Michael Mullin ~ Spokane WA Home Loans |'s Blog

Recent Regulatory Changes Have Added Time And Cost To Your Home Loan Application

Wed, 28 Oct 2009 11:26:43 -0500

The lending industry has suffered dozens of small and large regulatory changes over the last twelve months. The new rules were intended to save consumers money by creating a more transparent process or by closely mandating the way lenders handle certain parts of the process.

Of course these changes were mandated by our friends in WA D.C., none of whom (as far as I can tell) have any actual knowledge of how the lending industry works. Although two of them, Senators Christopher Dodd and Kent Conrad know enough to get sweetheart loans via Countrywide’s now infamous “V.I.P” program. The program waived “normal” fees, points, and lending rules for friends of Countrywide.

Two of the largest changes this year were the Home Value Code of Conduct (HVCC) and the Mortgage Disclosure Improvement Act of 2008 (MDIA). Both were concocted to “protect” consumers but I can tell you from experience that both are actually costing consumers more money and jeopardizing their entire transaction. I'm a strong supporter of consumer education throughout the process but the execution needs to be done in a lest costly manner.

Following is my very non-technical and non-legal review of both.

HVCC was implemented by lenders “voluntarily” to settle a pending lawsuit. The suit claimed that lenders were forcing appraisers to overvalue your home so we could make more loans. Supposedly we threatened to withhold future business from our appraisers if they didn’t cooperate. The only specific case of wrong doing prior to the settlement was a lawsuit by New York Attorney General Andrew Cuomo against an appraisal subsidiary of First American Corporation. Cuomo maintained that Washington Mutual threatened to take future business away from First American’s appraisal company if they didn’t raise the value on already prepared appraisals. Why didn’t Cuomo sue WAMU at the same time as First American? WAMU couldn’t be named in the suit because Federally Chartered banks are exempt from oversight by state Attorneys General. Boy, there’s topic for another day! The rules now require that lenders order your appraisal from a blind pool called an Appraisal Management Company.

What does an AMC do? They farm out the report to whatever local appraisal will do the report for the lowest cost – and the AMC takes a huge chunk of that. Because it’s a blind pool I can no longer communicate with the appraiser ahead of time and make sure we’re not wasting your money on an appraisal that won’t work. In addition, I can no longer expedite your report by utilizing whichever of my professional appraisers is available tomorrow. You are at the mercy of whomever the AMC assigns to your report.

The Mortgage Disclosure Improvement Act of 2008 is well intended but can easily delay your transaction if your lender is not very careful. The rule details when a specific disclosure form – the Truth In Lending (TIL) form – must be delivered to you. The Act further defines what “delivered” means and has been interpreted to mean 3 days after said form has been mailed to you. Lenders are not allowed to spend your money ordering an appraisal until you’ve received the initial TIL form – hence your transaction is now delayed right at the beginning of the transaction. Rebecca and I have adapted our business to handle these new regulations without a problem for the customer, as have other professional lenders. However, we have heard horror stories of consumers losing their rate locks or not moving into their new home on time as a result of these new regulations.

3 Easy Steps To Find Your Next Home

Mon, 31 Aug 2009 15:32:12 -0500

This post was inspired by a discussion amongst real estate agents on a web forum I read recently. Contributions came from agents all over the country. These agents represent both national franchises (Keller Williams, Century 21, Coldwell Banker, etc.) and independent firms.

The discussion was about whether it was acceptable to force prospective home buyers to register on an agent’s property web search page or whether to make the information viewable without. There are thousands of web based home search sites and most (virtually all) are funneling data from the same source - the local multiple listing service (MLS). The unspoken secret is that these property search sites are great for the consumer but can also be incredible lead generation tools for an agent at the same time – if they force you to register to see the information. If you do register on a site just be prepared for some sort of follow up from whoever is hosting the site you used.

The forum posts got me thinking about what really is the most effective way for a consumer to search for and ultimately buy their next home.

Your best opportunity to locate and buy the perfect home is a simple three step process – loan preapproval, utilizing a web based property search, and employment of a professional Realtor. I’ve listed them in order of importance as each builds on the previous step.

There is absolutely no sense in even dreaming about a new home until you’ve had your loan preapproved. I worked with dozens of clients over the years who were heartbroken when they came to me with the home already picked out and I had to tell them they did not qualify.

It doesn’t matter how high your credit score is or how much money you make, I guarantee you that “good” borrowers are having their loans denied all the time for one reason or another. There are just too many potential skeletons in the closet that lenders are trained to look for. A preapproval will make the process much less stressful, allow you to shop with full knowledge of exactly what your payments and closing costs will be, and place you in a much stronger negotiating position with the seller of the home you chose.

Expect the preapproval process to take anywhere from a couple of days to a couple of weeks depending upon how many and what kind of skeletons you have! It should not cost you more than $15 for the credit report the lender will need to order on your behalf.

After your lender has assured you that you are fine to move forward you’ll want to begin using the web to search for homes. I wrote “homes” plural because I believe your mindset at this point needs to be that you are just trying to zero in on a particular neighborhood or two and to get an idea of how much your dream home is really going to cost.

Once you’ve done your preliminary home search on the web it’s time to partner up with an awesome agent. Why? Three reasons – an agent costs you (the buyer) nothing, an agent will have information about specific homes and neighborhoods that just aren’t available on the web search pages, and the agent will help you negotiate the deal with the seller.

Your real estate agent should be someone you like and trust as they will be handling a very expensive transaction on your behalf. It’s best if you can be referred to an agent by someone who can personally vouch for their past performance. If not you certainly want to interview a couple until you find one you are comfortable with.

To get pre-approved for a loan or to get a Realtor referral, please send Rebecca or me an email at MMullin@TheLoanConsultant.com, or give us a call at 509-252-9151. We’d love to share our knowledge with you!

Why FHA Loans Are The Program Of Choice For First Time Home Buyers

Thu, 27 Aug 2009 18:52:51 -0500

One of the most popular first time home buyer programs is the HUD FHA loan. The best part is you don't have to be a first time home buyer - anyone that qualifies can use this program.

The only limitation is that the base loan amount can’t exceed $271,050 (at least in the Spokane area – higher limits apply in higher cost areas like Seattle and the Western part of our state) which equate to a home price of about $280,000. That does not mean you can’t use the program to purchase a more expensive home, it just means you will need to make a larger down payment if you do.

Highlights of the FHA loan are:

3.5% down payment – that’s only $6,125 on a $175,000 home. You can come up with that!
ALL of the down payment can come from a gift from a family member.
Do not need to be a first time home buyer.
No limit on how much money you make.
Family members can help you qualify by co-signing on the loan.

The FHA loan can be a great program for "out of the box" situatioons that don't fit the cookie cutter mold a Conventional loan program requires. I recently helped a college student who had completed his AA but is still working on his 4 year degree at Eastern Washington University. He had some part time work experience, but nothing you could use to qualify for a home loan.

His mother was willing to co-sign his loan but two different lenders said the son needed to have a history of working before he could qualify. I knew that was not HUD's requirement so I spoke to a couple of our other wholesale partners and found one who was willing to accept the loan with just the mother's income - even though she wasn't going to live in the home. Now this young man is a home owner years earlier than if he’d had to wait until he graduated and obtained full-time employment.

