San Diego Mortgage

MySanDiegoMortgage.com welcomes Matt Young from MDC Financial Service Group for our latest market update. Read on for his story and advice, and scroll down for his direct contact information!

MORTGAGE LENDING 2011: WHERE WE WERE, ARE, AND ARE HEADED

THE BUYING FRENZY

I left the practice of law in 2002 to enter the real estate mortgage-lending world. Learning a whole new vocabulary and implementing that into the real-life workings of a mortgage broker, was tough at first, but the knowledge came pretty quickly and within about six months or so, I was pretty self-sufficient. Loan programs were well defined. Demand was brisk. People bought homes as quickly as they could in order to secure a price now ahead of what would sure to be a never-ending trend of upwardly moving values. As the buying frenzy increased, so did home values. They increased so much that buyers could no longer afford the 10% or 20% down payment, to say nothing of those hefty 30 year fixed payments on the ever-increasing loan amounts.

Rather than be OK with having people wait until they could afford to buy a home, banks and investor groups created loan programs that allowed for smaller down payments ($0 down and in some cases financing closing costs on top of the 100% loan amount), smaller monthly payments (interest only payment and in too many cases, payments that weren’t even covering the interest accruing on the loan each month), and smaller piles of documentation necessary to prove the borrower’s income (in many cases no documentation at all was required). The borrowers, having these new options available to them, snapped them up with all the self-control of a piranha in an Amazonian feeding frenzy.

We all, of course, know the end of that story. Since the start of the housing crash in 2006, banks that based their whole business platforms on these “creative” loans have vanished while others quickly eliminated these risky loans from their lineup.

By 2008, the risky type of loans were gone and the industry seemed to be making loans that were really clean: down payments were being made of at least 10%, borrowers income was required and provided, and appraisals were being scrutinized closely. The industry seemed to have corrected the problem.

Unfortunately, as most people now know, the finance world since has undergone several rounds of legislation that has made getting a loan one of the most exhausting and frustrating processes one can endure.

However, remembering a few things will help get you through escrow.

1. HAVE YOUR FINANCIAL DOCUMENTATION READY

What does this mean? Well, a borrower must prove 3 things: 1. ) You make enough income to qualify for the monthly payment; 2.) You have enough in the bank to cover their down payment and closing costs; and 3.) Whether you are going to live there, vacation there, or rent it out?

PROOF OF INCOME

To prove your income, you must provide complete copies of your federal tax returns, including any and all schedules. For W-2/employee borrowers, two most recent paystubs and the two most recent W-2’s are also required. In cases where one earns bonus, hourly wage with varying hours per week, commission income, or any other type of pay that yields inconsistent earnings paycheck to paycheck, the lender will require documentation of two years of those earnings from that employer in order to use to help qualify for a mortgage.

PROOF OF ASSETS

For the down payment and closing cost requirement, you must provide the two most recent bank statements from each bank account or retirement account that you have. These are not Internet printouts. These are the copies of the actual statements that you receive in the mail or e-statement PDF’s from the bank’s online website. Additionally, any unidentified deposits that appear on the bank statement must be explained and paper trailed. If you are one of the few lucky borrowers that have relatives that will be helping you with a down payment, the gift amount must be paper trailed from their account into your account.

BUYER’S OCCUPANCY

Finally, the occupancy must be “determined.” I use the word “determined” loosely. Loans are submitted as an “owner-occupied loan” or as an “investor home” or a “vacation home.” The borrower and loan originator “determine” the occupancy. However, the underwriter during their analysis of the file, will be on the lookout for anything that does not make sense on paper with the occupancy stated. Why does this matter? Because owner-occupied loans (loans where the borrower intends to live in the property being purchased) are less-risky and therefore have a lower interest rate than loans for homes that will be rented out. Additionally, the guidelines are more flexible for owner-occupied loans than for vacation or investor loans, each of which require either 20-25% as a minimum down payment.

