Dennis' Mortgage Blog

Below is response I sent in to the Press-Telegram in Long Beach, CA to an editorial they wrote (here) deriding commission based professionals such as myself and suggesting those looking for mortgage advice spend a couple of hundred dollars for a financial consultant...are they licensed?  Typical media reaction to a problem they either no longer have the resources to devote to a story or they are too lazy to actually dig into and get information about:

Dear Editor:

As a mortgage broker with twenty years experience helping families obtain the American Dream of homeownership and helping those already owning homes with their mortgage and debt management I take great offense with your 8/28/07 editorial “Tips on Mortgages.”

Your editorial wrongly paints thousands of honest mortgage originators, such as me, with the same brush as those who have misled mortgage applicants and placed them in some mortgage products for their own benefit.  As can be attested by the California Association of Mortgage Brokers, Realtors® and most importantly the millions of homeowners throughout California and the nation who have benefited from the services of commission based mortgage brokers, our segment of the industry offers the widest range of products to best fit the financial abilities and needs of mortgage applicants.

Yes my compensation is commission based; does that mean I give poor advice merely to benefit myself?  Perhaps the many, many potential clients I speak with each year can address that by informing you of the transactions I have talked people out of because, while it would benefit me it would not be in there best interest.  You use the example of the $30,000 commission paid a Countrywide agent, I certainly have never had a commission even close to that amount.  Further, because I am a mortgage broker licensed by the California Department of Real Estate by law, and by conscience, I must disclose upfront and at closing to the borrower how much compensation is being paid to our company.  These disclosures includes processing fees, originations fees, rebates paid by the lender or any funds received by us—note that banks and mortgage bankers such as Countrywide are not required to make such disclosures.

As an active member of the Long Beach community who has assisted hundreds of homeowners in the area, has spent many, many hours annually and thousands of dollars assisting local non-profits—donations as a result of commission based compensation, to read your editorial accusing me as a commission based mortgage consultant of not acting in the clients best interests is an insult and reprehensible. Time and donations made by my wife and I to show our children it is the right thing to do and also to thank a community that has supported us in using my services.  How many will now look at us and think, “Dennis can do this because, according to the Press-Telegram, he rips people off for their mortgages.”  Ironically I read the editorial a day after leading an invigorating conversation for the Leadership Long Beach Class of 2008 on ethics, integrity, values and other leadership principles.  One of our conversation points involved judgment—while some of your editors were at the reception for the class that evening I now wish they had been in our classroom earlier in the day.

I am not surprised that the Press-Telegram, like the rest of the mainstream media, has misreported the situation in the mortgage and credit markets and has now taken the easy route of blaming me and others like me for the situation.  Thankfully my clients and business partners in real estate know a lot more than you and will continue to come to me for honest advice on home financing and mortgages.

Dennis C. Smith

Mortgage Broker

          Chairman, Board of Directors, Community Hospital of Long Beach

                                  Past President, Leadership Long Beach

                                    Past President, Long Beach Education Foundation  

                                  Past President, Southern Los Angeles Chapter,

                                            California Association of Mortgage Brokers

                                    Past President, Greater Long Beach Association of Realtors Affiliates

                                     Past President, Greater Long Beach Real Estate Club

The following is part III of a series originally posted on The Long Beach Post (www.lbpost.com) a website to which I am a regular contributor dealing with news and opinions based in Long Beach, CA.

The Mortgage Industry Part III: Licensing

Although I said I had a two part series on the mortgage industry, I thought I would sneak a short Part III in on licensing.

Many industries are controlled and regulated by local, state or federal mandated licensing: doctors, attorneys, building contractors, nurses, stock brokers, and real estate agents. All these professions and many more have some form of licensing requirement that usually require some form of education component and testing to obtain and maintain an active license. Most licensing is handled by the states with each state having its own requirements for obtaining and maintaining a valid professional license.

In the mortgage industry there are no standard rules nationwide for licensing companies or their originators—i.e. loan officers, or those who actually take and process mortgage applications. While the Department of Housing and Urban Development (HUD) has requirements and regulations for brokers and lenders who wish to originate and fund HUD loans (FHA and VA), and all activity falling under the Real Estate Settlement Procedures Act (RESPA), all other lending is subject to the licensing requirements of the state where the loan is being funded. The licensing laws to originate, broker and/or fund mortgages in Idaho are different from the requirements in New Jersey, which differ from California and so on. While there is a National Association of Mortgage Brokers that is a trade association with a code of ethics and best lending practices for its members, it has no national regulatory powers. As well mortgage brokers have trade associations in every state (in California it is the California Association of Mortgage Brokers), with input through their government affairs committees but otherwise no regulatory powers.