WARNING ON FHA LENDING - When talking to a lender about an FHA loan be wary. In 2007 only 4.12% of all homes sold were financed with an FHA loan (Source: FHA Single Family Activity in the Home-Purchase Market Through January 2009). In 2008 that number had jumped to almost 13% and it’s running close to 30% year to date in 2009.

Why the dramatic increase in FHA loan business?

Well, FHA is the “new” loan program of choice for all the lenders who used to peddle subprime and alt-A loans. HUD’s new Secretary, Shaun Donovan, testified before the US Senate on April 2, 2009 that the number of FHA approved lenders had increased by 525% since 2006!! I’m not a math genius but I think that means that only 20% of the current FHA approved lenders have been involved in this specialized lending product for more than 2 years. The other 80% have just jumped on the bandwagon. If you talk to a lender about an FHA loan, your first question should be “how long have you personally been approved to offer this loan program?”

Home loans are my passion - if you have any questions about how an FHA loan can help someone finance their first home just give me a call at 509-252-9151 or send an email to mmullin@theloanconsultant.com

60 Days Left To Qualify For The $8,000 Tax Credit?

Mon, 17 Aug 2009 17:41:49 -0500

If you, or anyone you know, have not owned a principal residence in the last 36 months your opportunity to get a free $8,000 gift from Uncle Sam is quickly disappearing. To qualify for the tax credit you must close escrow on a home on or before Monday, November 30, 2009. That gives you about 60 days to find a home and get into contract so you can comfortably beat the deadline.

The Housing and Economic Recovery Act of 2008 makes it possible to get a “refundable tax credit” of 10% of the purchase price of the new house up to maximum of $8000. Thus in order to get a full tax credit of $8000 your purchased property must be above $80,000 in price. While “refundable” sounds like you have to pay it back the term “refundable” really means you get the full credit even if you owe no taxes. The credit will reduce your taxes owed or increase the amount of your refund dollar for dollar.

While the deadline to close escrow on a home is November 30, eligibility for one of the two tax credits (remember this started as a $7,500 repayable tax credit) extends back to homes closed on or after April 9, 2008. Keep in mind the “purchase date” to you and I would normally mean the day you signed the contract but the IRS defines it as the day you closed escrow and the property was recorded in your name. That will become a critical distinction; I’m sure, as this program expires. We’ll see a rush to close home transactions in the last weeks of November.

One of the biggest misunderstandings of the program is over the term “first time home buyer.” To the IRS that means an individual who has not owned a principal residence within the last three years. If you own a home but do not reside in said home, but rent it out instead, you would qualify as a “first time home buyer.”

The full credit is only available to individuals with a modified gross annual income (MGAI) of $75,000 or less and for married taxpayers with MGAI of $150,000 or less. The tax credit is gradually reduced to zero for individuals with MAGI between $75,000 to $95,000 and for married taxpayers with MAGI between $150,000 to $170,000. Your adjusted income for tax purposes is often times, but not always, less than your gross wages as reported on your W2.

A frequent question we get is how can you apply this tax credit to your down payment so you don’t need as much money to close escrow? The answer is there isn’t a way – at least in the state of Washington. Some states have made funds available as sort of a short term loan, repayable when you get your tax credit, but the Washington Housing Finance Commission was not able to develop a program. The best suggestion I have to limit your cash out of pocket is to make sure your real estate agent and lender structure your transaction to minimize your out of pocket expenses. There are just a few little known ways to accomplish this.

While there are lots of details that can’t be covered in the space of this post, two important ones are that you will not qualify for the credit if you purchase a home from a direct relative and you will have to repay the credit in full if you rent out the home within 36 months of purchase.

An important distinction is that this is an IRS program – it has nothing to do with loan programs or lending guidelines. I strongly recommend you speak with a tax professional if you have specific qualifying questions as they are the only ones with the expertise to do so.

If you have already purchased your first home, and it closed escrow anytime after April 8,, 2008 don’t forget to file for the credit when you complete your 2009 tax returns!

The IRS provides a remarkably great web page with all the pertinent details of the $8,000 Tax Credit for First Time Home Owners.

If there is any inside info about lending or real estate you’ve been curious about, please send an email to MMullin@TheLoanConsultant.com, or give me a call at 509-252-9151. I’m passionate about real estate and mortgage lending, and would be happy to share my knowledge with you!

Are lenders offering bridge loan for tax credit in WA?

Wed, 01 Jul 2009 12:25:01 -0500

Does anyone know if there is a source or method for monetizing the $8,000 tax credit so it can be utilized at COE? Jana Rankin had a nice post about the state of Idaho making funds available but I've yet to see anything for WA. A search of the Active Rain and various other national forums I belong to indicate this may still be an unattainable financing mechanism in WA at this point.

Any suggestions would be greatly appreciated.

Yes, You Can Purchase A Home With Less Than 20% Down

Thu, 30 Apr 2009 12:28:32 -0500

I'm getting more and more calls from clients and friends who think that the new lending guidelines require at least a 20% down payment.

While having that much cash to put down would certainly lower your payment, there are plenty of low down payment options available right now.

One very little known program is the Gauranteed Rural Housing Loan Program administered by the USDA – yep, the same people that certify your beef!

Following are some general highlights:

No down paymen, 100% financing
No monthly mortgage insurance
Do NOT need to be a first time home buyer
Seller can pay all closing costs (if negotiated properly!)

The program is restricted to “rural” areas but that includes a large portion of our readers’ locations – ALL of Ferry, Pend Oreille, and Lincoln Counties are eligible as is most of Stevens County (the community of Suncrest is excluded), and the outlying portions of Spokane County. While I have only listed a few areas covered, we can help you with a USDA Rural Housing Loan Program in any eligible location in the states of WA, ID, and CA. We have reference maps to verify the eligibility of specific addresses and you are welcome to call us to check for you.

There is also an income limit of 115% of area median income limit, scaled to family size. The income limit is actually quite high, particularly when there are three or more family members residing in the home.

If you are a real estate agent or a prospective home buyer, and would like to know how this program could help you purchase a home just give us a call. We’d be happy to fill in the details.

If you have a question about lending or real estate, please send me an email at MMullin@TheLoanConsultant.com, or give us a call at 509-252-9151. I’d love to share my knowledge with you!

Why The Lender On The Phone Is Not Telling You The Truth About The Rates - Part Four

Fri, 17 Apr 2009 11:17:32 -0500

During the last three weeks I’ve discussed how your property location, credit score, your specific loan scenario, timing, and games sales people play can significantly impact the rate you pay for your loan. If you’ve missed any of the last three parts you can view them at PART I, PART II, and PART III.

Games Sales People Play, is such a large topic itself, I had to break it up into two parts! The reason that it’s even possible to play games with you and your rate is because the mortgage lending process is complicated – plain and simple. In addition, the salespeople have a huge advantage over you. While you may get a home loan 2-3 times in your lifetime the sales people are closing at least that many loans every month.

