the title can not be legally sold and conveyed to another party or if the property is “unmarketable”), for example if an interest in the property is found to belong to someone else, if there is no access to the land, or if there is some other defect on the title. The policy also contains various standard exclusions to coverage and also specific exceptions to coverage, based on documents that have been recorded against the property at some point in the past, that the title company is unwilling to insure.

The policy limits of the owner’s policy is typically the purchase price paid for the property. Consumers should inquire about the cost of title insurance as soon as possible. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.

The lender’s policy is separate from the owner’s policy. The lender’s policy protects the lender for the amount of money lent against the property. When you get a mortgage it is mandatory to get a ‘lender’s policy’ but its only optional to get an ‘owner’s policy.’ Coverage under the lender’s policy lasts as long as the loan secured by the mortgage or deed of trust has a balance. The title insurer’s risk under a lender’s policy is generally less than that of an owner’s policy; as a result, insurers typically charge lower premiums for a lender’s policy than would be charged for the same dollar amount of coverage on an owner’s policy.

In many states, separate policies exist for construction loans.

In the United States, the American Land Title Association (ALTA) is a national trade association of title insurers. ALTA has created standard forms of title insurance policy “jackets” (standard terms and conditions) for Owner’s, Lender’s and Construction Loan policies. ALTA forms are used in most, but not all, U.S. states. ALTA also offers special endorsement forms for the various policies; endorsements amend and typically broaden the coverage given under a basic title insurance policy. ALTA does not issue title insurance; they provide the policy forms that title insurers issue.

Title insurance is extremely important when purchasing a house or piece of property. Yet many consumers are unsure about what title insurance is and what it protects against. Here are some answers to the more common questions about title insurance.

* How Am I Protected?
* I’m refinancing, why do I need new title insurance?
* I’m buying a newly built home, do I need title insurance?

How Am I Protected?

In order to issue title insurance, the title company must search public land records for matters affecting that title. Many search the “chain” of title back 50 years. Twenty-five percent of title searches find a title problem that is fixed before the insurance is issued. Some examples of items that can cause a problem are: deeds, wills and trust that contain improper information; outstanding judgments or tax liens against the property; and easements. Title companies fix the problems then issue the title insurance.

Occasionally, in spite of an exhaustive title search, hidden hazards can emerge after closing. Things such as mistakes in the public record, previously undisclosed heirs claiming to own the property; or forged deeds could cloud the title. Owner’s title insurance offers financial protection against these by negotiating with third-parties, and paying claims and the legal fees involved in defending the title.
Refinancing.

When you refinance you are obtaining a new loan, even if you stay with your original lender. Your lender will require lender’s title insurance to protect their investment in the property. You will not need to purchase a new owner’s title policy; the one you bought at closing is good for as long as you and your heirs have an interest in the property. So you may end up getting the existing title policy “re-issued”, in which you case you would pay a much lower reissue rate.

Even if you recently purchased or refinanced your home, there are some problems that could arise with the title. For instance, you might have incurred a mechanics lien from a contractor who claims he/she has not been paid. Or you might have a judgment placed on your house due to unpaid taxes, homeowner dues, or child support for instance. The lender needs reassurance that the title to the property they are financing is clear.

If it has been no more than 10 years since you bought your house or refinanced, ask for a reissue or discount rate. They are not available in every state, and you might have to meet some criteria to be eligible, so be sure to ask.

I’m buying a newly built home, do I need title insurance?

Construction of a new home raises special title problems for the lender and owner. You may think you are the first owner when constructing a home on a purchased lot. However, there were most likely many prior owners of the unimproved land. A title search will uncover any existing liens and a survey will determine the boundaries of the property being purchased. In addition, builders routinely fail to pay subcontractors and suppliers. This could result in the subcontractor or supplier placing a lien on your property. Again, lenders want to be sure the property has clear title, and they are insuring the correct property. Purchasing owner’s title insurance will protect you against these potential problems and pay for any legal fees involved in defending a claim.

