Your Senator and Congressman hate the yield spread premium…..because they don’t understand it, and they don’t understand why a yield spread premiumcould be beneficial to a borrower.

A yield spread premium is the only time that your mortgage lender will pay you!  That’s correct it’s an opportunity to GET money from your mortgage lender.  But why would your mortgage lender pay you money?

A mortgage lender pays a yield spread premium to a borrower when the borrower accepts a higher interest rate.  The lender can sell the loan for more money at a higher interest rate, and they pay money to a borrower to induce them to take a higher interest rate.

Why would a borrower accept a higher interest rate?  There are actually several reasons.

1 – Closing costs are expensive.  A borrower might take a higher rate to offset their closing costs so that they have to bring less money into closing.

2 – The borrower might have a short term ownership in mind.  Oftentimes, if you are planning on staying in the house only 4 to 7 years (the math varies), it makes sense to take the yield spread premium and higher interest rate.  It can take 4 to 7 years for the payment savings to add up to the amount of money you can get credited to your closing costs.

3 – Sometimes, as amazing as it sounds, a higher interest rate can result in a lower monthly payment.  How?  By taking a yield spread premium and buying asingle-premium mortgage insurance policy.  This strategy eliminates more expensive monthly mortgage insurance and can result in huge savings in some circumstances.

So, despite what Grand-dad, your Senator and Congressman say, sometimes it’s smarter to take a higher interest rate and use the yield spread premium to better your financial situation!

To pay for a two month extension in the payroll tax, Congress (both sides of the aisle), and the President have decided to tax real estate loans for the next ten years.  This was voted in recently, and will now start affecting real estate transactions.

It’s not been publicized as a tax because it’s been identified as an increase in the agency’s “Guarantee Fee”.  But the money does not go to the agency’s, it goes directly to the US Treasury.  The fee is only 10bps(bps stands for “basis points” which means 1/100th of a percent, or .1%).  But, when market factors come into play(like lock term, etc.), it will be more.  The largest US mortgage lender said recently that some programs will be affected as much as 80 bps.

This will not be an additional fee on the Good Faith Estimate, but will be factored into pricing.  Industry estimates conclude that the typical borrower will pay approximately $4,000 more during the life of their loan.

Let’s face it, this is a tax.  A couple interesting thoughts come to mind when considering this new tax.

First, since Fannie Mae and Freddie Mac are now a funding source for the US budget this works against the goal of both parties to “wind them down”, or eliminate them and replace them with private funding sources.

Second, for those of you who will immediately jump on this as “liberal” spending….the “conservatives” were also in favor of this new tax, despite their signing of the “no new taxes” pledge.

Third, housing has led the economy out of recession historically.  Housing is still hurting nationally.  The Federal Reserve has kept interest rates low to stimulate the economy and just last week wrote a letter to Congress expressing the importance of housing in revitalizing the economy.  It makes you wonder why all these “job creators” in Washington, D.C. are for this tax that will serve as an additional barrier to stimulating housing and create jobs.

It would appear that the Nation’s leaders have other priorities.  What they are, who knows.

Mortgage insurance is viewed nearly universally as a bad thing, but in reality, it’s a tool to be used that can be very good for home buyers, the housing market and the economy in general.

Why do many complain about mortgage insurance?  Because its expensive, and sometimes difficult to get rid of when it’s no longer necessary.  If that’s the case, why do I say it can be good for buyers and the economy?  Because it’s a tool that allows people to buy a home with less than twenty percent down.

Mortgage insurance insures the lender against the risk of the buyers default (stop making the payments) on the loan.  It does NOT insure the buyers life, like many people think.

The single biggest hurdle for home buyers is accumulating an adequate down payment.  Lenders want buyers to put twenty percent down for two reasons.  First, a buyer with a large down payment is less likely to quit making their payments.  Second, and most importantly, if a buyer does default, the more the buyer put down usually means more equity in the house when the lender forecloses, which means the lender loses less money.

But, if a buyer wants to buy a $200,000 and has to put up a twenty percent down, that will equal a $40,000 down payment!  Hard to save up, for most buyers.  BUT, with the use of mortgage insurance, that buyer might be able to put as little as $6,000 down!  A lot easier to save.