To help you make smart decisions about home loan financing, let me share with you some of the insider secrets I’ve learned during my 19 years in the business:

Telling you that you can’t Lock until Approval – An important question to ask the lender from whom you are getting a rate quote is “can I lock the rate right now, over the phone?” For most lenders, the answer is no. Making you wait to Lock until your loan is approved means you are subject to anywhere from 2 weeks to a month of rate market changes. Basically, you have applied for a loan with the final terms left open till a later date. It’s kind of like writing a blank check to your lender! Why would a lender tell you this? Well, it’s to the sales person’s advantage if they can convince you not to lock your loan. Your guard is typically lowered once you’ve been in process with the lender for a few weeks and they can take advantage of this. Realize that when you called them on the phone a few weeks prior, they told you whatever rate they thought you needed to hear to get you to apply. Now, you can bet their “best” rate quote won’t be nearly as aggressive when they’ve got $450 of your money, non-refundable, and have collected all your private financial information for the last three weeks. Are you really going to cancel just because they quote you a rate that is 1/8% higher than someone else? And that’s assuming you even notice. You can prevent this from happening by selecting a lender that is able to lock you right up front, over the phone.

Rates are low and it looks like they may stay that way for the next few months as our government pumps tons of money into the mortgage business in an attempt to stabilize the housing mess. Lenders are slammed with refinance applications and are operating with a fraction of the staff they had a couple of years ago. It’s not a pretty process – a couple of the largest banks are taking 60 days to process a loan!

Rebecca and I hand select our lenders, and to date have been able to keep our process to 30 days or so.

So, the next time you ask a lender “what’s your rate?” just remember that it is virtually impossible for them to give you a valid rate quote. The only way to give you an accurate and valid quote is to have a full loan application, appraisal, and credit report. Anything less than that and the rate quote is just an educated guess at best.

So how do Rebecca and I overcome these roadblocks to providing you a rate quote you can count on? First, we take your information by telephone in about a 15 minute conversation. It’s not necessary to come in for a two hour loan application appointment. Second, we will order a credit report for you. We can provide you a written Good Faith Estimate with a valid rate quote and we can lock right over the telephone at the point of our conversation. There is never any up-front money collected or costs incurred by our customers until such time as they have a solid, written proposal upon which they can make a smart decision.

If you have a question about lending or real estate, please send Rebecca and I an email at MMullin@TheLoanConsultant.com, or give us a call at 509-252-9151. We’d love to share our knowledge with you!

Why The Lender On The Phone Is Not Telling You The Truth About The Rates - Part Three

Thu, 09 Apr 2009 10:40:12 -0500

During the last two weeks I’ve discussed how your property location, credit score, your specific loan scenario, and timing can significantly impact the rate you pay for your loan. If you’ve missed either or both of the last two parts you can view them at PART I, and PART II.

Now we’ve arrived at the part I’m most passionate about - Games sales people play to bamboozle you. If you have read the previous sections you should honestly be saying to yourself – “hey, there is absolutely ZERO chance the mortgage guy I talked to on the telephone gave me a valid rate quote, or even if he did, that the quote is still valid now.”

To help you make a smart decision about what lender to work with, let me share with you some of the insider secrets I’ve learned during my 19 years in the business:

· Low Ball rate quotes over the telephone - The loan salesperson’s main motivation is to get you to make a formal application and cough up a non-refundable “application fee.” Given this motivation (and the information I’ve provided about all the factors that impact your rate), do you honestly think the rates you see published on web pages, in print, or given verbally over the phone are accurate and valid? Nope! Usually they are just low enough to entice you to call. Once they have your non-refundable application fee they can sell you on a higher rate very easily by referring you to any one, or more, of the “add on” factors I’ve mentioned previously. The conversation, quite honestly, goes like this – “gee, I’m sorry Mr. Borrower. After you applied I ordered your credit report and your credit score is a 685. I have to add .875% in fees to your loan.” A professional lender will allow you to hold off on the non-refundable fee until AFTER they’ve seen your credit report and given you a valid rate quote.

· Encouraging you to Float instead of Locking – when you apply for a loan, one of the first choices you have to make is whether to Lock the rate (if the lender allows this option before loan approval, see below) or whether to Float with the market while you are in process. If your motivation is to Float (gamble) with the market please understand you have just given the lender the ability to play games with your rate! Here’s how it works – you’ve applied with Sally Saleswoman because she had the “best rate” when you were rate shopping. Unbeknownst to you she gave you a Low Ball quote to get you to apply. You’ve now made application, paid your $450 non-refundable Appraisal/Application Fee, and handed over all your confidential financial information. Sally Saleswoman confidently advises you that “lenders offer the BEST rates when we only lock for 15 days. A 30 day lock is always more expensive – like .5% in added costs. If you want to pay the extra fees that’s ok. Or we can process your file to completion and then we’ll be in a position to lock for only 15 days and you’ll get the best pricing.” Sounds pretty good, doesn’t it? There are two problems with this scenario. First, if rates get worse by even a smidgen (see Timing in part two of this series) the rate you pay when you are eligible to lock for 15 days could be WAY higher than the rate you could have had if you had locked up front for 30 days!!!! Second, Sally Saleswoman knows you won’t back out if you wait to lock until only 15 days before closing escrow. She no longer has to honor the Low Ball offer she gave you to get your application and can now extract as much from you as she thinks she can get away with. Does every mortgage person play the game this way? Of course not! But given what you read in the papers about greed and irresponsible behavior do you think it’s possible that a good percentage of the mortgage people behave this way? How do you know whether you lender is playing games with you? There’s a secret way to expose the game players, and I’ll write about that shortly.

Why The Lender On The Phone Is Not Telling You The Truth About The Rates - Part Two

Sun, 29 Mar 2009 15:49:45 -0500

“Mike, I keep hearing about low 4.5% rates, but every time I call a lender the rate they quote is higher! What’s up?” How Your Rate Is Determined, Part 2

Last week we discussed how your location and your credit score can impact the interest rate you pay. This week we look at two more factors, both of which can be even more critical that the first two.

Specific Loan Scenario – So, we’ve already adjusted your rate for where you live and what your credit score is. Now, let’s get into the more complex “hits” and “add ons” and look at how your specific loan scenario can impact the rate you pay:

· Purpose of loan – purchasing a home is the least risky loan and will always have the “base” rate. Refinancing your current first mortgage increases the cost, and including a second mortgage in the payoff or pulling additional cash out of your home to consolidate debt sends the cost exponentially higher. The chart below shows the "add ons" and "hit" for a refinance loan. If you have a 700 FICO (remember, you have perfect credit at this level!), and want to borrow up to 80% of your home’s value lenders will add approximately .875% to your cost – that’s $1,750 on a $200,000 loan and is in addition to the “hits” you may have already incurred for your location and your Credit Score.

· Property Type – borrowing against your principal residence is always the least expensive. Borrowing against an investment (rental) home adds approximately 1.75% to 3% of the loan amount to the cost.

· And on and on… If you go back to Part 1, you can see the master “add on” chart from a national lender. If you look closely you’ll notice I haven’t listed ALL the possible “hits” or “add ons.” In addition, other lenders may have more factors to consider.

The factors to this point are what I call “static” factors – they are specific to your credit profile and the characteristics of your loan request. They remain the same whether you talk to me today or next week. The next factor, Timing, is the one that drives you (and I) crazy because it makes obtaining a rate quote a moving target.

