The Mortgage Blog

I have heard a lot of politicians and news media talk about how mortgage brokers created the problems that are plaguing the mortgage industry. That is a bunch of baloney! I am a mortgage broker and lender and here is my side of the story.

Mortgage brokers can only work within the framework of guidelines set up by the investors (banks) who buy loans from them. The bank sets down rules for minimum credit score, max loan to value, documentation requirements, etc. Mortgage brokers do not approve loans. They fit customers into programs that investor banks offer.

If a client comes in with a 600 credit score, no documentable income and no money for a down payment the mortgage brokers job is to look around the universe of wholesale mortgage programs and see if there is a program the client can fit into. If there is, then the broker puts the loan together per the program guidelines and submits the loan to the bank for approval. The bank underwrites and approves the deal if it meets their requirements. If this loan goes into foreclosure who's fault is it? The mortgage broker? I don't think so. As long as no fraud was committed on behalf of the broker then it's the bank's fault for creating a loan program that is ridiculous. Zero down, no income documentation for someone with weak credit? You're kidding right? No - these types of loans were being made routinely up until the end of last year.

Are there loans out there that went bad because of a mortgage broker? Absolutely. These are the loans where the mortgage broker did something fraudulent to make it appear the borrower met the banks guidelines and duped the bank into approving the loan. That is the fault of the mortgage broker and, like every business, there are bad people in this industry. This is a small percentage of the loans that have gone bad but there are certainly those out there.

Big banks and Wall Street greed are the true causes of the current mortgage crisis. Between 2000 and 2006 there was a huge amount of money made on sub-prime mortgage lending and some giant players entered the arena, like Morgan Stanley. They have all been bitten badly though as the reality of these subprime borrowers showed itself in the form of large numbers of non-performing loans. Now the collapse of subprime lending has bled over to the prime credit markets and to the U.S. housing market in general. Many homeowners who have lost the equity in their homes due to declining values are choosing to walk away from their homes. I have heard the words "I'm going to give it back to the bank" too many times in the past year. There is an irresponsible attitude out there right now that is adding to the problem as some people who could make their house payment choose not to because their home has lost value. If they hang in there they may yet get it back. Right now the single biggest cause of foreclosures is declining values.

The bottom line is that the mortgage industry and it's various players created the problems we are facing by relaxing credit standards to a ridiculous degree and lending money to nearly anyone that had a pulse. The good news? Over the next year or so we should see the bulk of these loans move through the system and be sold and both the real estate market and the lending industry should start to heal.

I hovered over my crystal ball all night last night trying to figure out what the universe has in store for Southeast Michigan real estate. That darned thing was cloudy until about 3am but by that time I had had about 3 martini’s and things started to happen (besides the headache and blurred vision!). The ball said I should layoff the liquor! It also told me what’s happening now in real estate and what to expect over the next year.

It seems there are 2 main factors affecting today’s market – Distress Sales and Opportunism:

Distress sales, of course, are foreclosures and short sales. We’ve learned a lot about these over the past year – a lot more than I ever wanted to know! The fact is that these sales are ruling today’s market. In the past 6 months most of the sales activity in our market has come from distressed sales and it’s been a real drag on market values.

Opportunism comes in the form of buyers who “want to get the best deal.” They are making ridiculously low offers on numerous properties until they find a seller who’s dangerously close to a financial disaster, or a bank that has to unload a property. They are, in many cases, buying a home that is missing the appliances, has not been properly maintained and is in need of significant repairs. In a lot of these cases the end result is that after spending the money to bring the house back up to snuff the buyer will have just as much money invested in the home as they would have had they bought a house that was in excellent shape. The reason? All homes are selling at a significant discount right now and homes in excellent shape are also selling “cheap.”