In California there are two licensing options for mortgage originators: Department of Corporations (DOC) or Department of Real Estate (DRE). I will deal with the DRE licensing first.

Under the Department of Real Estate there are two levels of license, a Broker’s license (which I hold) and a Salesperson’s license. An individual with a salesperson’s license must work for and have their license attached to a Broker. Any real estate company or mortgage broker licensed by the DRE has one individual’s license which is responsible for all the licensed activity of that company. If I owned DeeCees LB Realty and had sales people everyone representing buyers and sellers (a licensed activity) would have to have either a salespersons or brokers license and register their affiliation with the DRE, as well I would be the “responsible officer” for the company and all their activity would be my responsibility. The DRE does not allow a corporate veil for malfeasance and holds one individual ultimately responsible for company activities.

A mortgage broker in California licensed by the Department of Real Estate must therefore has one individual licensed as a Broker and every individual working in the capacity of a mortgage originator or loan officer—or anyone who is quoting interest rates—must have at minimum a salesperson’s license. Further, the DRE and RESPA requirements mandate that all mortgage brokers in California licensed under the DRE must provide a detailed disclosure of charges and fees paid to the mortgage broker, including by not limited to processing fees, origination fees, points and any rebates from the lender. This disclosure must also indicate if the applied for mortgage contains pre-payment penalties, an adjustable component, a balloon payment and the interest rate on the loan. If there are any changes to the terms or fees received by the broker between application and funding the borrower must be provided with an updated and accurate disclosure statement that coincides with the terms on the final loan documents.

So if an individual is working with a mortgage originator who is operating under a DRE license they can: a) verify the license on the DRE website b) expect and require a detailed disclosure for all the fees associated with the transaction including compensation to the broker and c) know that there is one individual, the Broker listed on the DRE site, to whom they can go with any complaints or comments should they feel the originator they are working with is not handling their transaction properly or ethically. While this licensing does not eliminate fraud or malfeasance on behalf of the originator or the Broker if he or she is crooked, overall it allows for accountability and responsibility through the DRE who if violations are found may punish the Broker and licensed individuals with fines, suspension or loss of license.

The other license through which mortgages may be transacted in California is under a license from the Department of Corporations. These licenses are a bit harder to obtain as they have requirements of net worth for the corporation and also mandate how originators are paid (i.e. W2 v. 1099). Licensees under the DOC are exempt from many of the disclosure requirements imposed by the DRE; most notably originators working for companies licensed by the DOC do not need to be individually licensed.

When an individual is speaking with a mortgage originator or loan officer who works for a company lending under a DOC license that individual is not specifically licensed to transact mortgages. The individual is an employee of the bank or institution for whom he or she works. The originator is not subject to specific suspension or forfeiture of a license for acting in bad faith or misrepresentation because he or she is not licensed. The consumer may file a complaint against the individual with the manager of the office, or even with the DOC, but there is no official sanction that may come down on the individual, instead if enough complaints are filed and the company investigated it, the company, may face fines from the DOC.

Further, loans originated under a DOC license do not require disclosures of profit or fees paid to the lender and/or originator; making it very easy to hide rebates paid to originators for higher rate mortgages, differentiation of origination fees paid to the originator versus discount points paid to purchase a lower rate, or extra fees charged not relevant to the transaction but used to pad the revenue generated.

So there exists in California, and many other states, a system that allows one segment of the mortgage industry to operate with little oversight or regulation over individuals who also do not need to disclose to the consumer the revenue earned on the transaction. There also exists a segment of the mortgage industry where individuals follow strict licensing, regulatory and compliance requirements and must disclose in detail revenues paid and earned in the transaction. Even though this is the case it is the mortgage brokers who are the brunt of most of the negative attitudes in the industry. Not to say that there are not many who deserve such criticism, but after twenty years in the industry I know it is unjustly slanted to one particular segment.