So, mortgage insurance can be a very beneficial tool.

With that being said, don’t let your lender shoehorn you into only considering monthly mortgage insurance.  There are other options such as single premium mortgage insurance, or “split” mortgage insurance.  These programs can be more expensive up front, but sometimes much less expensive over time.  They don’t work for everyone, but they certainly should be looked into.

The Small Business Saturday promotion is a great one that’s going on today. Your local small business is run by your neighbors, family and friends. They spend their profits and wages in your local economy. They employ your neighbors, who spend their pay in your local economy. Oftentimes, they support local charities that help make your community.

Did you know you can support small business in your real estate transaction too? Choose a local lender instead of one of the big national banks, or that on-line lender that looks so tempting. In addition to the benefits of using small business above, using a local mortgage lender makes sense for other reasons, as well.

First, due to their smaller size, they will find it necassary to offer superior service as a way to attract business. In this day and age of the big banks missing closing date after closing date, it’s nice to have that stress removed from an already stressful transaction. Also, if you have service issues, with a smaller lender, you can reach somebody who matters and who cares about your transaction. This can mean all the difference in getting your transaction done.

Second, the smaller mortgage lenders tend to have a more experienced staff. This experience can pay off in helping you find your way through the maze of requirements and regulations that have been added to the mortgage lending process in the last few years.

Third, the smaller mortgage lender will have to be competitive price-wise. They may not have the absolute lowest rock-bottom price, but the quicker closing times will help you avoid expensive “lock-in” extension fee’s, or expensive longer term “lock-in” periods. This can ulitmately result in a lower rate and lower fee’s in the transaction.

Fourth, the smaller lender may have more options than the larger lenders. For example, our firm offers the products from a number of large banks and other lenders. A borrower who may not qualify at one bank, may qualify at another. Save yourself the hassle, time and cost of another appraisal by working with the smaller mortgage lender.

The entire economy will benefit if we make a concsious decision to check with the locally owned, small business first… including your locally owned mortgage lender.

Your loan hasn’t ben sent to the Doctor-to get healthy.  We don’t have a secret “loan hospital” for sick loans.  No when we refer to a loan as having gone to “Doc’s”, we are referring to sending your loan to have the Loan Documents prepared or drawn.

What this means to you as a borrower is, your loan is almost done!  This is the part of the process where a “Closer” or a “Doc Drawer” prepares all the documents that you will sign at the closing table.  The Promissory Note, The Deed of Trust, the page after page of government required disclosures are all prepared at the point that the loan has “gone to doc’s”.

At this point your loan should be fully approved, with the exception of some, hopefully simple, prior to funding conditions (usually simple things like signatures on an explanation letter or something).  Your interest rate and terms are locked in.

The process of “drawing doc’s” can take anywhere from an hour or two all the way to a couple of days.  Why so long in this era of push button, super fast technology?  Because at this point everything has to be right and correct.

So, congratulations!  You are almost done!  The next step, is the doc drawer will send the loan to the escrow officer or closing agent, where you will sign your loan documents!

Yesterday, a fairly sophisticated home buyer called me about a pre-approval.  He and his wife own a home, and a vacation home.  This is a successful business couple who are doing well in the residential construction market despite the current economy.  He indicated that they wanted to buy a new primary residence.  His question to me was “We can get together about 10% down.  Can we even buy a new home with less than 20% down?”

It’s no wonder they are confused.  Every other article where leadership of the National Association of Realtors is quoted, every press release they issue usually has the quote that “tight lender guidelines are hurting the real estate market”  or “buyers need to have 20% down and be perfect to accomplish a purchase” or some words like that.

Unfortunately, these types of statements are blatantly untrue in most markets, and are very damaging to the real estate market at large and to home buyers and sellers everywhere.