These are the things affecting the market but what does the future hold? Well, after wiping the crystal ball clean of slobber I found that over the next 12 months distressed sales will be fewer and fewer as the current wave of problem properties are pushed through the system and sold. Just yesterday The Detroit News reported that January foreclosure data shows that in the Metro-Detroit area foreclosure filings dropped between 10 and 30% (depending on specific area) compared to last year! That’s the best news I’ve heard this year. After the number of distressed properties drops to more historical norms and the market is driven by quality homes sold by the homeowner, then we’re going to see a slight bump up in sales prices and a return to stable real estate values. Yahoooooo! We may even get a mini real estate boom because there is so much pent-up demand right now. Gotta love that crystal ball. So stay tuned and optimistic because those real estate professionals that survive are going to prosper. You homebuyers out there better get off the fence and take action because the prices you are seeing now will not last. Next time I have to remember to ask that darned ball for a winning lottery number!

originally posted on The Oakland County Real Estate Blog

Great News! Mortgage rates are as low as they’ve been in over 2 years!! 30 Year Fixed rate loans have been as low as 5.875% this week for conventional loans up to $417,000 with zero points (2 points would buy you down to 5.375%). Some of you will also be thrilled to hear that Jumbo rates have also made a huge leap downward! Jumbo 5 Year ARM rates had been over 7% for the past few months but have moved down into the low 6’s in the past couple of weeks.

All you home buyers now is the time to make a move! Mortgage rates are down as a direct result of weakness in the US economy. Soon the Federal Reserve Board will start to reduce the federal funds rate in an effort to stimulate the economy. The reason rates are low is because the economy is slow, so, when the Fed gets serious about putting some fire back in the economy mortgage rates will go up. Nobody gets this – mortgage rates can actually go up when the Fed reduces the federal funds rate!

PS: We are still doing 100% financing at great rates!

One topic has gotten a lot of press lately and it’s how everybody is in foreclosure. I have heard some of the craziest statements made as if they were fact; “1 in 5 homes in Southeast Michigan are in foreclosure.” “25% of SubPrime loans are delinquent.” “25% of home purchases are funded with SubPrime loans.” People read or hear this stuff from sources that may be totally misinformed or are incorrectly quoting other sources.

Obviously, it’s ridiculous to imagine that 1 in 5 homes are in foreclosure. Look around your neighborhood – are 5 people on your block in foreclosure? I don’t think so. The delinquency rate of Prime mortgages right now is, on average, a little over 2% of total prime loans and these loans account for the vast majority of all home loans in existence. The delinquency rate of SubPrime loans is higher at approximately 18%. So, it’s true, a lot more Subprime loans are in trouble right now and that means foreclosures in this arena are also up.

The question is do foreclosure rates effect home values? The answer, of course, is yes. Homes that are in foreclosure are generally in worse condition and sell for less money than competing homes in the marketplace. Banks, although not giving homes away, are likely to sell a home they are carrying for less than it may have sold for if not in foreclosure.

In a report from the Fannie Mae Foundation they estimate that “each conventional loan foreclosure within a 1/8 of a mile of a single family home results in a 0.9% decline in the value of that home. Certainly, there is a correlation between home values and foreclosure rates.

There is a factor here that no one is really talking about though. It’s the idea that what could really impact home values is a significant reduction in available credit via a tightening of credit standards. A reduction of loans being made is also a reduction in buyers to make purchases and this results in lower sales prices because there are fewer buyers in the market.

Credit standards have tightened up this year primarily in the SubPrime arena where some crazy loans were being originated last year. A buyer who has bad credit, can’t document their income and has no down payment has no business getting a mortgage! These loans, which never should have been made, are no longer going to be available. However, there are still a host of great loan programs which have not changed and are still available for no money down and bruised credit borrowers. It doesn’t look like there is going to be a significant change in credit standards that would have had a negative impact on home values.

I believe that the current run of foreclosures and credit tightening is going to be contained and normalize over the remainder of 2007 and that home values are stabilizing. There is reason for optimism and I suggest everybody stop listening to all the negative talk they see on the news, hear on the radio and see on the web! Keep in mind – Your own positive thinking impacts the world you operate in so be a positive influence on it!