For many years I have advocated much stricter licensing requirements in California and throughout the United States for individuals in the real estate industries. It is too easy to obtain a license from the Department of Real Estate which then allows the individual licensee to handle transactions that involve the most important asset for all families: their home. From real estate agents, to mortgage originators to those involved in the escrow segment of the industry the current process and requirements to handle transactions involving tremendous sums of money and people’s primary assets are too readily attainable. It requires rigorous education and testing to obtain a Series 7 license to become a stock broker, it requires rigorous education and testing to pass a Bar Exam and become a licensed attorney, it requires simple education and testing to obtain a real estate license in California and in most of the United States.

Unfortunately this ease of licensing will not change for some time if ever because of the tremendously effective lobbying of the Realtor® state and national associations. Easily obtainable licenses allow them to employ thousands of part-time agents who have low margin expenses and high margin profits when they close transactions. Unfortunately the easy licensing requirements for real estate industries, or no license requirements for banks and direct lenders, allows too many individuals who do not have the capacity to properly handle the nature of the transactions to participate in the industry.

Before Congress or State Legislatures begin to add more and more regulations and disclosures to our industry (the standard mortgage application package is already 28 pages in California—seems to pretty thoroughly disclose everything to me) I strongly feel they should deal with the licensing of those who participate not only in the mortgage part of the industry but also the real estate agency segment of the industry. Once they have effectively dealt with this issue and allowed several years to pass to monitor the effectiveness they can properly evaluate any other regulations that may be needed.

California Department of Real Estate here

California Association of Mortgage Brokers here

National Association of Mortgage Brokers here

The following is part II of a series originally posted on my regular column at www.lbpost.com, a site for news and opinions based in Long Beach, CA.  My columns are under the heading "My Front Porch".

What Is Happening In The Mortgage Industry: Part II

In Part I of this series I explained how money flows from investors through secondary markets through lenders to borrowers to fund mortgages. As investors face the decisions of where to invest their money they calculate the risk-reward for various investments and then decide which opportunity offers them the best return for acceptable amount of risk. As a result mortgage interest rates rise and fall daily like every other investment as investors put money into or take money out of the securities and bonds used to fund mortgages. I used the secondary markets of Fannie Mae and Freddie Mac to show flow of funds, and each of these institutions funds billions of dollars of mortgages annually.

Critical to the next part in the series are that not only do Fannie and Freddie provide secondary markets through which funds flow between investors (supplying principal for mortgages) and borrowers (supplying interest payments to investors); but they also dictate what underwriting guidelines and criteria must be met by all borrowers to meet their standards. By having uniform guidelines Fannie and Freddie are telling investors the level of risk associated with the investment. Because of the outstanding performance of borrowers with Fannie and Freddie loans investors know the standards work in creating an acceptable level of risk (foreclosure or default) to the rate of return on their investment.

Guidelines and investors determine acceptable risk-reward scenarios that result in money being made available (liquidity) for mortgages. This relationship, guidelines and risk-reward, are at the heart of the current mortgage industry problems. The looser the guidelines established for borrower qualification the higher the risk of non-performance on the mortgages funded with those guidelines, the higher the risk of course the higher the return which means higher interest rates. This is the basis for the sub-prime market, looser guidelines and higher interest rates for borrowers, higher risk and higher returns for investors.

Sub-prime borrowers are those that do not meet the criteria of Fannie Mae or Freddie Mac or the other “A-paper” mortgages that use many of the same criteria. Typically they are most deficient compared to prime or A-paper borrowers in their credit history. Sub-prime lenders were established to provide mortgages to the many people who own homes or wish to purchase homes and need a mortgage but have credit histories with a significant number of late payments, bankruptcy, possibly prior-foreclosures, etc. Traditionally these mortgage products required significant down payments or equity in the property being used as collateral. More recently with the surge in real estate values post 9/11 the industry required less and less equity in properties (what is termed LTV or Loan To Value), eventually providing combination fundings of First and Second mortgages to 100% LTV—or loans to borrowers with no down payments. As you can imagine lending money to someone with no down payment and a poor credit history appears to be pretty risky—and it is. However because of the rising market values this risk was somewhat mitigated as the $400,000 home with no equity became a $500,000 home with plenty of equity in a short period of time, allowing the sub-prime borrower to refinance to better terms, or if in trouble to sell the home, pay-off the mortgages and still collect equity. For many years this segment of the industry made a lot of people a lot of money: the homeowner able to purchase a home in a very “up” market, the mortgage broker and real estate broker who made commissions on the sale, the lender who funded high interest rate mortgages, and the Wall Street investor who purchased the bundled mortgages and then sold them through mutual and hedge funds. Everyone was happy.