Refinance Questions

GetLoans.com — Thu, 01 Apr 2010 06:35:37 -0700

There are a lot of questions about refinancing, or at least there should be. The questions a consumer should be asking of a mortgage professional are:

1. What are the closing costs I have to spend to refinance?
2. Can I finance those costs into the new loan amount?
3. How much would I save by refinancing?
4. How long has the mortgage firm been licensed?
5. How long has the individual mortgage professional been licensed? And how long have they been with their current firm?
6. If you are being offered a “no closing cost” loan, are the costs simply being built into the rate so that you are paying simply paying a higher rate in trade for no costs?
7. What happens if your appraisal comes in lower than expected?
8. Will you be required to pay mortgage insurance?
9. If you have mortgage insurance on your current loan can you drop it?
10. How long is the interest rate locked-in for, and what is the turn around time on loan processing, underwriting, and loan document preparation?

And the questions that you “should” be asked by a mortgage professional are:

1. When did you buy the home?
2. What is the current rate on the 1st trust mortgage?
3. Do you have a 2nd trust/equity line, and if so at what rate?
4. Have you drawn on the equity line in the last 12 months, and if so how much?
5. What did you originally pay for the home?
6. What do you believe the home to be “realistically” worth now?
7. What is the balance of the loan amount/s?
8. Is this home your primary residence, a rental property, or a vacation home?
9. What is the property address?
10. What type of property is it, condo, single family detached, rowhome, 2 unit, 3 unit, or 4 unit?

If ALL of the above questions are not being asked of you, and if you are not asking the above questions, there is a strong chance you may not get what you bargained for!

And, you should read this blog post about whether or not you even should refinance in the first place: http://www.getloans.com/blog/?p=335#more-335.

Loan Shopping

GetLoans.com — Fri, 26 Mar 2010 18:46:16 -0700

Shopping for a loan is easy, kind of like window shopping. You poke your head in the window, take a look, maybe you go in the store and ask a few questions, maybe you go to another store, who knows. You are not obligated to buy from anyone, and you are going to check every source you can TO GET THE BEST PRICE. It’s all about the best price after all (he said sarcastically).

It is all about the best price, as long as you get what you wanted in the first place. And this is the problem in shopping for goods and services, people are so focused on the price, they lose of track of making sure they are going to get what they need. You have to ask a lot of questions, and be asked a lot of questions, to ensure the process will go smoothly and to ensure you will get the price being promised. If you are not being asked a lot of questions when you ask about a mortgage, something is wrong.

With a mortgage, people only seem to care about the interest rate, they don’t ask questions about fees, turn times, execution, experience, etc.

And sometimes, there is a need to go even deeper. It seems most loans nowadays have a twist, there may be a credit issue, a gift that may or may not be allowable, a new job, a recent career switch, or even a property condition issue. People seem to think a bank will lend on just about any property, in any condition. After all, if you have good credit, a good job, and a decent down payment, what does the condition of the property matter. Read on…

I had a potential client several months ago shopping around for a mortgage. All he was interested in was what rate I could get him, and it had to be the lowest. I tried asking questions about credit, property, etc; but he was either vague or not interested in talking about that at all.

Below is a recent email from him to me, after he had applied for a mortgage elsewhere about 30 days ago:

“Hi Brian

Please contact me when you get a chance. I would like to see what you can offer today. However, I need to speak with you about the right mortgage product.

The property I am buying was used as a private school in the past and auctioned. We plan to use it as our residence but the past use of property seems to be of concern despite the R1 zoning and residential district. In any case-if we talk, I can share more and we can determine the best course to take.

Rates are also good today- so please call me ASAP.”

Hmmm, sounds like he is having a problem getting a loan at the mortgage firm or bank that he went to because they had THE BEST RATE. And it sounds like he is STILL focused on getting the best rates, judging by the end of his email. My reply was:

“Do you have a website I can see to look at the property. I can run it by some appraisers and underwriters, to see if this is even anything I can do a loan on. Thanks.”