It’s true that lenders are giving loan applications MUCH greater scrutiny than they have in any time since 1998.  Rampant mortgage fraud on the part of borrowers, Realtors, lenders, and mortgage originators have required lenders to check and recheck everything represented in a loan application.  Unfortunatley, until we get everyone to realize that the “silly bank rules” they are breaking consititutes a federal crime we are stuck with the extra scrutiny.  Fortunately, the new national loan originator licensing and registration systems should make loan officers everywhere realize the seriousness of this issue and root out fraud before it get’s to the point of a loan being funded.  The safety of our banking and financial systems is too important to allow the kinds of games that have been played over the last few years.

The National Association of Realtors is right about appraisals.  Appraisals remain a very serious issue.  Pressure from Fannie Mae and Freddie Mac on lenders results in pressures by lending institutions on appraisers to bring in appraisals very conservatively.  It’s common for appraisers to use inappropriate appraisal practice due to the Fannie Mae/Freddie Mac form1004mc, which results in innacurate appraisal (see previous posts).

It’s also true that underwriting guidelines are stricter than they were during the golden age of loose underwriting (1998 thru 2008).  What people don’t realize that underwriting guidelines are easier now than they’ve been in any previous time frame.  In fact, it’s a great time to buy for many folks who have been priced out of markets previously.

How can I make that type of claim?  Because I remember the “bad old days”…..Prior to 1997-1998, debt-to-income ratio’s were much stricter than they are now.   A debt-to-income ratio compares your total debt to your total income.  In the old days, if you put 5% down on a conventional loan, you couldn’t have more than 36% of your total income go towards your debt.  Now?  If you’ve been reasonably careful with your credit, have decent job stability, and a little savings left over for emergency it’s pretty easy to get to a ratio of 41%!  With only 5% down!  On FHA loans, it’s really easy to go to 45% DTI with only 3.5% down!   In fact, there are times that we go even higher.

Is that obvious in the mass media?  No.  They paint a dire picture based, in part, on the statements of NAR.

So, if you are a Realtor, press NAR to paint a more positve picture of financing.  Nothing that is “puffed up”, just reality.  If you are a buyer, don’t be fooled by what you read in the mainstream press.  Talk to a good, local, independent mortgage banker.  They’ll give you a clear path to home ownership and join the ranks of homeowners!

 The Hive Daily

So….if you haven’t heard, there’s been a bit of a recession, brought on by the housing and mortgage crisis.  Many so-called “experts” tell us it’s really hard to get a mortgage, and speak of ridiculous rumors as fact (things like you have to have 20% down, and it’s harder than ever to get a mortgage).

Here are the facts.    From a guideline perspective, it’s easier to get a mortgage now than anytime before 1997 or 1998.  Debt-to-income ratio requirements are more flexible, private mortgage insurance options are better, etc., etc.  Yes, appraisals are difficult, but they are still easier than they were prior to the “great easing” of requirements in the golden years of loose lending.

From a paperwork perspective, it IS probably harder to get a loan now than ever.  Every ”I” has to be dotted twenty-three times, every “T” has to be crossed 18 times……Why?  Easy – The public, mortgage companies, banks and mortgage brokers committed fraud at record levels for a decade and now lenders have to cross check everything multiple times to protect themselves, their shareholders, subsequent investors and  government guarantors from fraudsters.

So – here’s the deal.  You probably qualify for a loan.  Maybe even more loan than you want.  But the mortgage lending industry is going to make you prove it.  So when we ask you for paperwork and documentation, get it to us.  It’s a pain, but if you are doing a mortgage in today’s world, it will be a pain worth going through.  That’s because you will be buying a house at a low price or dropping your rate or term significantly.  Don’t curse at us, curse at those who have gone before us for their fraudulent practices.  Just get us what we need and we’ll get the job done for you!

Someone told me that once – and they weren’t referring to a woman….it’s kind of like the bumper sticker – “my karma ran over your dogma”.  A play on words – Carmen will get you really means, karma will get you.  You know what goes around comes around.  You reap what you sow.

This has been so true for me in my life.  Good things I’ve done have paid me back well, bad things I’ve done, I’ve been paid back for in many ways and many times.

I was thinking of these types of truths this afternoon when my google alert for mortgage fraud sent me an interesting e-mail.  A mortgage broker that I knew of, in a market I used to work many years ago, is getting his…..