Then late in 2006 some housing markets around the country started to slow down and the fantastic appreciation of the several preceding years slowed, or in some cases stopped. Home builders started reporting the sales of newly constructed homes in their, as one of my clients calls them, “Target Town” communities slowed as well. Coinciding with this slow down was the expiration of many borrowers short term fixed rate notes they used to purchase their homes with no money down.

Much is being written about “higher interest rates” also occurring during this time frame, however the rates used as the basis for adjustable rate mortgages, and those turning into adjustables after being fixed for two or three years (the majority of sub-prime loans). The higher rates for these borrowers were because of the type of loans they are in, loans now tied to high short term rates with high margins. (Sidebar: and adjustable rate mortgage interest rate for payment consists of two factors. 1) The index which floats daily and is used to calculate the mortgage rate on specified anniversary dates. The index can be one of many different indexes, 1 year Treasury, LIBOR, etc. 2) A margin that is added to the index. The better the risk of the buyer, i.e. income qualification, credit score, etc, the lower the margin. For most sub-prime borrowers their margins are over 3%. So today with a borrower with a 1 year Treasury index (about 4.1%) and a 3% margin would have an interest rate of 7.1%). Because many of the borrowers currently in default were marginally qualified to purchase the property as exhibited by poor credit, no savings for down payment and often inability to show income to support the mortgage payment, it is not real surprising that faced with no equity and a higher mortgage payment that they are not making those payments.

I understand that of the many families in foreclosure now there are some cases of true hardship, changing financial conditions and several who dealt with unscrupulous loan officers who did not fully disclose before loan documents the types of loans they were getting. But believe me after twenty years in the business this is a small percentage of the homes currently in foreclosure. The majority of those in foreclosure went in knowing the type of loans they had, that they had no equity invested and they were betting that the market would go up and they would be able to either refinance to lower rates or sell the property because of large appreciation and make a nice profit with no risk.

That all said, the sub-prime collapse started because as some of these foreclosures started analysts on Wall Street started looking at their sub-prime portfolios and felt they were at risk, greater risk then they thought they would be in when they came up with the loan programs and started funding and investing in them. Finding the level of risk unacceptable to the return, especially in comparison to the double digit returns they were seeing in equities on the stock markets for the year, Wall Street investors stopped purchasing the loans from the lenders. With no money coming in for loans they have already funded New Century, and then other lenders, could not operate and had to close their doors. This is what is known as a liquidity problem.

Now with Wall Street seeing what risk they had with the sub-prime deals they started looking at other products they were invested in and it is essentially the entire non-conforming market; i.e. loans that are not under the Fannie Mae or Freddie Mac umbrella (and government loans like FHA and VA). And Wall Street being the culture that it is one investor followed another until they moved the liquidity problem from the sub-prime mortgage market that they created to then next market where they were highly invested: Jumbo and non-conforming loans. Even though the default rate on these types of loans are well within historical norms and risk/reward calculations Wall Street has stopped purchasing many of them as well.

Overall the media has blown the current foreclosure rates somewhat out of proportion. I find the comparisons of foreclosure rates in 2007 to those in 2006 as intellectually lazy and sensationalized. With 2006 being a peak year for housing prices it was unlikely most homeowners in trouble with a mortgage would have a difficult time selling their home and paying off the mortgage. Comparing 2007 to any of the prior years in terms of number of home sales, prices or foreclosures is like comparing the last year of Henry Aaron’s career—it came after many years of exemplary performance. We are in a period of record home ownership, a very small segment of that market is experiencing difficulties and much of it due to their own greed or inability to properly calculate the risk they were taking. This is what makes news because most reporters and editors either enjoy printing bad news to show how bad the country is doing, or because they are too lazy to dig into the story, learn about what and why and who, and do some real reporting on the history and it relation to today.

