Protecting your largest investment

Millions of Americans home owners are at risk due to being underinsured or not insured for life insurance. When a home is purchased, it often takes two people working full time positions to be able to afford the mortgage in today’s economic climate. People often worry what would happy if they lost their job or became disabled, however, very few realize the risk that death presents for their families. As a result they inadvertently leave the financial well being of their family in jeopardy when the mortgage becomes unaffordable due to the death of a spouse. When the loss of a loved one occurs, the family home is often lost to foreclosure, the kids or uprooted from schools, or life savings are drained in an effort just to hold on financially.

“I’m young; I don’t need to worry about life insurance yet!” “I can’t afford life insurance!” “But I have a pre existing condition, what kind of insurance could I possibly be eligible for?” These are just a few of the many excuses people provide for the rationale about life insurance and the reasons they don’t have enough, or even none at all. Many, especially at a younger age aren’t able to possibly consider the possibility of dying. Often family longevity comes in and is viewed as yet another reason why should needs can be put off for later in life. However, once the commitment of a home and family has started the level of need for life insurance rises exponentially. The responsibility to the family to take care of them and allow for a quality upbringing as well as the expenses of clothing, food, and medical care is a daunting enough task. However, when the mortgage becomes unaffordable, the bank will take the home thus destroying the stability and structure of the family which creates serious problems. Still others assume it’s unaffordable or have medical conditions that make them uninsurable. They rely on the small employer sponsored plan that is often cut back or eliminated in cost cutting measures. Never will the thought of actually loosing their job, and the life insurance due to a layoff. Even without those issues, many don’t consider that life insurance rates have dropped and often can qualify for much more coverage, with a longer guaranteed term.

The truth is life insurance is affordable, necessary, and a small price to pay for the piece of mind it brings. For many, coverage will be less than the price spent in a week ordering take out.  While it may take small sacrifices from your budget, one has to ask themselves “what is more important than the financial wellbeing of my family?” Those will pre-existing medical conditions are also able to get insurance through some providers. For those who may be uninsurable, there are often plans available without medical underwriting. While it may cost more than someone with a stronger medical history, it is still a necessary step to take. But like everything else, the price increases the longer you wait. Email today to see just how easy and affordable proper coverage is!

National Mortgage Licensing System Protects Consumers

Based on the state of the industry these last few years, it was completely necessary to remodel the licensing system. Prior to the recent changes, tracking the quality of lenders/brokers and originators was challenging. Those individuals/companies committing suspect or illegal business practices were tough to track leaving individuals vulnerable to deceptive loan officers.

While the system continues to evolve, it has experience a few setbacks along the way to improvement. While still a great success, understaffed states are lacking the preparations to change over. Poorly trained individuals end up with unanswered questions as to how to adhere to the law while some states even have conflicting or duplicate standards. Some of these issues are still being worked out. However, since the playing field has been leveled (so to speak) by having originators at big banks becoming NMLS registered it reassuring that any loan officer you work with should be registered regardless of minor kinks in the system.  These changes are probably the most important piece of pro-consumer legislation introduced to the residential lending industry. The barriers of entry into this field were too low previously and almost anyone could originate mortgage loans with little or no training or education. In the first half of the 2000’s, thousands were entering the industry yearly as a part time job with little ramifications for the quality or ethical standards of their work. 

Recently, The National Mortgage Licensing System, or NMLS, has begun requiring the licensing, certification and registration of loan officers in all 50 states. Individuals and companies looking to apply for, amend, renew, and/or surrender licenses managed by NMLS for the state(s) licensed by the loan officer or mortgage lender/broker are required to use this system. The NMLS initiative was begun by state mortgage regulators in 2004 in response to the increased volume and variety of residential mortgage originators, and the need to address these changes with modern tools and authorities. The proliferation of the mortgage business had added to the urgency of a standardized licensing system which required a system of criminal background checks, education, and testing of loan originators and the lenders/brokers where they are employed. The overall goal is to tract, monitor, and remove unscrupulous originators when necessary.

