Posts Tagged Banks

Today’s ramblings of a lunatic mortgage broker

According to the Salt Lake Board of Realtors home sales in Salt Lake County were down 25% from last year, but the median home price fell less than expected, only 1.3% across the board.  So there’s some good with the bad.

According to this article in the Salt Lake Tribune today, homes in the under $300,000 category are moving well, but those above are spending much more time on the MLS, and sales above $600,000 are almost non-existent.

I feel that home prices are coming down, and sales are slowing down because of several factors:

One major influence on the decline of home prices is that homes are settling into the price range that the average Utah household can afford.  The median income of a W2’d household in Salt Lake City is just a bit more than $60,000 a year, which qualifies them to buy about a $210,000 home.  Those that sign the front of the paycheck, the entrepreneur and business owners that employ W2’d employees and personally make more than $60,000 a year, usually don’t W2 themselves and instead file a Schedule C or K with their 1040’s.

The elimination of stated-income loans leaves the self-employed or business owner borrower at a huge disadvantage when seeking financing.  Self-employed people usually pay themselves a “reasonable” salary for running their business to minimize the income taxes they pay (self-employed people pay an additional 15% self-employment tax on top of everything else that their W2’d employees pay).  Stuff W2’d employees pay for out of their personal income, like their cell phones, car payments, auto insurance, gasoline, etc., a self-employed person pays for out of the business to minimize both the business taxes and minimizing the salary the owner draws from the business, thus decreasing their personal income tax, too.  Business owners still pay for the same things their W2’d employees do, but where the money comes from is shifted around to minimize taxation, to the detriment of documentable personal income.  The self-employed person or business owner may legitimately have made $300,000 last year and can honestly afford a $900,000 home, but on paper they only made a “reasonable” salary of $50,000 and thus that was their taxable income that will be used under the current underwriting guidelines to qualify them for a loan.  So the self-employed borrower will only qualify for a $165,000 loan (hence the reason homes over $300,000 are not selling so well).

This is very evident right now with the current refi boom, where these self-employed borrowers with excellent credit scores can’t qualify to refinance the home they bought five years ago, even though they obviously are good for it.

To make a huge difference in the economy right now either Fannie Mae, Freddie Mac and FHA will have to develop new underwriting guidelines for self-employed borrowers so that they can buy new homes, right now, or self-employed people will have to go back and amend their last two years of tax returns and pay income taxes on the amended amount, or wait two more years for self-employed borrowers to file returns that more accurately disclose actual personal income and the higher taxes that go along with it.  The latter solution won’t help the economy any time in the near future.

My solution: Allow the self-employed to use alternate forms of proof of income, like bank statements, or allow a self-employed borrower to use a percentage (say 75%) of their Schedule C income to qualify.  After all, the current guidelines allow a W2’d borrower to use their gross income with no regard for what they spend their money on other than debts that show on a credit report, shouldn’t the self-employed be given the same consideration?

Another reason is one I’ve been harping on all week, stricter appraisal guidelines that lenders will accept, which is making it difficult to accurately value your home.

In Salt Lake City the cause of lower home values that is currently carrying the least weight is foreclosures since our unemployment rate is half of the national average.  But we are seeing more short sales, which is when a homeowner sales their home for just what they owe on it or less if the bank agrees on it.  Some homeowners are having to do this just to sell their house because borrowers can’t qualify for the higher price under current underwriting guidelines.

The plus side to all this is if you are a W2’d wage earner and can provide documented proof of your income and have a 620 FICO score or better, you are pretty much golden to buy a home right now, and some at really good deals.

All that said, here’s today’s rates:

For Salt Lake City, UT today’s average mortgage rates are as follows:

30-year fixed: 5.25%

15-year fixed: 5.125%

Conforming Jumbo 30-year fixed: 5.75%

FHA 30-year fixed: 5.50%

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New Fannie Mae/Freddie Mac rules will eliminate your right for an independent appraisal

On December 23, 2008, the New York Attorney General Andrew Cuomo, Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac, and their regulator the Federal Housing Finance Agency (FHFA) released a revised Home Valuation Code of Conduct (HVCC), part of their Appraisal Agreement first issued on March 3, 2008.  The HVCC will be in effect May 1, 2009.