Once someone on Wall Street wakes up and realizes that for many, many years they enjoyed solid and dependable return on investment in mortgages for well qualified borrowers they mortgage market will settle down and return to some sense of normalcy. We will see the non-conforming rates more in line with the Fannie and Freddie rates and we will see a return of confidence to most markets. The underlying fundamentals of low unemployment, low inflation and a growing economy still exist; these fundamentals support a strong housing market.

I hope my comments on this have given you a better understanding of how mortgage markets work and hopefully dispelled some of the hysteria and poor reporting that has occurred around the mortgage and housing markets.

This post and the following, part II, are posted on my regular column at www.lbpost.com which features news and opinions based in Long Beach, CA. 

What Is Happening In The Mortgage Industry: Part I

How is your summer going? Mine has been filled with typical family fare of a few vacations, spending time with the kids, swimming, seeing the summer movies, oh and spending a lot of time communicating with clients and consumers about what is happening in the mortgage industry and subsequent affects on the real estate markets.

Today and tomorrow I will post a two part segment on how the mortgage industry works and from that how this current crisis has evolved. In Part I the mechanics of the industry will be explained, in Part II how the mechanics created the domino effect that has the focus of the media and created some irrational behavior on Wall Street.

The media has been ecstatic over the credit crisis that started with New Century Mortgage’s inability to obtain financing on Wall Street, since then Wall Street took a problem and with the help of the media has created a crisis. If one thing has been very apparent the last several years it is that the media climbs all over itself to report negative news and editorialize its news reporting to put the negative spin on the front page and bury the statistics and objective analysis of the stats inside the story on page B23. The current situation in the mortgage and real estate markets are perfect for the editorials as news policies most major media outlets have been following. In the next few posts I will attempt to explain how one lender’s problem has become a national crisis dominating the news.

To understand the underlying trigger for the problem, New Century’s inability to obtain financing, one needs to understand how the mortgage industry operates; here is a somewhat simplified explanation of the process.

Like the health care system in the U.S. there are a lot of layers involved beyond the doctor/patient—or in this case loan officer/borrower—transaction. To start very few of the mortgages funded in the United States are kept by the lender that funds the mortgage—those loans that are kept by the funding institution are called “portfolio” loans. The overwhelming majority of mortgages are packaged by the lenders and sold in bulk on secondary markets. Lenders usually retain the servicing rights of the mortgages (meaning the collect the mortgage payments) and pass along the payments to the actual holders of the mortgages in the secondary market—less a servicing fee. The biggest and most well known secondary markets are Fannie Mae (Federal National Mortgage Association; FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation; FHLMC). Fannie and Freddie behave like brother and sister and most of their underwriting and funding guidelines are very similar. It is the underwriting and funding guidelines that are critical to our story.

Fannie and Freddie have established underwriting criteria and if a mortgage applicant is able to meet those criteria Fannie and Freddie will purchase the applicant’s mortgage from the lender that funds the loan. Example, Marcy and Chuck are purchasing a home for $500,000 and have down payment of $100,000 so they need a loan for $400,000. They meet with me and we complete a mortgage application package and obtain information showing their income, assets and credit report. This information is uploaded to Fannie Mae’s automated underwriting site and a credit approval with conditions is generated. With that automated approval, I can go to any of our lending sources that fund Fannie Mae mortgages and deliver the loan with the conditions (paystub, appraisal, bank statements, etc) and ultimately fund mortgage so Marcy and Chuck may move into their new home. For this example let us say that at the time Bank Lender Plus (fictitious), a national bank has the best rate for the mortgage Marcy and Chuck are applying for so that is where I send the mortgage and where we fund.