Timing – can be everything. Timing is the reason I say “you can cost yourself a ton of money by shopping around for the ‘best’ rate.” The market forces that impact mortgage interest rates are moving 24/7 and lenders can, and do, change rates throughout the day. Below is a rate change notice sent by one of my lenders. You'll note they changed rates TWICE in one day for a total of .25%

A “normal” mid-day rate change is .25% of the loan amount which is $500 on a $200,000 loan. One “normal” rate change of .25% and you’ve erased two days of effort to shop for a lender with lower fees.

Keep in mind that by the time the lender issues the rate change it’s too late to LOCK at the previous terms. You could get a rate quote from a lender and that quote could be invalid minutes later.

If the cost can change .25% or more in one DAY, how much do you imagine it can change from day to day or week to week? This is why calling multiple lenders over the course of a couple of days can actually cost you money. You could spend 2-3 days calling different lenders gathering invalid quotes (based upon the fact those lenders can’t possibly know enough about you or your circumstances to apply the correct “hits”). You decide you think you know who has the “best” rate and you call them back on the 4^th day to apply – oops! – the cost has increased .50% over the last three days and your “best rate” lender is now offering you a rate that is worse than the “worst rate” lender you spoke to three days ago!

So…you think you’ve found the lender you want to use because you like their rate quote. But wait! Can they LOCK in the rate they just quoted you? Or are you still subject to market changes? The rate you pay on your loan is not determined until your lender LOCKS your loan.

Many lenders require your loan to be approved before they can lock the rate – and this subjects you to a couple more weeks of rate changes while they process your file. We have the ability to LOCK the terms for you right over the phone, with just a few pieces of personal information.

Why The Lender On The Phone Is Not Telling You The Truth About The Rates

Thu, 26 Mar 2009 01:24:48 -0500

“Mike, I keep hearing about low 4.5% rates, but every time I call a lender the rate they quote is higher! What’s up?”

Do you want to know how lenders price your loan? Want to know about the little known details that might cost you thousands of dollars? Read on, and I'll explain...

The last couple of weeks we’ve been fielding tons of requests for rate quotes as homeowners shop around for the “best” rate to refinance their home loans. One particular caller spilled out his frustrations to me over the conflicting information he’s been getting as he calls one lender after another. While I’d like to tell you that the other lenders just didn’t know what they were talking about, in all likelihood they were just blindly answering the callers question (“what is your rate?”) but not taking the time to explain the entire process of how mortgage rates are determined.

The reality is that the rate YOU pay for a home mortgage in Spokane, WA is determined by a complex combination of geographic differentiation, your credit profile, your specific loan scenario, timing, and finally, good old fashioned sales games played by lenders.

First, I’d like you to know that the cost of mortgage money is pretty much the same on a wholesale basis to everyone. Banks and credit unions sell the majority of their loans to Fannie Mae and Freddie Mac, as do mortgage brokers via their wholesale relationships. A complete explanation of Fannie Mae and Freddie Mac is pretty tough to do here, but the easiest way to describe them is they are pretty much the ONLY funding source for home loans right now in the U.S. Bank, credit unions, and mortgage brokers “originate” the loans and the loans are ultimately purchased by Fannie and Freddie to replenish the cash that was used to make your home loan so we can lend to another family. The point to understand is that the basic cost of home loans is determined by what price Fannie Mae and Freddie Mac is willing to pay for a loan on any given day.

Another distinction to understand is the difference between banks and credit unions versus mortgage brokers. In the old days banks and credit unions used to make loans on their own terms and pricing by lending you money that they had in their vault. With very minor exceptions, all banks and credit unions now sell their loans to Fannie Mae and Freddie Mac just like mortgage brokers do. The big difference is that the banks and credit unions only offer ONE single menu of loan products – they either approve your loan or deny it based upon their product menu. Their loan sales people will typically have one rate sheet of programs.

Mortgage brokers, on the other hand, can represent an unlimited number of lenders. There are small mortgage broker shops that are approved with only 1-2 wholesale lenders and there are larger brokers who are approved with hundreds of wholesale lenders. While bank and credit union loan sales people have one rate sheet to serve you, mortgage brokers have literally dozens to view and chose from.

Given all of that, the rate differentiation between lenders it is not nearly as wide as most consumers think. Most of the pricing differences you see or hear are due more to the specific issues I’ll discuss below, than to one lender being “more expensive” than another.

The follow chart is going to be instrumental in my demonstration of how rates are determined.

This is a copy of a portion of an actual wholesale rate sheet from one of my favorite lenders. What you are seeing is small section of ONE page, out of FIVE pages of programs they offer. Keep in mind, I have potentially 296 other lenders all of whom have some variation of this same chart. Lenders call this an “add on chart,” because each one of the numbers on the chart represents an improvement or worsening of the base interest rate. For every borrower we have to carefully pick through these charts to make sure we apply the correct “add ons” to your specific loan scenario. The negative numbers are a worsening of your base cost, and the positive numbers are improvements. The cost change as a percent of your loan amount. For example, -.300 means that we have to add 3/10ths of 1% to your costs or $600 on a $200,000 loan request. The final cost is calculated by adding and subtracting the applicable “add ons” for your specific request and credit profile. These “hits” and “add ons” are universal to ALL banks, credit unions, and mortgage brokers – the actual percentages may be slightly different but everyone has them. You can see how easy it is for a careless person to make a mistake and miss-quote your rate!

Geographic rate differences – Every week Freddie Mac publishes the Freddie Mac Primary Mortgage Market Survey® in which they provide the average rates and points for home loans across the country. If you look more closely at the data, though, you will see there are regional differences with the average rates. In addition, specific lenders will have different pricing for different regions. In the chart below you can see that this lender segments the county into 6 different regions and has slightly different pricing for each. This lender give price improvements to regions 1, 2, and 3 but has worse pricing for the high foreclosure states in region 4 and 5.

Your Credit Profile – your credit score has never impacted your financial security more than today. A year ago rates were pretty much the same for everyone if their score exceeded 700 points, and there was only a small cost increase for scores between 680 and 700. Now it’s another story! Take a look at the 75.01-80% column below – your credit score needs to exceed 740 in order to get the base price. Any score below that has additional cost. I’ll tell you right now that the majority of people do NOT have a 740 score. In my experience most people fall between 700 and 720 – and that range includes people with perfect credit. If you have a $200,000 loan request, a 700 FICO, and want to borrow 80% of the home’s value we have to ADD .75% ($1,500) to your costs. And the price gets exponentially worse if you are just below 700. How do you find out what your score is and improve it if necessary? I’ll get around to writing about that at some point, but in the mean time just give me a call and we can discuss. Whatever you do – do NOT pay an online credit service to check your score. They will give you the wrong score!

So we’ve discussed the first two major categories of pricing criteria for your loan and already you could easily be .5% to 1% higher than the base cost for a home loan – and we’ve got three more criteria to cover!

Again, these issues are common to ALL lenders whether they be your bank, a small credit union, or a mortgage broker. We all get our money from Fannie Mae and Freddie Mac so the cost factors are pretty generic.

Next week we’ll discuss how your specific loan scenario impacts the rate you pay. You’ll be surprised at some of the things lenders have to charge you for that will continue to increase your cost over the base rate.

