Good Faith Estimate 2010

We just finished training for the 2010 versions of the Good Faith Estimate (GFE) and HUD1 or closing statement. It is going to be choppy getting accustomed to the new forms. And it means we will need to do things differently moving forward.

I just completed my first estimate using the new form. There are times when I scratch my head and wonder if the King is really naked, this is one of those times. The two questions home buyers have asked on every application I have ever prepared are not answered on this new form:

1) How much will my total payment be?
2) How much money will I need at closing?

Those figures are shown in the application but not on the GFE. Is that not strange?

A couple of other very odd changes include no disclosure of seller paid contributions (again it is in the application but not GFE) and inclusion of fees paid outside of closing such as pest control, home inspection and realtor administration fees. Heads up realtors, if your company charges the buyer an admin fee it needs to be on the GFE. There will not be any adding of fees at the closing to the borrower’s side of the HUD1!

Something else I found very odd, the transfer tax is going to be on the GFE. In our area that is assumed to be a seller expense but it must be shown on the buyer’s GFE. Wonder why that particular item is carved out of the seller’s list and not others like deed prep? Strangest of all, the closing cost are not itemized on the new GFE, one lump sum figure. How bazaar.

All of this is going to slow down the process, closings can not occur until 10 days after the disclosures. Some changes will require a new disclosure and that can delay a closing for another 10 days. A loan approved today will no longer be able to close today, a situation I had last week. The new process that goes on behind the curtains is multiple signatures that everything is in compliance. In the past this step was limited to only one person prior-to-close, will now be three or four people and could take up to 48 hours to complete! All of this could be very inconvenient for scheduling moving trucks and utilities.

We will not be able to issue a GFE before we pull credit, this is a huge change. It makes sense because credit scores can impact the fees or rate. Once a closing cost is disclosed it can not be changed so lenders will not send out an estimate until they have the six basic items needed at application. These include: Borrower’s name, SS#, property address, monthly income, valuation of the property and proposed loan amount. Many homebuyers are not going to like this at all. Can’t you give me an estimate? Nope! Basically not until you give up all of your information.

Here is the good, the bad and the ugly; it really is going to help the consumer by eliminating the bait and switch tactics used by many lenders - which has always been one of my pet peeves with the industry. It is going to be bad for mortgage brokers because they are required to disclose information mortgage bankers like us are not. If I understand the math correctly it is going to make their fees look much higher which is going to be confusing to the consumer and as a result bankrupt many brokers.

Fannie Mae Changes

There are a few more changes that could impact borrowers that have recently applied for mortgage financing. In the underwriting release notes mentioned in the last post I found a huge change. FNMA no longer counts trailing spouse anticipated income. This could be a very big problem for the thousands of relocation homebuyers next year.

Another change, Fannie now requires IRS Form 4506-T instead of the Form 4506. My company has been doing this for a long time. Both forms allow the lender to receive a transcript of tax returns from the IRS for documenting the borrower’s income. The difference is the 4506 is for the previous year and the 4506-T is for the previous two years. In the past, these forms were used after a loan closed and only for a fraction of the transactions. Today we order them on every loan and the transcript must be received prior to closing! This is a really big change and it is expensive. Each transcript cost $50 and thankfully can not be passed on to the borrower. It costs us an additional $100 to process every loan even if they do not close.

Biweekly Mortgages On The Way Out?

My Calyx application software was updated on Monday and it looks like there were several changes. This morning I received an email regarding the changes in Desktop Underwriter®. The one that caught my eye concerns biweekly mortgages being sold to Fannie Mae. This was announced back in September in FNMA Announcement 09-29:

“Due to a lack of demand and increased operational costs, Fannie Mae is retiring the biweekly payment mortgage product, which requires the borrower to make biweekly payments in accordance with the note. Fannie Mae is also discontinuing the standard first-lien notes and riders that were used in connection with the biweekly payment mortgage.” CLICK HERE to read the entire announcement.

Lenders can still offer the option on portfolio loans, but it sounds like the largest player is out of the game on these.

Loan Applications Increase

WASHINGTON, D.C. (December 2, 2009) — The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending November 27, 2009, which was a shortened week due to the Thanksgiving holiday. The Market Composite Index, a measure of mortgage loan application volume, increased 2.1 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 29.3 percent compared with the previous week. The Refinance Index increased 1.7 percent from the previous week and the seasonally adjusted Purchase Index increased 4.1 percent from one week earlier. These results include an adjustment to account for the Thanksgiving holiday. The unadjusted Purchase Index decreased 30.4 percent compared with the previous week and was 34.9 percent lower than the same week one year ago.

The four week moving average for the seasonally adjusted Market Index is up 0.2 percent. The four week moving average is down 2.0 percent for the seasonally adjusted Purchase Index, while this average is up 1.5 percent for the Refinance Index.

The refinance share of mortgage activity increased to 72.1 percent of total applications from 71.7 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 4.8 percent from 5.3 percent of total applications from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.79 percent from 4.82 percent, with points decreasing to 1.00 from 1.19 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the lowest 30-year fixed-rate observed in the survey since the week ending May 15, 2009.

