Dennis' Mortgage Blog

Question of the week:  Can you explain the new paperwork in the mortgage package and why?

Answer:   Our mortgage application packages have grown by about five pages effective January 1, 2010.  The reason being the new HUD regulations and new Good Faith Estimate (known as GFE2010, or as we call it in our office the “Goofy-Ten”).  I addressed, or let out frustration, over the new form in my Weekly Rate and Market Update 12-11-2009.  Most particularly is all the work putting the form together to protect consumers and no method of acknowledging receipt.

Back to the question, three of the new pages are the GFE2010, one page is a list of “preferred providers” that we must issue to the borrower showing who we prefer to use for services that we select or control, pretty much limited to escrow and title on refinances—though borrowers can always select their own.  And finally a “preferred providers relationship” disclosure where we disclose if there is any financial relationship between service providers, i.e. if Stratis owns any interest in the escrow company or are owned by the same company that owns the escrow or title company or other services (we aren’t). 

The intent of HUD in creating the GFE2010 and service providers list and relationship are honorable: to protect the consumer from bait and switch tactics, last minute fees borrowers feel forced to pay or lose their mortgage, ability to shop for rates with knowledge what is being quoted is what will be closed; as well to inform borrowers if they are using a certain company that it could be adding to the profit margin of the lender or another company in the transaction (usually the realty company if broker owned lender and/or escrow). 

However the intent and the implementation have not exactly met so we, you the consumer and me the loan originator, will have to struggle through as we get more accustomed to the forms and implementation.  The challenge we have faced is if the GFE2010 is not properly completed we, the loan originator, may have to pay fees for the borrower which will go to principal reduction of the closed mortgage.  Or if not properly completed the lender might reject the loan application before it gets underwritten.

How does the form work for borrowers?  First the form states how long the origination fees quoted are good, and they must be honored by the provider of the form for at least ten days (not counting the date delivered, Sundays or holidays).  So if a GFE2010 is provided today then all fees quoted for origination points, discount points, processing fees, underwriting fees, tax service, etc, plus estimates provided for escrow and title fees from preferred providers, must be honored until January 28, 2010.  So long as the loan amount does not change and the loan does not change from unlocked to locked, the origination fees must remain the same if the consumer applies and acknowledges the fees.

This process will, should, prevent low-ball quotes to get applications in the door and then higher costs at closing.  If due diligence is applied by lenders and underwriters on all originated loans, including those in-house, then very quickly quotes and closings will match, or come very close to matching, across the industry.  This is good for the industry and good for the consumer.

Once the loan is locked the borrower is issued a new GFE2010 that states how long the rate is good for, i.e. the lock expiration date, and that the fees quoted are will remain the same throughout the lock period.  If any origination fees exceed the quote on the GFE then the lender/originator will not be paid the fees, but rather will be charged the fees and they will be applied to the borrower’s loan balance.  Further, if the fees on services we select vary by more than 10% we must also pay that amount into the borrower’s principal reduction of their mortgage. 

What leads to confusion for us, and the borrower, is that we are required to disclose fees and costs for items that are traditionally sellers’ fees in California: pest inspection and clearance (i.e. termite), transfer taxes, seller’s title policy, homeowners association transfer fees are just a few.  My speculation on this is that because the form is national these may be fees paid by the buyer in other parts of the country.  California is one of only nine escrow states in the country, so our way of doing business is not the norm for HUD and lenders.

So the penalties for improper disclosure can be pretty steep. This, plus the newness and uncertainty of exactly how to complete the form, have had the industry on pause for the start of the year.  Now that we have a few examples and trials under our belt we are ready to embrace the new form, albeit like the hug we give our crazy cousin at Christmas.

I hope this form, as onerous and confusing as it is for us today, does what it is intended to do:  stop under quoting, bait and switch tactics and deceptive lending practices.  Hopefully it will finish the job the market downturn started and get rid of those who never should have been in our industry.

Have a question for me?  Ask me!