The Federal Reserve Board is meeting today and reduced the Federal Funds rate by ½ % but what does that mean for mortgage rates? The Federal Funds Rate is the rate of interest that banks are charged for short term loans and has a direct impact on the Prime Rate. Many variable rate credit cards and home equity line of credit loans are based on the Prime Rate and these loans will get cheaper after the Fed makes its move. If you have an Equity Line at Prime +1%, then you are currently paying 9.25% to borrow against it (Prime Rate was 8.25% and will go down to 7.75%). The Fed reduces by ½% then your rate will go down to 8.75% next month. That’s a good thing!

The question is will mortgage rates also go down by ½%? The answer, unfortunately, is no. The Federal Funds rate is a short term rate and affects other short term rates. Mortgages are long term instruments and are less affected by changes in short term rates. Plus, as you’ll see below, the mortgage market is more efficient than the Fed in making adjustments.

The Fed is reducing the rate in an effort to keep the economy from going into a recession and all interest rates are directly impacted by the general strength, or weakness, of the overall economy. So, when the economy is booming interest rates will be higher and when the economy is slow interest rates will be lower. The Federal Reserve is reacting to general weakness in the economy and is lowering the rate in an effort to stimulate business.

The good news is that mortgage rates have come down over the past 3 weeks because of the same reasons the Fed is now lowering the Federal Funds Rate. Fixed rate mortgages were at 6.75% a few weeks ago and have moved down to the 6.25% range today! Mortgage rates were not waiting for the Fed to take action but had already moved down over the last 3 weeks.

originally posted on the number one site for info on Oakland County Michigan Real Estate

Getting a mortgage loan can be very confusing and a lot of Lenders like it that way. They get you lost in the numbers and make you believe that you’re getting a better deal when they are the one who’s benefiting from making more money on the loan. The Good Faith Estimate (GFE) is the document the lender gives you and it spells out the closing costs, monthly payment and type of loan & interest rate they are offering you.

Let’s take a look at 2 crucial areas of the Good Faith Estimate (GFE) that you should know about and they are Closing Costs, Junk Fees & Points, and Pre-Paid Items & cash to close.

1) Closing Costs, Junk Fees and Points

Closing costs consist of appraisal fee, credit report, underwriting, and flood certification, land survey, closing fee, title insurance, recording and courier fees. These are all charges that are being paid directly to a 3^rd party for work they have done to help get the loan to closing - otherwise known as being necessary to the deal. Junk fees are things like application fees, origination fees, mortgage broker fees, processing fees and these are not necessary to the deal but are charges by the lender to increase fee income. Points are paid to obtain a lower interest rate. Paying 1 Point generally lowers the interest rate on your loan by ¼% (1 point is 1% of the loan amount - $1,000 on a $100,000 loan).

Watch out for Junk Fees. Some lenders will offer you a slightly lower rate than everyone else but they are charging hundreds of dollars more in junk fees. What you have to compare is the amount of the extra fees compared to the difference in the monthly house payment. If you’re paying $900 extra in fees and your house payment is going to be $25 lower it’s going to take you 36 months to break even (900 divided by 25). You don’t save a nickel until after the third year. Considering the average life of a mortgage is only about 5 years your lender is more likely to benefit from this arrangement than you are.

Paying points amounts to the same thing. You pay higher closing costs to obtain a lower rate. The best thing to do is to calculate the break even period by dividing the difference in the house payment into the amount of the extra fees. As an example, if you borrow $100,000 @ 6.25% your payment is $616. Paying 1 point reduces the rate to 6.0% and your payment is $600. The 1 point cost you $1,000 at closing. Dividing the reduction in payment of $16 into the cost of $1,000 leaves you with a break even at 62 months. That’s an awful long time to wait just to get the thousand dollars back!! It generally does not make sense to pay a lot of extra fees or points to get a slightly lower rate. Look for the best rate combined with lower fees.