I think you will agree by the time you have read this and the next few weeks’ segments, that there really is no way a mortgage professional can give you valid rate quote over the telephone. Sure, they may throw out a number but just realize it’s a “sales call” to them and they are going to give you whatever number they think you need to hear to get you to apply. There will be plenty of opportunities after you apply to give you the “oops! The rate has to change, because…”

$8,000 First Time Home Buyer Tax Credit - Even If You Are NOT a First Time Owner

Sat, 07 Mar 2009 12:40:39 -0600

This is an update to an earlier post I made on this topic. Now that the details are published by the IRS it is clear that some clarification is in order.

Why does the heading of the article indicate you may not have to be a first time home buyer in order to qualify for the “first time home buyer” tax credit?

Because the government’s definition of “first time home buyer” is someone who has not owned a principal residence within the last 3 years. If you’ve been renting for the last three years you are now a “first time home buyer.” If owned a rental property but not a principal residence, you are a “first time home buyer.”

Here are some pitfalls of the program that might trip you up:

“Purchase date” is defined as the day your purchase closed escrow and recorded. This is typically 30 days or so after you signed the contract to purchase the home and there will be countless stories of people who missed the cut off dates by 1 or 2 days if they or their real estate agents misunderstand this definition. To meet the November 30, 2009 deadline I'd make sure you are under contract to purchase a home in the Spokane area no later than late October, 2009.
You cannot claim the credit if you purchase the home from a close relative.
You do not qualify if you have recently married and your spouse owned a principal residence within the last three years.
The $7,500 tax credit is advertised as repayable over 15 years (repayment is deferred for first two years) at $500 per year, unless you no longer occupy the home as your principal residence (rent it out, vacate it, or sell). If you do, the remainder of the tax credit is due and payable.
The $8,000 “non-repayable” tax credit IS repayable if you sell the home within the first 36 months of ownership.
If you purchased a home for less than $75,000 (during the 2008 qualifying period) or $80,000 (during the 2009 qualifying period) then the credit will be 10% of the purchase price.
There is an income limit – the credit is phased out for single tax filers whose modified adjusted gross income (MAGI) is over $75,000, and married couples filing a joint return who’s MAGI is over $150,000. The IRS’s definition of MAGI is too lengthy for this article – read page 2 of Form 5405 to get an idea.

The tax credit is an IRS program, not a home loan program, and I am not a tax expert. The IRS has creeated a great information page that includes many additional details. CLICK HERE to go to the IRS info.

If you qualify as a “first time home buyer,” or know someone that is – you should act quickly. Particularly if you have not yet filed your 2008 tax return. You could purchase a home in the next 30 days, eFile your 2008 tax return, and get a quick $8,000 cash gift from the IRS a couple of weeks later!

To get pre-approved for your first home, give us a call!

First Time Home Buyer Tax Credit

Fri, 13 Feb 2009 09:51:48 -0600

Note: At this time the current stimulus plan has only been agreed to by the Senate and the House of Representatives - there has NOT been a final vote yet so details are still subject to change.

The tax credit (not a tax deduction) will be 10% of the purchase price of a home, up to a maximum of $7,500 or $8,000 depending upon when you purchased. In other words, the government is providing first-time home buyers an interest-free loan to be used for home improvements or any other use. The confusing part is we will now have two different, but similar, first time home buyer tax credit plans running.

Is it $15,000, is it $7,500, or...Congress seems to have settled on $8,000 as the amount of the tax rebate for first time home buyers. The other two significant alterations just announced is that the tax credit would be forgiven if the buyer does not sell the home in the first three years, and the opportunity to purchase a home is extended to December 1,2009.

This will mean that first time home owners who purchased between April 9th, 2008 and December 31st, 2008 fall under the rules of the current tax credit plan of $7,500 with repayment required over 15 years.

The NEW plan will apply to those first time home buyers who purchase a home after January 1st, 2009 and before December 1st, 2009. Hey, it's the U.S. Tax Code - did you think this would make sense?

Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

FAQ's:

What is the definition of a first-time home buyer? The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.
How do I claim the tax credit? Do I need to complete a form or application? Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. No other applications or forms are required.
Does the credit amount differ based on tax filing status? No. The credit is in general equal to $7,500 or $8,000 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 or $8,000 is claimed as a $3,750 or $4,000 credit on each of the two returns.
Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit? In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500 or $8,000. For most first-time home buyers, this means they will receive the maximum credit. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.
What is the difference between a tax credit and a tax deduction? A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS. A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer’s tax liability would be reduced by $1,125 (15 percent of $7,500), or lowered from $7,500 to $6,375.
Does the credit have to be paid back to the government? If so, what are the payback provisions? If you purchased between April 9th, 2008 and December 31st, 2008 - Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven. If you purchase a home between January 1st, 2009 and December 1st, 2009 - You might NOT have to pay back the credit, if you own the home for at least three years.

Please remember, these are my interpretations of the plan as I understand them – you must consult with your tax accountant to determine how this plan will impact you and your taxes.

If you, or someone you know is thinking about purchasing their first home, give me a call. Getting pre-approved is easy! 15 minutes on the phone and I'll get you started.

Michael Mullin, WA 510-LO-44740
Branch Manager/Mortgage Consultant
First Priority Financial/Lake Spokane Home Loans
Office: 509-252-9151

Have You Thrown In The Towel?

Thu, 29 Jan 2009 09:50:19 -0600

Have you given up? Thrown in the towel?

Well Newsweek magazine says you have in their article "The Quitter Economy." I know catchy headlines sell magazines, but this got me riled up this morning - you CAN'T QUIT!! There are families to feed and lives to live.

Of course we're not giving up. And it doesn't take much on your part to do the complete opposite:

Yesterday I had a lunch with a top producing real estate agent in my area. Janet, I met him via some of that "junk" advertising that Realtors don't respond to.
This morning I have a scheduled conference call with another local Realtor to discuss some joint marketing.
Contrary to the Newsweek article, mortgage brokers ARE APPROVING loans. The banks and credit unions may be choking on their limited menu of loan products but mortgage brokers are doing fine, thank you very much. In fact I've spoken to a dozen other brokers in the last two weeks who want to join our firm - yes, we're hiring (as are others). Residential home loans are being approved everyday for people who have jobs, decent credit (not perfect!), and a few thousand dollars in cash.
Home buyers are getting incredible deals on foreclosed homes, REO's (bank owned properties), and short sales. Coupled with low interest rates, your buying power is pretty good right now.
Exising home owners are refinancing into lower rates and lower monthly payments, or converting their ARMs and Option ARMs into fixed rate loans.

I don't mean to trivialize the situation of anyone who has lost a job or a home. That IS a difficult situation but you still CAN'T give up.

Have you given up? Let's talk about it and turn it around for you.

Michael Mullin
Lake Spokane Home Loans
First Priority Financial

Spokane, WA
(509)252-9151
MMullin@TheLoanConsultant.com

What Is Worse - Personal Bankruptcy Or Foreclosure?

Mon, 12 Jan 2009 17:18:29 -0600

A friend forwarded me a story posted by Diana Olick with CNBC titled "What Is Worse - Personal Bankruptcy Or Foreclosure?"

The full article can be read HERE

I thought Diana's post had some valid points but there were some important details missing - so I emailed her. I'm not sure I should have done that, but I've already hit the Send button in Outlook so it's too late to take back my rant.