He sent me some data on the property and an appraisal. The appraisal showed not only was the building previously a school, but that it was missing some very critical elements any bank would want to see. My next reply was:

“I am afraid I did not need to ready any further than the first few pages. The below comments/facts on the appraisal make it impossible for any mainstream lender to do a loan on this building:

THERE IS A GALLEY KITCHEN AREA WITH NO STOVE/OVEN AREA, THEREFORE, THE
KITCHEN IS NOT FUNCTIONAL. ALSO, THERE ARE NO FULL BATHROOMS IN THE DWELLING, ONLY SEPARATE HIS/ HER HALF BATHS ON EACH LEVEL. TWO HALF BATHS NEED CONVERTED TO FULL BATHS TO MAKE THE PROPERTY MORE SIMILAR IN FUNCTIONAL UTILITY TO THE MARKET AREA.THE SUBJECT HAS RESIDENTIAL ZONING ALTHOUGH WAS CONVERTED INTO A PRIVATE SCHOOL.

So, without a full, operating kitchen, and without functioning bathrooms, this house will never get a regular loan.

The only loan that this would be eligible for, to accommodate the current condition of the home, is a construction-permanent loan which allows for odd or incomplete condition of property. And these loans are very complicated to get, a bit more costly, and they take a lot of time (60 days). You have to have a licensed General Contractor, plans & specs, a draw schedule, materials list…it is quite a lot of detail and planning to get these loans. We can talk about this type of loan, bit since your loan has been in process at another lender, and you likely have a sales contract on the property that is about to expire, would you even have time for me to get you this loan?

So I am afraid you have to either let the contract die and look at other properties, or we can talk about a construction-permanent loan (if the seller will wait for you to get a loan of that type), or pay cash for the property and then do whatever work/renovations you had planned, and maybe you could come back at a later date when the property is finished, and get a “cash out” refinance to recoup some of your money by placing a mortgage on the place after it is fully renovated.

Check in with any other questions.”

His reply was very nice and thoughtful, and he said the contract would likely die, and he thanked me for my factual and frank reply.

Wouldn’t it have been nice if he was more focused on making sure he was going to get what he needed, asking a lot of questions, allowing himself to be asked a lot of questions, and most of all NOT FOCUSING SOLELY ON PRICE?!

As always, make sure you talk to a very experienced mortgage professional, ask a lot of questions, and expect to be asked a lot of questions. It will save a lot of heartache in the end.

Appraisals, What Are They Good For?

GetLoans.com — Wed, 24 Mar 2010 07:19:36 -0700

Appraisals seem to be the issue of the day in the mortgage and real estate world. Everybody seems to value property differently even in the best of real estate markets. In a more difficult real estate environment, appraising becomes even more contentious.

For example, banks have really tightened their underwriting policy on appraisals. On an FHA loan they may require two appraisals if if the loan is an FHA jumbo loan (which is one that is over $417,000), if the property is in a declining market, and if the buyer is borrowing the maximum loan to value (which is 96.5%, i.e. a 3.5% down payment).

Also on an FHA loan, even if it is a loan that is a conforming FHA loan (which is one that is below $417,000) the bank may require a desk review if the property is in a “declining market”. A desk review simply takes the original appraisal and has a second appraiser review it, no re-inspection of the property is required. However, if the second appraiser finds a problem with the first appraiser’s work, they may lower the value of the appraisal.

Also, on Conventional loans, there are usually two appraisals required on properties valued at $1 million or more.

And beyond the strict requirements by the banks and underwriters, there simply seems to be more disagreement than ever as to how to value property. There was a property that was being bought by some client of mine recently, where the agreed upon purchase price was $858,000. There was a Realtor involved, buyers who had looked at many properties in the marketplace, and a seller who lived in the neighborhood and you would think would know the values of the properties there. However, an appraiser told us that he believed the property was only worth $810,000. I spoke to another appraiser to get their opinion, and while he thought that the $810,000 valuation was too low, he also thought $858,000 was too high. He cited the fact that the two highest sales in the neighborhood recently were at $839,000 and $850,000. In this market, to be the highest sale in the marketplace at $858,000 the second appraiser said that the property better be special, and either be larger, or more nicely renovated, or have features that the other properties at the top of the market did not. However, the property was not larger, nor better renovated, nor did it have any extra special features. The second appraiser ended up saying that he thought the property was worth around $825,000. So now we have to get all parties to agree and meet in the middle somehow.