Frequent and long time readers of the Weekly Rate and Market Update will recall past issues where I address the levels of support and resistance for markets; if so you may skip to next paragraph.  As a refresher, every commodity has a high price and a low price and the market trades within those prices.  For stocks and bonds these are called trading ranges.  Prices move up and hit the high end of the range, called resistance, and usually bounce off, or prices will move down and hit the bottom price in the range, called support, and bounce off.  The levels of resistance and support are often moving averages, 10, 25, 50, 100 day averages of the commodity’s price.  If a price breaks through a level of support then usually prices will drop further until stabilizing and establishing a new range of trading at lower prices. Conversely if prices break through a level of resistance  prices will typically go higher and a range of trading will evolve at higher prices.

This week levels of support and resistance have been converging for mortgage backed securities (MBS).  The ten day moving average has been a level of support that bond prices have hit and rested on, and the twenty-five day moving average has been a level of resistance that mortgage prices have hit and bounced off and come back down.  As a result we have had an up and down week as daily these two price levels converge, the ten day average rising and the twenty-five day level dropping.  This technical factor creates a very unstable market with prices able to break either way.

With negative economic news yesterday of new unemployment claims higher than expectations at 447,000 claims, and retail sales in December a lot lower than expectations, mortgage backed securities looked like they would break clear of resistance and head higher.  (Remember higher prices mean lower rates)  As the market closed prices fell back below the level of resistance and it looked like we were heading into a down market.

This morning in early trading (6:00 a.m. Pacific) as I write this the 10 and 25 day moving averages are almost touching and tame news on inflation combined with some not exactly positive revenue news from Chase prices have broken above the 25 day moving average that has been capping prices and creating a floor for rates.  Prices are on the next level of resistance (the 200 day moving average) and we will see if this holds, if so then the range shifts up, rates improve slightly for the coming week and we begin the cycles again.

Update 8:30 to show the volatility, consumer confidence numbers came in very weak this morning, pushing MBS over the 200 day moving average—creating an opportunity for a higher trading range and possible lower rates.  “Opportunity,” “possible” are very key words.  In the past few weeks we have seen early ups and late downs making timing the market very difficult and risky.

What does all this mean?  The interest rate markets are volatile.  Unless you are very risk averse, I suggest if you are in a position to consider locking a mortgage rate you consider doing so when you are able.  Floating a rate in hopes of a “better deal” in this market is financially dangerous and many will find themselves with higher rates as a result of the gamble.

Further adding to the risk are the new guidelines from Fannie Mae capping income to debt ratios at 45% of gross income.  An applicant on the edge of that number at 4.75% may no longer qualify at 5.00%.  Trouble.  With this in mind, note that whenever prequalifying applicants it is my practice to do so at about 0.25% (one quarter of one percent) above the current market rate to better ensure ability to qualify when in escrow.

This week in rates all the ups beat the downs.  With the constant challenging of resistance levels the market was consistently, albeit incrementally, higher.  As a result all rates improve slightly from last Friday.  Which is two weeks in a row to start the year.  Trend?  I would not be willing to make that prediction at this time.

Rates for Friday January 15, 2010:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.875%                            Down 0.125%

30 year conforming-jumbo 5.125%                   Down 0.125

30 year FHA    4.75%                                      Down 0.25

30 year FHA jumbo 5.125%                            Down 0.125

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Monday is a national holiday in honor of one of America’s greatest citizens, Martin Luther King.  America has made tremendous strides in overcoming bigotry and racism in the four decades since Dr. King’s “I Have A Dream” speech.  There are still bigots and racists in our country, thankfully they are becoming fewer and farther between.

While many invoke the memory and desires of Dr. King, I like to at least once each year listen to his speech in Washington D.C. in August 1963.  I you wish to do so here is a link to a site where you can choose to read the speech, listen to the speech or watch the speech that changed America.  “I Have A Dream”   As a father I have the same hope for my children that he had for his, that they be judged by the content of their character.

Have a great weekend.

Dennis

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