Should the HVCC take effect, lenders will not longer be able to accept any appraisal report that is completed by an appraiser selected, retained or compensated in any manner from a mortgage broker, real estate agent or homeowner.

The stated idea behind this is to eliminate appraisal fraud, however it doesn’t address the problem with appraisal fraud: the appraiser.  The only difference is that the lender will have to order your appraisal for you from for the most part the same appraiser any broker, real estate agent or you would order it from.  And lets face it, me, you and your Realtor are not the problem in appraisal fraud, the appraiser is.

So what this really is, is another attempt by big banks like J.P. Morgan Chase, Wells Fargo, Bank of America, etc. to elimate the mortgage broker and to have the ability to pull the wool over your eyes as to the real value of your home?

Why would they do this?

To start with, 20-something years ago nearly all home loans were originated through a bank.  A borrower would have to go to the bank and sit across the huge desk from the bank’s lending manager and beg for money.  Fast forward to the last 10 years and what’s happened is that 60% of home loans are now originated through independent brokers because frankly in most cases we offer better rates and better service and you don’t have to swallow your pride and be judged worthy by a banker to be loaned their money.

Banks pour millions and millions of dollars into lobbying Congress every year to pass legislation making business more restrictive on independent brokers thus hoping to drive more business back to the big banks.  Mortgage brokers are represented by the National Association of Mortgage Brokers, but that only has hundreds of thousands of dollars to lobby with.  In most cases the big banks win.  Legislation was passed last year that applies to independent brokers but not to banks; regulations such as brokers having to disclose compensation received from originating a mortgage loan while bank loan officers do not; and education and licensing requirements becoming stricter (which I support) for independent brokers when employees of banks have no such requirements (which I don’t support).

Just like big banks have targeted credit unions over the past few years, they are continuing their attack on all their competition including independent providers of services they also offer.

How are they trying to pull the wool over your eyes?  By the lender ordering the appraisal report they have the ability to influence the appraiser to your detriment and their benefit.  They can influence the appraiser to undervalue your home and thus they lend less on it, strengthening their position should they have to foreclose on a home.  This way the know they have more value in the home than they are lending on.

Case in point: I recently closed a commercial loan for a client.  In the commercial world almost all appraisals have to ordered by the lender.  The first lender we used appraised the property at $335,000 and they’d loan 65% of that.  We knew from talking to commercial real estate agents that the market value of the property was close to $500,000.  Due to lender issues we did not close the loan through this lender.  The next lender told us the appraisal came in at $410,000 and they were loaning 55% of that value.  After the loan closed we asked for a copy of the appraisal since my client had paid for it and legally owned it.  The actual appraised value was $465,000.  By the lenders guidelines they should have loaned 55% of $465,000, but instead hedged their bet by lying to us and telling us the value was only $410,000 and in reality only loaned 48% of the property’s value, shorting the borrower over $30,000 in cash but strengthing their lien position.

A perfect example of the lender (and on a larger scale the GSE’s) not working for you, but for themselves.

One other harm to the borrower is that this appraisal will have to be paid for up-front, so the homeowner wishing to refinance their house will have to outlay $350 to $450 up front in cash to start the refinance transaction.  Usually this cost is rolled-up in the refinance costs and is not an out-of-pocket expense.  How do you feel about paying $350 for an appraisal you have no control over and will not own for your own records?

This is just another reason independent brokers work for you.  Being small businesses we have to be competitive in both price and service to get your business.  We depend on repeat business and referrals.  Banks don’t.  If we don’t get you the best deal and give you the best service than we don’t stay in business.  I don’t think Chase, Wells Fargo or Bank of America worry too much about that, especially if they eliminate your options as a consumer and force you to business with them on their terms only.

I’m in the process of finding-out how you as a homeowner can help defeat the new HVCC.  When I do I’ll post it here.

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