An example of a scenario where occupancy is questioned is for a buyer who lives out of state currently but is relocating here. The buyer wants to find a home now and buy an owner-occupied residence. What are the problems? Well, first, one cannot occupy a home in San Diego when one is working in Michigan. Secondly, if we explain to the underwriter that the buyer will be leaving the current job to relocate here, then the income being used to qualify cannot be used at all since the borrower will soon be leaving that job. It is a lending “catch-22.” The solution for that would be that the buyer either 1.) buys the new home as a “vacation home” and brings in 20% down payment and must be able to qualify with that house payment plus their primary residence house payment or rental payment they are currently making, or 2.) wait until the borrower has secured a new job. At that point you can submit a loan based upon that new income and can close the loan once you are on the job and have received a month’s worth of paychecks.

Another example of this is where a buyer may own a large home and wants to buy a condo in the same area as an “owner-occupied” home. This doesn’t make sense to banks. A buyer must be “moving up” in order to be able to buy an owner-occupied residence, or have no other homes owned in the area where the new home is being purchased. In this situation, a bank would approve the loan but “counteroffer” it to an investor purchase.

2. NEW TIMELINE CONSTRAINTS AREN’T OPTIONAL

I mentioned briefly the cluster of new laws and regulations governing lending, but didn’t go into detail on what each is and the resulting effects. The long and short of it is that these laws combine and overlap in ways that limit when, and in what order, things can be done during the loan process.

In the past, we used to be able to order an appraisal at any time. In a situation where the buyer wanted to buy the house but was unsure if it would even appraise for value, we were able to order that appraisal at that time to see what the value would be. Then once the appraisal came back with whatever result and the buyer determined that it was possible to move forward with the purchase, we could then submit the file and that appraisal to a bank. It wasn’t “value shopping,” which implies we were trying to coerce a certain value. But rather, sometimes the buyer needs to know if the asking price is reasonable based upon current value before moving forward with the offer and all of the expensive inspections, etc of the home as part of the escrow process.

But no more. Now we can no longer order appraisals directly. Only the bank can order an appraisal through a neutral Appraisal Management Company that then in turn places the appraisal order directly with the appraiser. So, essentially, a buyer must be first placed with a lender and have that file submitted in order to have an appraisal ordered. And with the new restrictions on the mobility of appraisals between lenders, we generally discourage ordering the appraisal this early because it limits our ability to obtain the best rate for the buyer if their loan is limited to that one bank. Otherwise, if Bank B has a lower rate, the buyer would have to pay for a brand new appraisal at Bank B in order to take advantage of the lower rate.

Other restrictions occur when any subsequent change of circumstance happens during escrow that results in a fee. An example would be the short sale lender has taken over a week to sign a document required for closing escrow, thereby delaying the closing, necessitating the buyer’s ratelock be extended to protect the interest rate. This fee would be charged to the buyer and would be a “change of circumstance.” This can generally mean a new disclosure is required and varying amounts of time must elapse (depending on the rule and where you are in the transaction) before loan docs can be drawn.

The best thing to remember is that these timelines cannot be argued away (unless you are making a plea to Congress that they should go away), but are a part of our landscape and they are defined and statutory. Most experienced loan originators will make every effort to foresee the unexpected, but there will always be something unexpected that arises. One way that we “expect the unexpected” is to over-disclose a bit on the Good Faith Estimate. This gives a little bit of monetary cushion should a random fee come up that was unexpected. However over disclosing fees too much makes one look more expensive than competitors, so there is a limit to a lender’s ability here.

3. BANK UNDERWRITERS ARE NOT QUESTIONING “YOU”

Underwriters are looking at so much these days and because of the volume of documentation in each file, there are more items in each file to scrutinize and therefore, more questions will arise. What a buyer should not do is to take these questions personally.