Because my comments are now in the public domain I figured I may as well share them with everyone else -

"Diana, I read your post with interest because I am in the lending industry and am talking to clients every day that are asking me the same question. The problem is that the answer depends upon the borrower’s circumstances, so there is no one answer. IF you want to stay in your home then bankruptcy might be the “best” choice because you may be able to get the judge to reorganize your debts in such as way that you can afford the mortgage payments. The reason the new administration is working on the “cram down” provision for bankruptcy judges is that may be the most effective way to stem the tide of foreclosures. Now, I’m not a proponent of allowing judges to forgive mortgage debt because I think it opens other cans of worms – however, lowering the debt level on a home to the current market value may just give the homeowner the HOPE they need to keep making payments. People are “walking away” from their mortgages because they have no HOPE of ever seeing that money again. When you are $200,000 upside down in a condo it is going to be a very LONG time before you ever get back to even again – so why keep making payments? Every day we see Fortune 500 executives getting “bailout” money from the US Government (yours and my tax money) because they ran their companies into the ground. Why is a corporations' responsibility to manage their finances properly any less than yours or mine? Regarding the FICO rep’s explanation of how a foreclosure effects your credit – he didn’t have the entire story. I’ve personally seen a credit report with a 700 FICO from a loan applicant that had a foreclosure one year prior – so I’m not sure I believe his “200 point drop” comment. However, the mortgage giants (Freddie Mac, Fannie Mae, HUD, and VA) ALL have provisions for dealing with applicants that have had foreclosures on their credit reports REGARDLESS the actual FICO score. In all cases, an applicant will have to wait significantly longer to obtain a mortgage after a foreclosure than after a bankruptcy."

So, what is worse - personal bankruptcy or foreclosure? You are going to need a CPA to figure the tax consequences and an attorney to truly answer that question. As to which one will be worse for your credit report - I don't think that's very important in light of the other troubles you have.

If you want to talk about how a foreclosure or bankruptcy effects your ability to purchase a home - now that IS something I can help you with. Give me a call or shoot me an email and we can talk about it.

4.5% 30 Year Fixed Rates Available in Spokane, Spokane Valley, South Hill, Mead, Nine Mile Falls, and Deer Park

Wed, 17 Dec 2008 11:01:54 -0600

Well, the Fed has finally done something that should make all homeowners and prospective homeowners happy...they lowered their target for the Federal funds rate to 0%-25% While that does not DIRECTLY impact mortgage interest rates (and it would take pages of economic and fiscal speak to explain why) yesterdays' move HAS had a positive impact. Two weeks ago I was able to offer clients rates in the mid 5% range. This morning I logged into my favorite wholesale lender to see 4.5% with NO ORIGINATION FEE!!!! That's unprecedented.

Who benefits:

Existing homeowners in Spokane, Spokane Valley, South Hill, Mead, Nine Mile Falls, and other neighborhoods in Washington, Idaho, and California need to contact their favorite lender ASAP to see if they can benefit from a refinance. I've seen this refinance rush many times in the past and those that wait to call miss the low rate opportunity as lenders get inundated with loan applications. Keep in mind that lenders have been cutting staff dramatically the last few years so there is a shortage of true mortgage professionals still in business to help.

Prospective homeowners - this may be a once in a lifetime event. You've got foreclosures and FSBO's competing with the normal resale market creating a serious advantage in your favor. Throw in the low interest rates and you've got a unique opportunity that won't last long. If down payment is an issue - no worries. There ARE still some 100% financing options available (limited, I'll admit, but available none the less), and FHA loans only require a 3.5% down payment.

Real estate agents - look like a HERO to your clients! Proactively inform them of this sudden rate drop. If they've already locked in with their lender they need to have a conversation to see what can be done to lower the rate or maybe get a second opinion. If you have a database of past clients - notify them! What better excuse to contact your great clients than to save them some money. Well, I've got to sign off and get to work! Have a great day. If you have a home loan, you need to consider a refinance as well.

2009 FHA and Conforming Loan Limits

Mon, 10 Nov 2008 15:15:16 -0600

2009 Conforming And FHA Loan Limits

The Federal Housing Finance Agency (FHFA) announced that the conforming loan limit will remain $417,000 in 2009 for most areas. They have designated some areas as "high-cost" where the limits are equal to 115 percent of local median house prices and cannot exceed 150 percent of the standard limit, which is $625,500 for one-unit homes in the continental U.S.

The only counties in WA that have higher limits than $417,000 are San Juan County at $483,000 and King, Pierce, and Snohomish Counties at $506,000.

In Idaho, only Blaine County and Teton County loans can exceed $417,000.

HUD also announced that the FHA loan limit for the Spokane area will remain at $271,050. For Kootenai County the limit is $286,250.

Click on the links below for more information

FHFA Press Release
2009 High-Cost Area Loan Limits
2009 Loan Limits for All Counties

Keep in mind, these figures are LOAN limits - for a sales price "limit" you would add in the down payment required.

If you are selling or buying a home that exceeds these amounts you need to get with a lender for a mortgage planning session. Jumbo interest rates are VERY expensive and the 2nd mortgage market has been dramatically curtailed. In other words, your options for financing a home in the Jumbo price range are very limited.

Search and Rescue Academy

Mon, 27 Oct 2008 15:12:45 -0500

During the weekend of October 17th, 18th, and 19th about 30 members of area Search and Rescue teams assembled at the Spokane Mountaineers' Chalet on Mount Spokane.

The Mountaineers have an incredible asset in the Chalet and the 40 acres surrounding it - here's a picture from the deck looking towards Idaho -

Participants started arriving Friday evening and settled into a humongous feast of chicken fajitas with all the fixings accompanied by Apple Pie and Cheesecake for desert. A gigantic THANKS to Karen Coates for putting it all together and allowing your husband Joe to feed us!

Hey! Two hours of studying FEMA's National Incident Management System (NIMS for short) is very hard work - for those of us that managed to stay awake.

Saturday was Map/Compass/GPS training, Litter Carrying, and Knots - both classroom and field sessions. The Navigation classes were taught by Phoebe Duke of Intermountain Search Dogs, Scott Foster of SMSAR taught Knots and Chad Skidmore gave the instruction on proper use of the patient litter.

Sunday was another full day with classes on Crime Scene Investigation and Search and Rescue Techniques, taught with skill by Jackie Bell and Andrea Sawyer

Search and Rescue is a fun and rewarding volunteer activity, and there are specialty groups for all outdoor enthusiasts - there are dog, ATV, horseback, snowmobile, dive, climb and ground teams. You are welcome to participate in one or more! For a list of all the search and rescue teams in Spokane County CLICK HERE.

If you know of someone who might be looking for an opportunity to help the community while enjoying the outdoors at the same time, shoot me an an email. I'd love to send you more information.

Can you help a Boy Scout?

Thu, 23 Oct 2008 10:01:10 -0500

I'd like to extend an invitation to come out and help a very special young man this Saturday from 8:30am to 3:00pm.

Boy Scout Connor Coates from Nine Mile Falls' Troop 19 will be coordinating a huge clean up project at John H. Shields Park. For details CLICK HERE.

Part of the work involves sand blasting graffiti that is so far off the ground we will need to access via rope and harness climbing methods. If nothing else, come out to watch the spectacle!