Today loan officers are held accountable and have to abide by these new regulations. Consumers can check the license status of the originator as well as the lender/broker at one simple website. On this website, consumers are able to easily find pertinent information about the loan officer, company affiliations, as well as any applicable investigative measures.

New Mandated Loan Options

The Federal Reserve Board amended the Truth in Lending Act, Regulation Z that is geared prohibiting three main areas of loan office compensation. The new rules which become effective April 1^st is the latest in a long line of regulations that have changed the face of residential mortgage lending over the past several years. The rules, affecting all loan originators, who for compensation, obtains an extension of consumer credit for another person outlaw certain practices. They include basing loan officer compensation on certain terms or conditions except loan amount, being compensated both by the lender and the client for the same transaction, and steering based on the loan officers ability to obtain greater compensation. As a result of these rules, clients are now able to negotiate a pre-determined compensation for acquiring the applicable mortgage loan or agree the lender can compensate the loan originator a preset percentage of the loan that does not vary based on rate.  When shopping for loans, you may hear these options commonly known as “Consumer-paid” option or “Lender-paid” option. The intention of the new rules is simply to have the loan officer’s interests to be better in line with that of their client’s. Unfortunately, certain originators or originator firms had made a practice of directing clients to overall higher cost loans solely for the benefit of extra compensation

While the spirit of the news rules is well intended, the resulting changes will unlikely have a meaningful benefit for the consumer. Several regulations including the Home Valuation Code of Conduct, Mortgage Disclosure Information Act, and the new Good Faith Estimate have been rolled out in the last two years, all with the same goal of helping improve real estate lending practices. In actuality, the new rules have burdened clients with increased paperwork, extra costs, fewer options, and unending regulations from numerous local, state and federal guidelines. Well, what’s so wrong with these new rules? Many consumers have limited home equity which preclude them from benefiting with lower rates by financing the “Consumer-paid” cost option.  Such an option generally would allow a consumer to obtain the lowest rate available. On the “Lender-paid” option, consumers will have less of an ability to renegotiate for lower rates with their originator. When banks compensate the originator a fixed percentage of the loan amount that cannot be allowed to decrease, the originator also is unable to lower their compensation under any circumstances.  While consumers are allowed to increase their interest rate in exchange for a fixed percentage of the loan amount as credit for their closing costs, the broker is not allowed to do the same. The practice of crediting the borrower money from originator compensation at closing to pay for an appraisal,  provide a special incentive, or help client’s  when they are short funds for closing is strictly forbidden.

As with any new policy, there are always unanticipated consequences that must be dealt with. Consumers, along with the originators who help them obtain their needed mortgages will have to adjust to yet another change in the housing industry. Perhaps the results will be more favorable that the current outcome. More than likely this new policy will result in yet another rule that will inundate an already overwhelmed consumer understand how this helps their bottom line.   

Another Option for Homebuyers: 203 (k) Renovation Lending

Prospective homebuyers today have a significant amount of inventory available to them for review. Many markets are flooded with potential foreclosure or short sale purchases that are much more affordable than ever before. However, these homes may often need a full or partial renovation before they are deemed to be in the livable condition required to obtain a standard FHA, VA or Conventional mortgage loan.  For those homebuyers, an FHA 203 (k) may be the right answer for you.

The Federal Housing Administration (FHA) administers the 203 (k) program as part of the Housing and Urban Development Agency (HUD). Buyers can utilize the program in one of three ways: purchase a property, that is resided in by the owner as an “owner occupied property”, as a refinance of existing balance of their current loan on the home they currently occupy while taking out funds to complete applicable repairs, or lastly to purchase a home on another site and move it onto a new foundation and rehabilitate it.