His fraudulent files put a bank out of business.  Yes, one loan officer, his own production, broke a bank.  This loan officer did a lot of business.  I mean A LOT of business.  He was featured in the top 10 in the country by one leading mortgage magazine.  The bank, lured by his great numbers, hired him to run their mortgage department.  Oops.  It turns out he was the loan officer that specialized in doing the loans other lenders turned down.  It turns out, he was doing things he shouldn’t have been doing.  In fact, his whole department soon adopted this way of doing business.  Newspapers are reporting garbage bags of cash to be used for buyers down payments, straw buyers and other fraudulent practices.

An underwriter I know worked as an auditor on these files when the Fed’s seized the bank.  She said that every file had fraud in them. All there in plain sight.

It’s good that people like this are getting caught.  Beware the loan officer who “can get any loan done”.  He/she might just be doing something they shouldn’t.  When this fraud happens, it’s not just a few sill bank rules being broken, it’s an attack on the strength of the American banking system.

Carmen is going to get this guy.  I hope he enjoyed his high roller years, his success so many were jealous of.  One of his co-horts just was sentenced to six years in federal prison.  He hasn’t been charged yet, but it’s clear the government is building a case.  It’s a shame, really.

We all just need to remember in our daily business that “Carmen” is out there…..she’ll either help us or hurt us….and it’s all based on what we do.

-This blog is about real estate, real estate finance and Brett’s random thoughts on life and what’s interesting about it.

Brett Reichel is a mortgage banker in the greater Portland, Oregon metro area.  He’s been in either the real estate or mortgage business since 1979, and has been in the mortgage business locally since 1995.  Brett’s NMLS number is MLO -210215, and he works for Pacific Residential Mortgage, LLC  – NMLS – 1477  / WA CL-1477.

Brett can be contacted at brett.reichel@gmail.com, or 888-860-1484.

What are “Points”?  Simply stated, a “Point” is 1% of the loan amount.  So, if you have a $100,000 loan, 1 point = $1,000 (1% of $100,000).  So, 1 and 1/2 points would be $1,500 (1.5% of $100,000), and 1/2 point would be $500 (.5 of $100,000).

It’s not as hard as it sounded, is it?

BUT, the mortgage world has found a way to make it more confusing to the client.  If you call a lender and ask them how many “Points” they charge, they may say “none”, or a competitor might say “one”, and they could be charging the same thing!  How can that be?

Well, some lenders differentiate between “Origination Points”, and “Discount Points”.  What in the heck does that mean?

Well, “Origination” charges are typically charged by a lender to offset the costs of “originating” or just doing the loan.  In other words, “Origination Points” are charged to offset a lenders costs, and to create their profit.

“Discount Points” are charged to lower, or “Discount” the interest rate.  For example 1 point (1% of the loan amount), might “Discount” or “Buy Down” theinterest rate of a loan by 1/4% for the life of the loan.  Or, it might discount the interest rate temporarily, like, for a year.  It’s a “pay me now or pay me later” kind of thing.

How does a borrower protect themselves?  In the past, they would get a “Good Faith Estimate of Settlement Charges” (GFE), asking for a same day, same rate, same lock-in time frame quote.  But, the government “improved” the GFE a year or so ago, and now it doesn’t make a lot of sense to most borrowers (it went from one page to three pages).  It does have some really good points, but it has some negative points that make it less than desirable.  For example, a smart lender won’t give you one if you haven’t applied for a loan and authorized them pulling a credit report.  Why?  Because they are bound to the costs, and if a borrower gives them bad information, they could lose a lot of money.  The new “Consumer Financial Protection Bureau” will be fixing the document soon, and hopefully we’ll have something a little more consumer friendly soon.

So, if you don’t want to apply for a bunch of loans, what do you do?  Most lenders have a “summary” of charges that they will release preapplication.  ask for one of those.  Then you can see the total closing costs, rates, and compare.  Then after considering cost, service, expertise and other factors, you can make a great decision on your next home loan!

-Brett Reichel is mortgage banking expert that has been in the field for over three decades. He currently lives in Portland Oregon with his family. Brett is a contributor to The Hive Daily. Check out his website  at www.brettreichel.com