Please note - do NOT confuse this park with the City of Spokane's Minnehaha Park which is about 2 miles away. John H. Shields is located on E. 5625 Upriver Drive: 1 mile east of Havana on Upriver Drive, north at City's Upriver Dam site.

Hope to see you there!

Can You Survive On $60 Per Month?

Wed, 15 Oct 2008 18:38:10 -0500

I'm going to share a secret with you - my allowance is $60 per month. That's right - $60 dollars to spend on dinning out, movies, coffee, and anything else I may want to treat myself to.

I wasn't always this frugal. In fact, my family can overspend with the best of them! Fortunately my wife and I decided to stop the crazy spending and put ourselves on a financial diet.

Should your allowance be $60? Well that depends. If you are putting 10% of your gross income into savings every month and have no credit card debt I'd say you could probably bump that figure up. If, on the other hand, you have less than 3 months worth of your income sitting in your regular savings account for emergencies, have any credit card balances, or are saving less than 10% of your gross income I'd suggest your number should be less than $60 until you can achieve those three benchmarks.

So how exactly do you get yourself on such a financial diet and then maintain? It's called "CASH ONLY."

For all your personal expenditures you must pay with cash from your wallet or pocket book. The amount of your allowance is not the critical part of this diet, it is the use of cash that is key. Having a finite amount of paper in your pocketbook that you can see every time you reach for some more is the only way to reign in the spending.

Pay yourself the allowance on the first of every month and then have fun! Of course, when the cash runs out you are done for that month. No reaching for the debit or credit card when you run out mid-month. No cash, no play!

We implemented this for our entire family, including our 13 year old and 10 year old. It's amazing the choices each individual will make when it is THEIR allowance on the line. There will be times that we drive through McDonalds' because one person wants to waste their money on some fries and the rest of us will not order anything and wait to get home to snack.

For each of the last 6 months I've managed to spend $20 or LESS of my allowance.

My passion is my involvement with Spokane County Search and Rescue, so I put away $40 per month to buy my SAR toys (er...equipment!). I never realized I could be THIS frugal until I had a finite amount of cash in my pocket.

How low do you think you could get your allowance to?

Would You Walk Away From Your Home And Mortgage?

Thu, 09 Oct 2008 09:24:22 -0500

Seems every day brings to light another bizarre angle to this incredible mess - today I was made aware of the web site You Walk Away.

Are they legit and can they help distressed homeowners? I have no idea!

I can tell you that if you are considering "walking away" from your home you had better consult both an attorney and a CPA. There are gigantic legal considerations and potentially expensive IRS implications as well when you abandon your home and mortgage.

I'm sure most of our brethren East of the great state of Arizona are wondering "why in the heck are these funny Californians and Nevadans walking away from their homes?!" And why are the foreclosure rates exceeding even the most pessimistic lender's estimates?

I'll tell you why - the erosion of value and long term loss of cash and equity are beyond comprehension and even borrowers with 700+ FICO scores are starting to abandon their homes.

Here's a quick example - In the summer of 2005, Ms. First Time Move Up Buyer purchases a home for $385,000 in Sacramento California and puts $100,000 cash down from the sale of her first home. Yesterday she niavely calls her friendly lender (me) to ask about refinancing. OOPS!! Current value of her home is only $170,000.

In case you like pictures better than words - here's some data I found on Zillow for a randomly selected property in Northern California. Just for fun, go to Zillow yourself and type in a random address and look at all the "hills" created by tanking values.

Last sale and tax info

Sold 03/29/2007: $465,000

Above data from Zillow web site - CLICK HERE to see full property details

What do you think went through my client's mind when I told her the news? First, the shock as she realizes her $100,000 CASH is gone.

Forever.

She's got a loan for $280,000 so she is also at least $125,000 upside down. There is no loan modification or rate reduction that is going to erase the loss and put the cash back in her pocket.

If she decides to stay and do the honorable thing and pay back her lender she has at least 10 years before she can hope that values will come back enough so she can sell and pay off her mortgage. Maybe. It might be 15 years.

Or, she can stop making payments now and take the hits to her credit report for a foreclosure. Then she can go out and lease/option a home that is twice the size of the one she is currently in, and in a better neighborhood for less than the payment she is making now. In about 3-4 years she'll be eligible for mortgage financing again and can pay off her landlord/lessor.

Why do I think she'll do this - because she asked me if it was possible.

This is just one person and it is a real story. I spoke to this person Monday. Now let's multiply her problem ($200,000 plus loss of equity in three years) by EVERY home purchase in California, Nevada, and Arizona from about 2003 to end of 2006. In California alone they sell about 50,000 homes per MONTH. So not counting any state but California and ignoring the fact that people who bought in 2001 and 2002 are probably underwater as well - you have almost 2 million families making the same decision my client is, in California.

If Nevadans, Arizonans, Floridians(?) are similar in thought, they'll be "walking" too.

What would (will) you do?

P.S. No comments on how I'm advocating people walking away from their mortgages - I'm just pointing out the obvious.

P.P.S The reporters at the Wall Street Journal agree with me - seems they just published a similar article today. There stats are even more sobering - almost 30% of people who bought homes in the last 5 years are underwater. You need to read this - the foreclosure problem is going to get worse before it gets better.

Tracing WaMu's Collapse - Part 2 (The no income verification loan)

Wed, 08 Oct 2008 15:38:17 -0500

This is a continuation of my thoughts around the article Tracing The Collapse of WaMu published in the Spokesman-Review.

In the mid 1990’s American Savings Bank and Great Western were niche lenders known for two products – the negative amortization loan (Option Arm is the “common” name for this product) AND the no income verification loan. I worked at a competing S&L in California at that time and am very familiar with those products. My bank did not offer the products but my loan clients would frequently ask me about these competing products.

Until the mid-1990’s both loan programs were utilized in an ethical and common sense manner for the most part, and to this point these products had been in existence at least a decade without trouble.

Then banks and other large investors jumped into this niche and started peddling these products to the masses – most of whom had no reason to obtain one of these loans.

Here's an insider's look at the no income verification loan

Towards the end of its life, the no income verification loan had gained almost all the attributes of a full documentation loan (fixed rates, 30 year terms, etc.) with the sole exception that the rates were higher and the borrower only had to "state" their income on the loan application.

Why would someone, who could verify their income, pay a higher interest rate just for the convenience of not having to provide 1 W2 statement and 2 pay check stubs to document their income?

I think you know the answer to that - because that borrower did NOT make enough income to qualify so they lied on the loan application, or were encouraged to lie on their application by their lender.

I even spoke to one borrower in 2004 that came to me after refusing to sign loan documents presented to him at the closing table by his current lender. Turns out the other lender had increased this borrower’s income on the loan application without even telling him – the borrower only found out when he was sitting at the closing table and was asked to review and certify the loan application as “true and correct.” I guess the tiny print at the bottom of the loan application that says the FBI will lock you up for committing loan fraud got his attention!

No Income Verification Loans – Then and Now

Here’s the main distinction between then and now – and I think the problem will be pretty obvious.

1995:

· These borrowers paid a premium to obtain the loan to reward the bank for the additional risk.

· Good credit was required.