2) Prepaid Items and Cash to Close

Prepaid items consist of property taxes, home insurance and prorated interest. Sometimes lenders will underestimate prepaid items because it will make it seem like you need less money to close. This will result in a surprise at closing time when the real numbers are released. When you purchase a home in Michigan and your mortgage has an escrow account for taxes then you will pay a full year of property taxes at closing. You will also be required to pay the first year of homeowners insurance and interest will be calculated for the days remaining in the month of closing. The GFE should include all three of these items or it is understating the true amount of cash needed to close.

The Good Faith Estimate can be a great tool to compare costs of different lenders but it’s very important to compare apples to apples and to be sure that both GFE’s include all of the costs associated with closing the deal! Don’t be fooled into paying a bunch of extra money at closing to get a rate that only reduces your house payment by a few bucks a month. Keep that money and use it to do something worthwhile!

Originally posted on the blogging queen of real estate at Oakland County Real Estate Blog

Check this out; many of the buyers I am talking to are looking for a “foreclosure”, because they want to “get a really great deal.” Well, I can understand the logic behind this thinking. All of the recent talk about high foreclosure rates combined with a slow real estate market would lead you to believe that there are some great deals out there on foreclosed homes. What’s the scoop?

The bottom line is this – aggressive mortgage lending has really taken the wind out of the sails of foreclosure buyers. Nearly every home that goes into foreclosure is mortgaged to the hilt and may in fact have loans that total more than the value of the property. Let’s face it folks, nobody that has a lot of equity in their home gets foreclosed on anymore. If you have equity, then there’s a lender somewhere that will loan you more money to get you out of trouble.

So, when the bank gets a house back after a foreclosure it has already incurred thousands of dollars in legal fees and probably has to spend some money to make the house presentable for marketing. There is not a lot of wiggle room on the sales price. Yea, says this foreclosure buyer, but they have to get rid of that thing, so I can get a deal on it, right? Not necessarily, you have to remember that the owner of the home is a gigantic bank with about a billion dollars in home loans on the books and they build in a reserve amount for expected losses on foreclosures. The bank’s balance sheet is so huge that the foreclosures are like a fly on their shoulder that goes unnoticed. They are not generally willing to lose a significant amount of money on these things. So if the equity in the property is zero or negative, then you may get lucky and be able to buy the house for a 5 – 15% discount to current market. That’s probably about as good as it gets and that’s not a great deal!

There are really better opportunities that go overlooked. One of these is estate sales. When a person dies, the surviving heirs are generally very motivated to sell the house and put the estate to rest. I have seen some of my clients get unbelievable deals from estate sales of homes.

Relocations also create good buying opportunities. When an employee is relocated to a new area sometimes a relocation company is employed to assist the employee. In some cases the Relo company will actually buy the house and then sell it themselves. They are generally motivated to sell the home quickly. I have seen some buyers get great deals on homes that were owned by relocation companies.

Another possibility is auctions. Recently there have been a couple of well know builders that have been forced to auction off a block of new homes to avoid a financial disaster. One of my own clients bought a home at auction in December for $195,000 that had been listed for sale in the mid 200’s and we appraised the house for $245,000 with a very conservative appraisal. This was also a builder model and he got all of the furnishings!! We didn’t even include that fact in the appraisal and the house probably had at least $25,000 in furnishings. This was a great deal!

Finally, a homeowner who has owned their home for a long time, bought it cheap, has a ton of equity and is motivated to sell is going to be way more flexible on price than a bank trying to get their loan money back on a foreclosure. Think about it – if you bought a house in 1985 for $125,000 and you only owe $75,000 on it now, and you sell it for $250,000 (even though you thought it was worth $300,000) you still doubled your money on this property. The buyer got it for $50,000 less than it will sell for when the market picks back up again. Look for sellers that have owned for a long time and have a lot of equity! If they are motivated you may get that great deal!