But it is always interesting to me how you can send 10 different people out to a property, whether they be Realtors, appraisers, buyers, or sellers; and you can get 10 different ideas of what a property is worth. It just goes to show you that valuing property is very subjective, and there is no science to it. A property is worth what someone is willing to pay for it, until you get the banks involved!

HO6 Insurance Policy???

GetLoans.com — Thu, 11 Mar 2010 17:29:11 -0800

An HO-6 policy is the form used for a condominium insurance policy. This condo policy will provide for coverage on the interior walls, interior upgrades, and for personal property held within the dwelling.

How does this apply to mortgage finance? In 24 years of mortgage banking, I have never even heard of HO6 insurance. And that is because when underwriting a condo loan, the banks only cared to see that the dwelling was insured in case of damage. And in a condo, part of condo fees go towards the master umbrella policy, so the unit owner usually does not concern himself with getting dwelling coverage, because the master policy covers the reconstruction of their unit. But now, banks have new HO6 rules. This changed in the middle of 2009, and I have done 30-40 condo loans since then, and am just finding out now!

Fannie Mae now requires that lenders verify that hazard insurance for all condominium projects covers fixtures, equipment, and other personal property inside individual units. The updated underwriting policy now requires that the borrower obtain a “walls-in” coverage policy (also known as an HO-6 policy) unless the lender can document that the master policy provides the same interior unit coverage. The master policy must include replacement of improvements and betterment coverage to cover any improvements that the borrower may have made to the unit. The HO-6 insurance policy must provide coverage in an amount that is no less than 20 percent of the condominium unit’s appraised value.

So Fannie Mae, in changing this rule, is forcing condo owners to absorb some of the financial/insurance risk. Maybe this is a wise move for condo owners? It may be especially good for condo owners who have done extensive interior renovations, and would never get their unit rebuilt to the level they renovated it to, if they solely relied on the master condo policy. Maybe its passing the insurance buck to the consumer?

All I know is that I have done all those condo loans I mentioned, since the middle of 2009, and no one brought it up until now! Maybe that is a good thing for all those prior condo loans I did?

The loan I am trying to get approved now is going to get more expensive for the consumer, because I now have to tell him to go out and spend money on an HO6 policy!

Do Investment Properties Cash Flow?

GetLoans.com — Sun, 07 Mar 2010 14:41:12 -0800

Has anyone else noticed that buying new investment real estate does not cash flow? At today’s prices, which are likely lower than in the last several years, you still seem unable to find real estate that can turn a profit as a rental property. I wonder why that is?

A January 3rd 2010 article in the “Washington Post” titled “Cash-rich real estate investors trigger bidding wars, frustrate other buyers” discussed how investors are beating out homeowners in making offers on homes, but these investors are solely the type to buy a property, fix it up, and sell it for a profit to a homeowner. That seems to be the only real estate “investment” going on these days, by real estate investors. These “investors” were not of the “buy and hold” sort.

So my question revolves around the “why” of the story, not how. Why can you not turn a profit renting real estate if you buy real estate at today’s prices? Is real estate still vastly over priced? Are there simply far too few renters in the Washington DC Metro area, too few to push up rents to the point of positive cash flow? My guess is that this is the case in most areas of the country, certainly most urban areas. What is the answer to my question?

I took a call from a client recently, who was excited to buy a piece of investment real estate, and hold it for the long haul. But my first question without even knowing the numbers was “why?”. I had a feeling it would not cash flow, and wondered if the investor had even gone through the numbers. He had not.