Unlike with standard loan programs, the 203 (k) Rehab loans allows one to qualify based on the future value of the home’s value AFTER the repairs are completed. This is especially vital in areas that a home is in dire need of repair and the other comparable homes support a higher appraised value. Such improvements on the right property can be a great investment for those looking to move to a new area, first-time homebuyers or those who have occupied a home for many years and need upgrades on their residence. For those who currently occupy the residence, most lenders will essentially allow you to “cash-out” the equity in a refinance for such improvements to 97.75% of the home’s equity whereas a typical loan program has limits in place to 80%.  Homeowners unable to reside in the home while work is completed may be eligible to refinance up to 6 payments into the loan while the work is being completed. The eligibility for this program is quite similar for that of a standard FHA loan – meaning a limited or sometimes no down payment needed at all.

The program is extremely beneficial to many in today’s market. However, like everything it has its limitations. Applicable repairs are closely regulated, monitored, and inspected by the bank appraiser for quality and completion of work. Furthermore, repairs are required to be completed by an applicable General Contractor and not by any handyman. Home buyers must own the property and intend to reside in the home after repairs are completed. They must also work with HUD approved 203 (k) Consultant who meets with borrowers to coordinate their wants and needs. The Consultant also evaluates the property to determine which repairs are needed for HUD and Code requirements.  The Consultant often acts as the liaison between the lender, client, appraiser and borrower and whose write up is used by the General Contractor to bid for the job. Rates for the program average about 35-50 basis points above a standard FHA 30 year loan rate, still making the program a must for many applicable homebuyers.   

HVCC Changes Residential Mortgages

HVCC Changes Residential Mortgages

The Home Valuation Code of Conduct (HVCC) adds an extra element of risk for the consumer when buying a new home or refinancing their existing mortgage. The code requires the random selection of appraisers by appraisal management companies set up individually by the chosen lender. Homeowners, who were often accustomed to using a “preferred” appraiser during much of the last decade, no longer have this option. First implemented for most loans as of May 1^st, 2009, HVCC has since expanded to include all FHA & conventional loans bought by Fannie Mae or Freddie Mac. The goal of the Code was to prohibit borrowers or mortgage originators from selecting appraisers which was believed to create a conflict of interest and thus reduce the quality of the appraisal. While the idea was noble in theory, it has substantial ramifications for the homeowner and the greater mortgage industry as a whole.

Homeowners have faced longer wait times, reduced quality of appraisals, as well as increased costs. Appraisal management companies (AMCs) have added an extra middle man to the process of loan origination. When banks sign up with relatively few management firms, it allows such companies to increase prices for the appraisal to pay for office staff and management while facing less competition. Such appraisal costs increases have been passed onto the homeowner and have been up to 33% higher than prior to HVCC. In addition local appraisers were forced to sign up to staff such companies, resulting in substantially reduced income due to reduced payouts by management companies to the appraiser. As a result of all of these changes, management companies will select appraisers far from the local market of the homeowner requiring the appraisal. Appraisers, trying to increase profits are taking on more jobs. Appraisal quality, speed of completion, and accuracy of appraised value have lagged. Homeowner’s have a difficult time disputing the inaccuracies in the reports, even after several rounds of quality control that are supposed to be part of the appraisal process. In addition, many have reported poor service with the AMC’s, delays with return calls, and a lot of added confusion from informal third party communication with the client. Most importantly, homeowners who spent up to $500 on an appraisal in an effort to obtain financing are often out luck when the completed appraisal makes them ineligible for a loan.  

HVCC was intended to provide a more accurate picture of the value of a home for the benefit of the homeowner and the investor who buys the loan. While it is true there were cases of aggressive mortgage lending creating undue pressure on the appraisal process, HVCC by itself has done little to curb such practices. The unethical and often illegal behavior of the few originators, homeowners, and realtors engaging in such activity created undue problems for those involved in the mortgage process. Those engaging in wrongdoing will only find new and innovative ways to stay ahead of any new regulations, including ways to get around HVCC itself. Reform in the mortgage industry is a necessary and vital need for its future. However HVCC has turned out to be another poorly planned and executed regulation by politicians who are often more focused on their political futures than the actual issue at hand.