The bottom line is, in today’s world foreclosed homes don’t necessarily make for bargains. There are a number of other ways to find great deals out there if you put your thinking cap on, are patient, know what to look for and take your Realtor’s advice. Happy Hunting!

Real Estate Market improving?? If you listen to the doom and gloom crew you’d never know it! I have read so many articles in the last few months that exclaim - Last Person Out of Michigan Shut Off the Lights - I am about to explode.

In my office, we make residential mortgage loans in Michigan. Over the past 8 weeks we have been busier than we’ve been at any time in the last 18 months! Why? Homes ARE selling. I am getting a steady flow of new clients who have either identified a home they want to buy or want to get Pre-Approved to purchase a new house. People are finally realizing that this is a GREAT market to be a homebuyer and prices aren’t likely to get any lower. Why? There are a number of reasons: 1) Home Sales are up, 2) Auto company future brightens, 3) Buyers are realizing great values.

Home sales are up? Yes! The Detroit News reported on March 8 that residential home sales in Southeast Michigan rose 6.7% in February. Yes, they rose. According to the National Association of Realtors article dated March 13 – “Underlying trends point to a (national) housing recovery in 2007, but it will take a couple of months for us to get a better handle on it.”   A prominent local real estate office reported to me that they sold $30,000,000 in properties in the month of May.  Their best month in over 2 years!

Auto company future brightens? Really? According to the Detroit News article dated March 14, “General Motors sold 9.1 Million vehicles for record revenue of $207 billion, up from $195 billion in 2005. In the fourth quarter, GM earned $950 million on sales of 51.2 billion – its first quarterly profit since 2004.” What great news is that! Who would have guessed with nothing but bad news being reported for about 2 years straight? Contrary to popular opinion it seems that the auto industry is not dead.

Buyers are realizing great values! One of my clients bought a cute little house in Royal Oak last month for a mere $110,000, and the house did not need a lot of work. I haven’t seen a house like this sell that cheap in Royal Oak since about 2001. Higher-end homes can be had at even greater discounts. This is probably the best time to be a home buyer in Southeastern Michigan in the past 20 years.

So, for all of you who are sitting out there thinking your going to wait to buy a house because you believe prices are still coming down, get off your butt before things turn around and prices start rising. Once that starts to happen sellers are going to stick to their guns a lot more on sales price and a lot of these great deals are going to evaporate. Remember – “Buy low and Sell High.” There’s never been a better opportunity to buy low!

I hear the craziest things that people have been told to do in order to rescue or improve their credit score. Have you ever gotten a copy of your credit report and then gone through it and closed all of the accounts you were not actively using? You thought this would be good for fraud prevention right? Was it really a good idea? No! This was covered in Part One so if you’ve forgotten it then go back and get caught up. Today we’re going over making a bad score good.

Many people that have over used credit, and gotten into payment trouble, make one gigantic mistake – they stop using credit all together. If you have a recent history of late payments to creditors (or a long ago history) the one thing that will improve your credit score is to re-establish that you are willing to repay lenders you owe money to. The only way to do this is to utilize credit and make your payments on time. One year of perfect payments on 2 or more credit lines will go a l o n g way towards improving a bruised credit score. “Yea, but, how do I get a bank to give me an account with my credit score”? I’ll tell you that in a minute. The bottom line here is that if you don’t take steps to improve your credit score and re-establish good credit, your score will never improve.

The first step on the road to credit recovery is to get a copy of your credit report and see what’s on there. You can get a free credit report once a year at www.annualcreditreport.com. If you have charged-off accounts, balances remaining on repossessions, or collection accounts, it may be worth the effort to remedy these problems. Keep in mind that a creditor that has not been paid in a long time could be willing to negotiate a settlement – sometimes they may be willing to settle for ½ or less than you actually owe and even forgive accrued interest and fees that they have been tacking on all along! Some accounts are more important than others, so payoff accounts in this order; 1) defaulted student loans, 2) repossessed vehicle loans, 3) charged-off loans or credit cards, 4) medical collection accounts. Left unpaid, these accounts will continue to haunt you for years and years.