Bank Lender Plus upon receiving signed loan documents and all the approval conditions wires the $400,000 to the title company and the transaction closes. Where did Bank Lender Plus get the $400,000? From their depositors? No, the money is from either a warehouse line, essentially a line of credit where they borrow the money from one bank to loan to the borrower, or from reserves they have on hand from selling other funded mortgages to Fannie Mae. If the bank or lender is big enough the transaction involves the latter. Marcy and Chuck’s $400,000 mortgage will become part of a larger bundle of say $20 million worth of mortgages that Bank Lender Plus will package together and sell to Fannie Mae. Since all of the mortgages meet Fannie Mae guidelines they will purchase the mortgages and thus provide the cash for the next transaction. Fannie Mae gets its cash from interest and payments collected from loans it already holds and more importantly from investors who purchase Fannie Mae backed securities, essentially bonds that pay interest to the investors based on the overall rate of the bundle being put up. Got it? Let’s recap from the end of the transaction: Paul in Des Moines through his investment advisor invests $100,000 in Fannie Mae backed securities with a 5.75% return. His money, after some transaction fees, is sent to Fannie Mae who holds part of a $20 million offering of securities with a performance rate of 6.00% for Paul. Fannie also receives an additional $19.9 million from other investors for the same offering. Fannie then uses the $20 million to purchase a bundle of mortgages from Bank Lender Plus that were funded in July with a return of 6.125%. Bank Lender Plus takes part of the $20 million it has received and lends $400,000 to Marcy and Chuck at 6.25%. So Paul in Des Moines is actually funding part of Marcy and Chuck’s mortgage—thanks Paul!

In reality Paul is not the investor, but rather equity funds, mutual funds, insurance companies, pension plans, CalPers, etc are purchasing the Fannie and Freddie securities in very large blocks of millions of dollars. Since investors are looking for the best rate of return when balancing risk and return the interest rates they demand on the mortgage backed securities goes up and down every day depending on what other investment opportunities are offering. If the Dow is up ten percent and mortgages are paying five percent then more money will be invested in stocks and equities and fewer in mortgages, this will result in mortgage rates increasing to attract investment and eventually it will reach point where investors will sell stocks (causing prices to fall) and buy mortgage securities (causing rates to fall). So ultimately the rate for Marcy and Chuck’s mortgage depends on what is occurring in the economy and investment industries.

Our mortgage industry, and therefore our real estate industry, depends on investors to have confidence and trust in the mortgage industry so they will invest in mortgage securities and bonds providing the funds for American families to purchase homes. This has been occurring since Franklin D. Roosevelt established Fannie Mae as part of the New Deal to increase home ownership in the United States, since then Ginnie Mae (which purchases federally insured mortgages such as FHA and VA) and Freddie Mac were created. Essential to the tremendous percentage of homeownership in the United States are these secondary markets providing liquidity and funds for home buyers.

All that breaks down to this: Fannie and Freddie as secondary markets facilitate investors providing principal to borrowers who provide investors with interest payments. You give me $100 to buy a bike (principal) and I will pay you $6 a month (principal repayment and interest) for twelve months.

So why are we where we are today? I hope my next segment is able to adequately provide the answer.

With the spread between 30 year conforming and jumbo (non-conforming) fixed rates growing to almost 1.00% those looking at getting new mortgages above $417,000 (the Fannie Mae/Freddie Mac lending limit for single family properties) need to do some math to see if they benefit from avoiding a jumbo product.

This morning I had a client looking to purchase a $700,000 property with 10% down call. Before the current mortgage market created the historically large spread between the conforming and non-conforming fixed rates we would have done a simple 80-10-10 piggyback transaction: 80% of the value in a first trust deed, 10% of the value in a second trust deed and 10% in down payment.

Today the rates for this would be:

$560,000 1st at 7.125% (interest only)

$70,000 2^nd at 7.45% (30 yr fixed)

For a “blended” rate of 7.161%

Not today however, the math is bad for the client. Instead of the "traditional" piggyback we are doing a conforming-based piggyback mortgage. This will lower the client’s monthly payment by almost $200 per month and lower the blended rate.

Conforming Based Piggyback Today:

$417,000 1^st at 6.375% (interest only)

$213,000 2^nd at 7.45% (30 yr fixed)

Blended rate of 6.744%, a savings of 0.337%

To properly serve clients mortgage brokers and lenders need to consider many different options—this is where an experienced mortgage professional provides tremendous value. Examining different scenarios and options can save borrowers thousands of dollars in mortgage and interest payments; as you can see from the example it can be done without using adjustable rate or other non-fixed products.

If I can be of service to you or someone you know please contact me.

Dennis

 Tuesday, August 21, 2007

In the current market with seemingly daily notifications of products being changed or pulled off the market, lenders leaving the market or not taking applications, lenders raising rates on non-conforming products dramatically and other surprises I am extremely glad to be a mortgage broker and not a direct lender.  Why? Because we still have the products and the sources for the overwhelming majority of our clients.