Trigger Leads

As if refinancing wasn’t difficult enough, homeowner’s now have more to worry about when applying for a loan. There are lenders and brokers that are immediately notified as soon as anyone does a mortgage credit report that's needed when taking an application to refinance. Almost immediately after the application, borrowers are often bombarded by phone calls and mail from other lenders. Brokers and lenders have the ability to buy "Trigger Leads". A trigger lead is generated by Experian, Trans Union and Equifax when a residential mortgage credit report is pulled. They are selling the information within hours so that others can solicit you for your refinance business. The information sold does not include your Social Security Number. It does, however, include your scores and your basic mortgage profile. They also include your phone number. It’s called purchasing “trigger leads” and guess what? 

It’s perfectly legal!

What’s the problem with home owner’s having brokers and lenders contact them to compete for their refinance business? Well, for one – it’s one of the leading causes of identity theft in the United States. Fortunately, today there is an option to opt-out. The consumer credit reporting industry has provided a way to “opt out” and remove your name from these lists. You can contact them by phone a 1-888-567-8688 or online.

Some have reported calls or mail that claims to need additional information as they work on processing your loan file. This is not legitimate, always remember to verify with your loan officer prior to giving any information to somebody to "process" your loan. Be sure to opt out right away before you fall victim to these deceptive practices. You can choose a five year or lifetime option, and the lifetime option will require a signed form. Make sure to report those violations to your states attorney general- the fines are rather hefty. If you don’t opt out now, be on the lookout for suspicious phone calls or mailers from someone who has purchased your data offering terms that are too good to be true – there is always a catch. Don’t wait until your data is stolen – protect yourself from trigger leads today!

HOME AFFORDABLE REFINANCE PROGRAM

Today there is a government-backed stimulus program, called Home Affordable Refinance Program (HARP), part of the Making Home Affordable program that allows those with declining home values qualify for today’s low rates. This is not to be confused with the Home Affordable Modification Program (HAMP) that has recently gotten some negative press (there will be more information on during a future blog over the next few weeks). The need for this program is tremendous. Many home owners are finding out that refinancing at today’s record low rates may be unobtainable. Several years of double digit housing price declines have caused them to become ineligible because they lack equity in their homes. While this would not have necessarily been an issue three to five years ago when clients could qualify for loans that had the best rates with less than 20% equity, today it is impossible. Many of the mortgage insurance companies that would have insured the lender against loss due to low homeowner equity positions are now out of business. Furthermore, the second mortgage lenders who used to provide a subordinate loan to help ease the equity issue for homeowners have been hit with record losses resulting in the products becoming unavailable.
This program will often allow homeowners to refinance their Fannie Mae or Freddie Mac owned homes, even if the home is not owner-occupied. Many home owners’ facing declining values have been unable to qualify due to their home’s depreciating value. As a result, those individuals have been unable to take advantage of today’s record low rates. While there are still restrictions, the first step for home owner’s told they were ineligible to refinance must first research whether Fannie Mae or Freddie Mac government agency currently owns their mortgage. Many unfortunately assume the owner of the mortgage is the same as the servicer, that’s the reason you need to check for yourself!
Some highlights:

• You are not currently paying mortgage insurance (MI/PMI) as part of your existing 1^st mortgage loan payment. If you are in this situation and are lucky enough to be eligible for Freddie Mac’s program, you may be okay.
• If you have an existing second mortgage, your home equity lender will have to agree to subordinate to the new first mortgage terms.
• No additional cash may be received at closing for debt consolidation, home improvement, etc.

While the Making Home Affordable Programs are not going to meet everyone’s needs, they are a start. With no end in sight to the continued price decline in many markets plus the unpredictability of the appraisal process through the Home Valuation Code of Conduct (****The HVCC will be covered in detail in February!), this program is the only coarse of action for many looking to save money on their mortgage. This program is currently scheduled to end by mid-year 2011 so don’t wait. With a divided Congress, there an extension of this program is unlikely.

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