Whew, my rates just beat the average! To see my posted rates or apply online for financing Click Here

Time to Refinance ARMS

Thousands of Homeowners in our area still have Adjustable Rate Mortgages. Over the past two years I have often wondered why many people are keeping their ARM instead of refinancing to a fixed rate.

One of the reasons may be because their payments have decreased. There are many indexes but the two most common around here are the CMT and LIBOR. The math can be a little complicated but the historical figures are easy to document. The 1-year CMT index usually has a margin of 2.75 and caps of either 5 or 6 above the start rate. If your start rate was 5% then you are a happy camper because the current index of .37 plus 2.75 equals just a little over 3%. But do not forget, the maximum rate is either 10% or 11% over the life of the loan!!

The one-year CMT index has only been below one percent 11 months out of the past 20 years!!! Another way of saying it, 95.5% of the time over the last 20 years the index has been above 1%.

Just for kicks, I averaged this index for the month of January over the last 20 years and the result is 4.34%. If we add 2.75% (the margin) to that average it is over 7%. The conventional 15 year fixed rate is currently lower than the 4.34% average index (not including the margin) for the previous 20 Januarys.

It is fun riding the rate down on an ARM, but when rates rise, so does the index and that makes it hard to switch to a fixed rate. If you have an ARM and plan on keeping your home more than another five years, there is a very high probability it will cost an arm and a leg if you do not switch now while rates are low.

Changes on FHA Streamline Refinance Transactions

There are significant changes taking place with all FHA Streamline refinance transactions. The new guideline will read, "At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced and 12 months seasoning in the subject property." This is a very minor change from the previous guideline.

HUD Mortgagee Letter 2009-48 modifies FHA’s requirements for second appraisals (as described in Mortgagee Letter 2008-09), eliminating the need for a second appraisal on high balance loans in declining markets. This policy is extended to cash-out refinances that exceed $417,000 and is secured by a property located in a declining market. This change is effective immediately and actually favors the homeowner.

FHA will retain the second appraisal policy described in Mortgagee letter 2006-14, Property Flipping Prohibition Amendment. This policy requires a second appraisal when a property is resold between 91 and 180 days following acquisition by the seller, if the resale price is 100 percent (or more) higher than the price paid by the seller when the property was acquired. CLC must obtain a second appraisal from another appraiser and the cost of the second appraisal may not be charged to the homebuyer.

For example, if a property is resold for $80,000 within six months of the seller’s acquisition of that property for $40,000, the mortgage lender must obtain a second independent appraisal supporting the $80,000 sales price. The mortgage lender may also provide documentation showing the costs and extent of rehabilitation that went into the property as support for the increased value but must still obtain the second appraisal.

Time For A Budget

Many credit issues are caused by overextending credit or another way of stating that - not adhering to a budget. Underwriters frequently face the problem of increased housing expense while reviewing loan applications. Stated simply, if the homebuyer is asking for a loan that will have a payment higher than their current housing expense, is it possible for them to make the higher payment? If the applicant has been saving an amount each month that covers the difference, it is a strong indication they can afford a higher payment.

This issue came up recently in a class I taught for first time homebuyers. One of the participants asked, "What if you aren’t saving by choice?"

My answer, "What are you proposing to give up after you buy a home? Nice shoes by-the-way, are they new?" Even she had to laugh with the rest of the class, exactly the point.

The loan officer that originates the loan application must include any documents provided by the applicant that supports the loan request. Fight fire with fire!!! This is the slickest trick I have ever thought up for using the system to trump the system. Freddie Mac publishes a sample budget on their web site under some obscure section (and I think it gets moved around). I saved a copy long ago. What is the underwriter going to think when he or she discovers a budget in the file that documents the ability to afford a higher housing expense AND it is on a form provided by Freddie Mac and contains the Freddie logo? I promise you it will be like finding a candy bar in the file. Well, lookie what I found!

In all the years originating loans I have never had a homebuyer offer a copy of their budget as part of the support documents. What a killer tool this would be especially if it documents a turn around contained in the credit report.

Send me an email if you want a copy of this form and I will send it ASAP: jsimms@cmcloans.com

FHA Making Financing Easier for Condos

Another change is taking place in the mortgage arena. A recent HUD letter to lenders is shifting more responsibility to lenders regarding financing condominiums, at least that is how I read it. I was alarmed today when I heard one of our wholesalers will stop accepting FHA spot approvals next Friday. Up to now lenders were able to approve a condo for FHA insurance when it was located in a project that was not approved by FHA. That process is being eliminated.

Of course that sounded bad to me. Just another option eliminated. But then I actually read the letter, and it does not sound bad at all. In fact it sounds good. Lenders are going to be able to approve the entire project instead of just one unit. There will be limitations, no more than 1/3 of the project can be financed using FHA, but it is a big move in the right direction. Thousands of additional condos in the Louisville area could now be eligible for maximum FHA financing. AAAhhhh, folks that could make your condo worth more!!!

You can read the letter for yourself: Click here