One national lender decides to hike their wholesale rates to mortgage brokers for non-conforming loans putting them about one percent above their competition? Not a problem, we still have multiple sources at lower rates.  Another national lender decides to stop accepting applications from brokers for equity lines and second trust deeds? Not a problem, we still have multiple sources for similar or better products.  A major lender's CEO decides to say on a conference call that the market is negative and raises concerns that contribute to the misinformation being disseminated hurting existing homeowners and prospective homeowners? No problem we do not reward his company with mortgages rather we direct them to his competitors who are reliable partners and working with us to help our clients.

As a broker I have the ability to be flexible.  The current liquidity crisis in the market affects perhaps 10-15% of our company's traditional client base.  What is happening is the number of options we have available may be shrinking but we still have plenty of options at competitive prices.  Historically we have had up to ten or fifteen sources for approximately seventy percent of our clients--A+ borrowers looking for fixed rate mortgages.  For approximately twenty to twenty five percent of our borrowers we have had up to four or five different sources--combination of minor difficulties with stating income, lower FICOs, lower down payment.  And for less than ten percent of our clients perhaps two or three sources--true sub-prime clients with large credit challenges.

In the current market for about twenty percent of our clients we have one or two sources, for about another twenty percent perhaps four or five sources and for the remaining sixty percent or so we have about six or seven sources depending on the day and who is competitive.  Direct lenders have one source for all their clients and if they do not match the changing and tightening criteria of many products those clients are out of luck and will be shopping for an honest and trustworthy broker to assist them.

As in any market when supply is reduced and demand stays constant prices will rise, conversely if demand drops and supply is constant prices drop.  Depending on the product and client financial capabilities we are straddling both markets.  As a broker I can evaluate a client's abilities and needs and match them to available mortgage products and rates and prices to assist them in choosing, most of the time, from different financing options.

An array of options allows consumers the best opportunity to enter into the mortgage solution that best fits their financial capabilities and family objectives.  A mortgage broker, like me, can provide more options than a direct lender.  Especially in a changing market like the one we are currently in.

It is good to be a broker, it is better to have a broker when looking for a mortgage.  Call me.

Dennis

 Tuesday, August 07, 2007

As previously mentioned Minnesota's legislature passed a bill, or bills, under the guise of "consumer protection" or "predatory lending prevention."  In effect what these bills have done is start the ball rolling on collapsing the Minnesota housing market.  Follow the ball....

In the past week we have received notification from national lenders that they will no longer fund mortgages in the state of Minnesota that are not fully documented for income and assets, have any pre-payment penalties (even if "soft" meaning no penalty if loan is paid off through sale of residence), have balloon payments or negative amortization.  For many people none of this matters, they obtain mortgages using documented income and assets, get a 30 year fixed rate loan and move on.  They also have excellent credit records and are currently about half of the mortgage market.

By passing laws that pull approximately half the mortgage products out of the market the Minnesota legislature, and governor who signed the bills, have greatly reduced the number of people who can qualify to purchase a property.  Reduced demand leads to reduced prices.  Further, as prices go down so do the comparable sales necessary for estimates of values for refinances. 

Homeowners in adjustable rate mortgages that they may have obtained say three years ago because at the time had some spotty credit items, were self employed and run all their expenses through their company or for whatever reason will have a difficult, or impossible, time refinancing out of their current mortgages.  Between the limited product offerings and dropping prices they will have two choices, start paying the dramatically higher payments when their interim ARM goes to adjustable, or not make the payments and give the property back to the lender.  Thus causing more depression in the housing market.

As happens too often politicians in Minnesota over-reacted to the media reports of the sub-prime mortgage market having capitalization issues.  Showing the typical trait of passing any kind of feel good legislation for today they completely ignored any long term consequences and results. They see their job as protecting people from making bad decisions and/or not knowing what is best for their situation.  Because less than 1% of the housing market is affected by the sub-prime situation they decide to pass legislation that negatively impacts 100% of the homeowners in their state.

Whenever I hear a politician say, "this is good for the public" I get very concerned, not being part of the public most of them have little clue what is good for me and my family....especially when it comes to complicated issues like mortgage and housing markets.

My sincerest sympathy to the homeowners of Minnesota, but this is somewhat tempered by the fact that they voted them in now them must live with what they elected.

Dennis

 Friday, August 03, 2007