The investor told me the price of the townhouse was $410,000. He saw this as a bargain since it was a bank sale/foreclosure, and he thought the value was more realistically $440,000. I told him the total mortgage payment, after putting down 20% (20% is the current minimum down payment for buying investment real estate) would be $2518 when including taxes, insurance and a small HOA fee. I then asked him how much it would rent for, the answer was $2100/month! Clearly this is a home that is suitable only to a homeowner, or if the numbers support it, an investor purchase, renovation, and quick resale for a profit. No investor would want to buy a long term rental property at a $418/month loss, and I did not even include expenses for maintenance, repairs and property management expense.

And the above story is not unique. I have been in the mortgage business for over 24 years, and I have not seen a property show a positive cash flow since the late 1990’s. So it all makes me wonder “why?”. Why is it that real estate in the Washington DC Metro area, and most other areas, does not seem to ever show a positive cash flow? Anyone else have any theories?

FHA Condo Loans Get “More” Complicated

GetLoans.com — Mon, 01 Mar 2010 19:06:06 -0800

It used to be simple to get an FHA condo loan. Lenders could do an FHA “Spot Condo Approval”, which meant that the condo did not need to be on the FHA Approved Condo List, and all we lenders needed to do was verify that the condo met certain FHA requirements (51% owner occupancy, no litigation against the condo, no more than 10% of the unit owners behind in their condo fees, etc). Now the condo approval process is more centralized, and more complicated.

There will be two methods of FHA condo approval:

1. HUD Review and Approval Process (HRAP). This means you have to have FHA approve the condo. Nightmare.

2. Direct Endorsement Lender Review and Approval Process (DELRAP). This option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects. So you have to deal with a lender who has their DE, and knows what they are doing.

I will spare you what goes into an FHA condo approval, whether it is being done through FHA or a lender with their DE. The guidelines are 21 mind numbing pages long, so suffice it to say that it will be complicated, and extra time will need to be allowed for FHA financing to get through the approval process. It is not to be feared or avoided, but all parties need to know it will be complicated and require more time.

Home Equity Line Limits

GetLoans.com — Fri, 26 Feb 2010 15:44:33 -0800

It seems any banks that are still doing home equity lines of credit (also known as a HELOC) have limited them to an 80% combined loan-to-value (LTV). This means that the existing 1st trust mortgage and any equity line cannot exceed 80% of the current appraised value. For example:

$1,000,000 appraisal
$600,000 current mortgage
80% of $1,000,000 = $800,000
$800,000 – $600,000 mortgage = $200,000 maximum equity line

I had this reinforced recently by a refinance I was attempting for a client. I am refinancing this client’s first trust mortgage, which is currently $603,000. The appraisal came in at $1,000,000. However he has an existing equity line of $245,000, and the existing equity line lender told the client he’d have to drop his equity line to $190,000 if he wanted to refinance.

We had to accept the mandate of the equity line lender because we needed them to subordinate to the new 1st trust mortgage we were refinancing.

A subordination agreement is something that shows the 2nd trust/equity line lender will ’subordinate’, or stay in 2nd trust place, when the 1st trust refinance takes place.

When a 1st trust is paid off, the 2nd trust automatically goes into 1st trust position. Of course the new lender that is paying off the old lender mandates that it retains 1st trust position. Hence, the need for the ’subordination agreement’ which shows the 2nd trust lender will stay in 2nd trust position.

Since the equity line lender had the client over a barrel and could stop his refinance if he did not lower his equity line (which he only owed $50,000 on, by the way), the client had no choice.

So now the client owes $603,000 on a new 1st trust mortgage that we are refinancing, and will have a new equity line capped out at $190,000. The total of those two loans is $793,000, and is a 79.3% combined loan-to-value. This is less than 80% LTV, and the equity line lender is willing to accept this.

Is it fair that since the equity line lender would have previously lent up to 90% LTV, and now has changed its guidelines to 80% that they can hijack a client’s refinance? I don’t know what fair is anymore in the banking industry, so I cannot answer.