· The borrower had to demonstrate they had substantial liquid reserves, sometimes as much as 6 times the amount of the monthly income they stated on the loan application – hence a verification that the borrower did in fact make a decent living.

· Typically only made to self-employed borrowers.

· Required a down payment of 10% to 20%.

· The banks held these loans in their own portfolios and posted adequate loan loss reserves against these portfolios.

· Commissions to the loan officers were generally 1-2% of the loan amount – thus making them not overly attractive to “sell.”

· These loans were not sold to Wall Street, thus limiting the risk of default to only the bank that made the loan.

2004:

· Interest rates were artificially similar to a 30 year fixed rate by offering a low 2, 3, or 5 year fixed term.

· No income verification loans were being made to people with 620 FICO scores, or lower.

· Cash reserves severely limited to 2 times the new house payment, if any required at all.

· No longer limited to self-employed people only. Now these loans were being made to borrowers who had easily verifiable income because they were regular employees. There were even lenders who would allow a retired person collecting Social Security to “state” their income.

· 0% down payment was available.

· Commissions to the loan officers were easily collected up to 3-4% of the loan amount.

· Wall Street started buying these loans in huge pools, now spreading the risk of default world wide.

Was Washington Mutual the only lender who had employees abusing this loan product? Nope! They are being picked on because they are the object of the article that raised the issue.

My point is that negative amortization loans and no income verification loans are now treated universally as "bad" loan products. As with any potentially dangerous product, it is the human that causes the problem not the product itself.

Part 3 - The Option Arm will be done and posted in a day or two. Stay tuned!

Even The Bailout Can Use Some Help

Mon, 06 Oct 2008 23:50:12 -0500

Steven Jacobs of the Associated Press penned an article under this title and it appeared in various newspapers and online sources. To read the entire article CLICK HERE.

Tying the $700 Billion bailout plan to the housing problem is a smoke screen and driving me crazy.

Yes, there is a huge problem in the commercial paper lending industry making it difficult or impossible for businesses to obtain funds to continue operations. (UPDATE: I love it when I'm right - here's the bailout of the commercial paper one day after my post! Click Here)Yes, there is serious deterioration of the value of our homes and the disappearance of a limited number of mortgage options. However, the commercial paper problem and the housing problem are really DIFFERENT issues and it would help if the media began to educate themselves so they were not unwittingly misleading their readership.

Why then are the two issues treated as one in the media and by our elected officials in Washington D.C.?

My guess is because most of them don’t really understand the problems (which is the scary part) and, second, they know the best way to get the $700 Billion bailout approved is to scare their constituents into thinking they are all going to lose their homes to foreclosure if the bailout didn’t happen. Hence, let’s just call the entire problem a housing problem.

I read this morning that:

"Experts say the most important thing that needs to happen before the $700 Billion bailout even has a chance of working: Home prices must stop falling. That would send a signal to banks that it’s safe to stare doling out money again.”

This is so misleading it makes me want to scream. Banks do NOT dole out their money for people to purchase homes. Banks and other lenders advance funds that are immediately replenished by selling the home loan to Fannie Mae, Freddie Mac, FHA, or VA. All four entities are operating very well right now and home loans are being approved every day.

The next paragraph goes on to say

“The problem is the lending freeze has made getting a mortgage loan tough for everyone except those with sterling credit.”

Again, this is a completely misleading statement on two fronts.

First, there is NO lending freeze. I just had my best month in a long time – the result of home owners taking advantage of low rates in early September and refinancing to a lower payment. I checked the Mortgage Bankers' Association figures and they are reporting that in the first 9 months of this year, 7.65 million loans were originated worth $1.53 trillion. Does that sound like a freeze?

Second, you hardly need “sterling credit” to get a home loan. That is such an exaggeration as to make my head spin. I’ve got a borrower right now with a 641 FICO score that I can get approved on either a Fannie Mae loan or an FHA program. A 641 is not “sterling.”

All that’s really changed in the home loan lending industry in the last 12 months is that they have curtailed the loans being made to people who should not have received them in the first place.

Plain and simple.

If you have ok credit – down to a 580 for goodness sakes! – have employment with verifiable income, and $3,000 to $5,000 you can easily purchase a home in Spokane, and Eastern Washington (or just about any other place in the US for that matter).

Those are hardly insurmountable hurdles for a determined homebuyer.

THE $700 BILLION BAILOUT - THE FUNNY VERSION

Mon, 06 Oct 2008 14:26:33 -0500

Forwarding a Saturday Night Live skit is not something I'd normally do but this is just so funny (as if a $700 Billion Bailout can be funny) I can't pass up the opportunity.

You can view the skit on the NBC website HERE.

Everyone needs to start the work week with a good laugh!

Happy Monday!

Tracing the collapse of WaMu

Sun, 05 Oct 2008 16:07:08 -0500

A couple of items in today’s Spokesman-Review article on WaMu’s collapse offers clues not only to WaMu’s demise but to the current lending mess in general.

The first item is WaMu’s purchase of American Savings Bank and Great Western in the late 1990’s. I worked for a competing bank during those years and I had frequent conversations with borrowers who wanted to refinance their home loan for NO other reason than to get away from WaMu’s loan servicing department. It was common knowledge in the industry that WaMu was totally choking on the integration of the other banks’ loan portfolios with their own. I remember thinking to myself, “WaMu is going to ruin their business by trying to acquire too many other banks all at the same time.” I guess I was wrong by about 10 years.

The second item, and the one that goes to the heart of the entire lending mess, is the statement that WaMu’s former CEO Kelly “Killinger clearly understood how mortgages worked.” I want to be clear the following has nothing to do with Killinger himself, but more my opinion on how thousands of executives like Killinger drove their businesses into trouble.

Just because lending executives “understood how mortgages worked,” that does not mean their companies acted in a responsible and ethical manner. I personally think there is a broad range of reasons for the lapses of judgment used by these executives – everything from intentional fraudulent behavior to just naïve ignorance of the products they offered and the manner their employees offered these products.

WaMu is just the most recent example of how understanding mortgages doesn’t mean you will be successful as a mortgage lender. Gone from the media, but the all time biggest flop, is the demise of Countrywide Home Loans. While they may have “merged” with Bank of America let’s not gloss over the fact that it was CW’s use of the Option Arm and no income documentation loans that caused them to spiral into the ground. CW’s founder Angelo Mozilo was considered a visionary of the mortgage industry and Countrywide itself was the largest lender in the U.S. for many years running. I’m sure Angelo “understood” the mortgage business, but he’s out of business now.

Let’s not confuse understanding something with behaving in an ethical and responsible manner.

SPOKANE ONE OF 100 BEST COMMUNITIES FOR YOUTH

Sat, 04 Oct 2008 15:47:59 -0500

Spokane has been chosen one of the 100 Best Communities in America for young people, as judged by America’s Promise Alliance.

What an encouraging endorsement of our community!

Unfortunately it’s buried on page B4 of The Spokesman-Review so most people probably missed it. Why is it we give such little attention to really important stories like this?

I’ll be including this information in all my presentations to out of town buyers.

If you missed the original Spokesman-Review article, it can be accessed by CLICKING HERE.

The story also led me to discover the wonderful organization – America’s Promise Alliance – founded by Colin Powell in partnership with his wife Alma. They are doing great work in support of our children – CLICK HERE to check out their organization.