Re-establishing credit can be a challenge if you have serious bruises. The second step is to try to open a minor department store card (Sears, JC Penney, etc) or a gas card. Sometimes these companies can be more flexible. If you find that no one will open an account for you the next step is to apply for a Secured Credit Card. There are a number of banks that will do this. They require you to deposit the same amount of money that you want as a credit limit. This means that if they give you a $500 limit Visa card, then you have to deposit $500 in an account with them. Then if you don’t make your payments they can just use your money to payoff the card. No risk for them! If you’re going this way you want to open at least 2 of these and then make sure you have something to pay for every month and pay it on time. Don’t max the cards out. Just buy something small and make a payment every month. One year of paying on-time and lenders start to get confidence in you and will be a lot more willing to loan you money. Then you can start to accumulate regular credit accounts which you also pay on-time. Next thing you know you are a good credit risk! I have seen people with really low credit scores get back to the acceptable range in 2 years or less. It’s worth the effort.

If you have had credit issues in the past right now is the best time to start working on rebuilding. Don’t wait until you really need credit to start because then you will not get the credit you need! Take good care of your credit score and it will take good care of you.

Ken Mascia

The credit score – as mysterious as a gypsy palm reading? Kind of, yea. Sometimes I’m surprised that some credit scores are better than it appears they should be and others are worse. Why? I have no idea. This system is not perfect and nobody knows exactly how it works (strange but true). I have a lot of information on this topic for you, so I’m going to split it up into two articles. The first will address how credit scores are derived, what affects them and the range of scores from good to bad. The second article will cover steps to take to improve a poor credit score or to maintain a good score..

There are some key factors that are used in determining your basic score;

1) Your payment histories – recent late payments hurt a lot. The older a late payment is the less impact on your score.

2) Number of accounts that have balances. If you have a dozen charge cards with balances consolidate them down to 3 or 4. There is no reason to have Macy’s, Nordstrom, GAP, Sears, Kohl’s, Liz Taylor, Mervyns, etc and owe $89 to each of them! Use your Visa card – they all take it!

3) Proportion of balances to credit limit. This means don’t max out your credit cards. When your credit cards are at there limit it is a big red flag. It’s best to never use more than half of the available balance on a charge card.

4) Length of time accounts have been opened. Old accounts with long payment histories are really great for a credit score. This is the reason why you should NOT close charge accounts that you are not using. Just shred the card and stop using it. This way the account remains active and continues to have a positive impact on your score.

5) Credit inquiries. An inquiry shows up when someone checks your credit report. Lot’s of inquiries indicate you may be trying to open a lot of new credit which is a red flag. If you get a new credit card every six months to get the low intro rate your credit score will suffer because of constant inquiries and the number of accounts which have been opened in the recent past.

6) Collection Accounts and Public Records. If you owe a creditor and you’re not paying they will send the account to a collection agency. This shows up on your credit report – bad. When you get a bill from the doctor’s office that your insurance did not cover do yourself a favor and pay it. Then you can try to get the insurance to reimburse you if they were wrong. Otherwise the doctor’s office will waste no time going to collection. Medical collection accounts are so common it’s ridiculous. Public records include Judgments, Tax Liens, Bankruptcy’s, Etc, all bad and should be avoided at all costs to keep your credit score in the positive range.

What is the positive range? Well, credit scores run from 300 (worst) to 850 (best). Generally speaking, anything under 500 is horrible. From 500 to 575 is very bad and 575 to 620 is bad. Then from 620 to 680 is OK and 680 to 720 is good. If you are over 720 you have excellent credit and you’ll get better rates on everything from credit cards to home loans and even insurance! Your credit score influences the cost of many important things in your life and should be taken very seriously. Next time we’ll talk about how to keep your score high or to get it higher.

Previously published on  The Scoop on Michigan Real Estate