So ask a lot of questions if you want an equity line, or if you have one currently and are thinking of refinancing your 1st trust mortgage. You need to know what the equity line lender’s combined LTV limit is.

It used to be that you could borrow 90% LTV. And actually, for a few years at the peak of the real estate boom around 2002-2004, you could borrow up to 100% LTV, and in some cases 125% LTV! You could actually borrow more than the house was worth! But that insanity deserves a separate blog post.

I would say 80% is more of a historic norm for equity line LTV’s. So if your house is worth $500,000 and you owe $400,000 on the 1st trust mortgage, you are already at 80% LTV and are likely not eligible to get any equity line.

You have to have a LOT of equity to get an equity line these days.

Private Mortgage Insurance Tougher To Get On Condos

GetLoans.com — Wed, 24 Feb 2010 10:56:42 -0800

I almost feel like there is no more PMI (Private Mortgage Insurance) on condos! But that is not true, there is PMI availability for condos, but it is getting harder to get. Most people know by now that PMI is needed on a Conventional loan if you have less than 20% down payment. I recently had a client who wanted to put 10% down on the purchase of a $600,000 condo. I first found out that on a loan that size ($540,000), which is a Conforming-Jumbo loan, that you cannot do a maximum LTV (loan-to-value) loan in a “declining market”, which most banks are still defining DC and most of Northern VA as. So the buyers have to put another 5% down, and do a 15% down payment, or 85% LTV. This loan size ($510,000) is still a Conforming-Jumbo loan (which is defined as all loans from $417,001 to $729,250), and I found that no one will do PMI on condos that have Conforming-Jumbo loan amounts.

It seems you can only get PMI on condos that have Conforming loans (those which are $417,000 or less), and if those loans are in a declining market you cannot do maximum LTV financing (which is 95% LTV), so you’d need 10% down (or 90% LTV).

So it seems if you want to buy a condo in DC or Northern VA (or any market defined as a declining market) and need to borrow between $417,001 and $729,250, the only loan you can get is a 20% down payment Conventional loan or possibly an FHA loan.

And if you want to buy a condo and borrow $417,000 or less, you need a 10% down payment Conventional loan, or you can possibly go with an FHA loan for this too.

I am sure this will be changing moving forward, but it may take a while for the banks and PMI companies to loosen up.

Buying Distressed Properties

GetLoans.com — Tue, 23 Feb 2010 07:56:42 -0800

Buying distressed properties, whether they are in foreclosure or are a short sale, can be difficult. I am going to cut and paste an email from a prior client in relation to this topic, and my reply, as an example of how difficult it can be to buy distressed properties:

“Hi Brian,
I found myself doing initial legwork for a home purchase and found myself posting the following to a forum. I’d like to hear your recommendations, as someone who is in the business. Thanks
________
In this day of browsing for your home, I do not see why Redfin cannot represent buyers for homes below their target price, or foreclosed homes for that matter. If there is an expense issue, buyers like myself may be willing to pay the regular commission just to facilitate property purchase. There is much opportunity there. I find a property that is outside Redfin’s purview and search for the listing agent and/or actually visit the property and write down a posted number. Somehow, I cannot get anyone to either call me back, or follow up with initial contact. I can’t believe this. I saw one house in foreclosure that I was willing to pay cash for due to location, land etc. and willing to accept other conditions. I call the agent, leave a message, and nobody returns my call. House sits on the market for a few more weeks. Then its price drops! WTF?

Second case, I find another property that a local says is on the market. The empty looking house has no signs on the lawn, no listing in Redfin.com, Homesdatabase.com, or Google Real Estate. A few weeks pass. The other day I drive by and BINGO – brand new sign with agent contact info. I call the number and get my call returned promptly (unusual) only to tell me that the property is under contract. That property was so ideal, I would have been willing to engage in competitive bidding to acquire it. Now I can only hope that their financing falls flat.

I don’t understand what I am doing wrong, other than the fact that I should probably not represent myself without a broker, which I want to avoid!. Now that my time has been wasted finding out about this chaotic process, I am forced to find broker representation elsewhere unless Redfin can fill the niche presented by loan free buyers.

Any advice?”

And my reply:

“Interesting post. I have heard similar stories. In fact, I have seen some Realtors say they flat out will not work with anyone interested in foreclosures and short sales, because the banks and listing Realtors are so difficult to work with. Most people feel buying these properties is difficult to impossible. Many Realtors feel it takes too many hours and their time will be more rewarded in regular resale’s.

I don’t know if its due to them being inundated with interest that they are unable to handle? Think about it, if you are a bank and just want inventory off your books, and you are a large out of control organization, not unlike government, do you care about getting top dollar or being efficient? So if a foreclosed property gets 34 calls, and half go unreturned, and the 17 parties that got called back bid the property up to the right number the bank was looking for, do you think the bank and the Realtor care about the other 17 people who did not get calls back who all insist they would have bid “a little bit more.” My guess is it just a sloppy inefficient process, the banks are probably leaving some money on the table and are too inefficient to know it, and I think buying these properties is like finding a needle in a haystack.

I am not sure getting a Realtor to help you will improve your odds, but I’d be interested to hear how that goes if you go that route. In other words, I am not sure a Realtor is going to return another Realtor’s call and faster than they would return your own call. I just think the process is a mess. I have done financing for a few foreclosures, and can see why people don’t want to work with them. It takes weeks or months to get a reply from a bank on a simple question pertaining to the loan of the buyer, or the settlement date, or a change to the sales contract. Good luck”

To finish the discussion, I just had a Realtor friend of mine finish my sentence. I said, “I am blogging about how hard it seems to be to buy foreclosed/distressed real estate for the…” and he stopped me and said “for the average consumer.” And I said yes, how did you know!? And he responded that regular consumers are getting beaten out by investors who are paying cash. He said, “its a waste of time for someone who wants to buy a foreclosed home and live in it, because they usually have financing contingencies, take too long to settle, and want home inspections!” Further, “investors come in and offer above asking, with no contingencies, pay cash, and settle fast, then they fix them up and flip them.” So it seems the bottom line is that if you want to buy a distressed/foreclosed home, you need to have all cash, settle fast, and maybe even say you are an investor!

Is Washington, DC real estate headed higher or lower?

GetLoans.com — Mon, 01 Jan 2007 12:08:01 -0800

Many people have said real estate in the Washington, DC area is headed for a further fall. Some people have emotional reasons, and some people have reasoning based on what they deem to be valid research. I have also heard people talk about why real estate in the Washington, DC area will be stable, and that values may even continue to rise strongly. The positive news seems to be based on strong local employment growth, a strong economy, and belief in a city that has undergone spectacular growth and gentrification. And the negative news seems to be based on the fact that prices have simply gotten too high. People have said that real estate prices by any measure are simply too high, measures such as rents, income, history, cyclical prices, and most importantly inflation. Real estate typically increases about 1% above the rate of inflation historically. The recent real estate boom in the first half of this decade has shown real estate that has annually gone 20% above inflation. Some economists say that this is simply unsupportable and unsustainable. They say that the market must adjust back to normal inflation adjusted real estate returns, and give back some or much of the recent gains. What is your opinion on where the real estate market in Washington, DC will go in the next few years, and why?

Does the media hurt the real estate industry by over hyping negative real estate stories and talking about the possibility of a "real estate bubble"?

GetLoans.com — Mon, 01 Jan 2007 11:58:09 -0800

I have heard many people say that the media is largely responsible for any negative opinion on real estate in the local Washington, DC area. They seem to suggest that if it were not for the media that the real estate market may be more stable and upbeat. But if this is so, should the media have been quiet when the real estate market was booming 20 to 30% a year? Was the media responsible for helping to run up prices in the boom years of real estate? Or did real estate boom for sound reasons? Some people believe that the media are simply reporting the facts and helping to inform people, and some people believe the media helps to sway opinion. What is your opinion?