Take the following example: a buyer has provided a “bank statement” that is really just an internet printout of the transaction history. The printout doesn’t have the borrower’s name or address on it. It does however contain the last 4 digits of the account number. The underwriter lists as a condition on the loan approval that “Borrower must provide actual bank statement for the account ending -4145,” essentially meaning that we need to prove that the account belongs to the borrower. The borrower insists that the account is his. The borrower points to the fact that he is only putting down $40,000 and there is over $200,000 in the account and that therefore, there should be no problem. The borrower is angry that the underwriter doesn’t trust or believe him and wants me to pull the loan and send it elsewhere.

Here is what a buyer should remember: First of all, chances are, most underwriter’s will be requiring the same thing. Secondly, the underwriter is not thinking about who the buyer is or whether the borrower is trustworthy. In fact, the buyer really doesn’t play a part in the underwriter’s analysis at all. The primary goal of the underwriter is to ensure the loan complies with the investor guidelines that have been determined and dictated (and will eventually be audited) by the Wall Street investors that created the loan program. The underwriter looks at each piece of required documentation and asks himself or herself: “Is there any way that an auditor will look at this paystub and be able to calculate the income any other way that would render this approval invalid?” Or “Is there any way that an auditor can look at this bank statement and question whether this is truly the borrower’s money?” If the underwriter can answer those questions satisfactorily, then the documentation is satisfactory.

Once a borrower can get past the feeling that they are being picked on and can recognize that it is really the underwriter trying to protect themselves (and their jobs) from a costly forced “loan buyback,” it will eliminate a lot of the anxiety and anger associated with lending. It will never eliminate all of the frustration, and that is where your expectations just need to be managed. A loan in 2011 is much different that a loan was in 2006, or even 2009. But with rates that continue to be near the all-time lows we have ever seen, and home prices that are quite a bit lower than they were at their peak in 2006, it does make it worthwhile to play the game, jump through the bank’s hoops and close escrow on your new home.

THINGS ARE IMPROVING

All this being said, we are starting to see some expansion of loan programs and loan products for the first time in many years. The biggest changes are happening in the “jumbo loan” market. From 2006 through the end of 2010, we saw most true jumbo loans, also called non-conforming loans, come with interest rates in the high 6%’s to high 7%’s for a 30 year fixed. Now, we are seeing them in the mid to higher 5%’s and 3, 5, or 7 year ARM’s (“Adjustable Rate Mortgages”) in the mid 4%’s. The down payment restrictions are being relaxed as housing values stabilize, as well. Where we were seeing 25% minimum down payments have now been relaxed to 20% and even in a few cases, down payments of only 10% for loan amounts up to $950,000.

We are seeing expansion in “alternative income documentation” to help borrowers who may not be able to prove income on paper in the traditionally required way. These are available when the borrower has a significant amount of assets in his or her name.

We also are seeing some improving guidelines for condos where down payment requirements have been a bit relaxed there, down to as little as 5% down for loans up to $417,000.

FHA continues to be a good option for borrowers with family gift money or where a family co-signer is necessary, or where they otherwise need a bit more flexibility in underwriting standards.

But lest the more cynical readers think banks are going back onto the same track they were several years ago in allowing crazy loans, there are some things that are vastly different now than they were then: Borrowers are still having to prove a lot. They still must prove their income is sufficient and stable. They must still have “skin in the game,” meaning they are still required to have a down payment of a certain amount, at least 3.5% for FHA. And in the case of the “alternative income documentation,” in lieu of proving the borrower’s income, the borrower must instead show that he or she has such a large amount of assets that the income calculation, or lack or one, is outweighed by the borrower’s ability to pay the loan off entirely.

LOOKING TO THE FUTURE

Looking forward, I believe we will see continued flexibility of the loan programs to a point. I don’t believe we will ever see the “come one come all” lending from a few years ago and I don’t think we should ever see that again. But a healthy, responsible, and reasonable array of loan programs that allow for qualified buyers to buy and sell homes will help to further stabilize home prices, which will be the start of an improved financial outlook for all.

Please feel free to contact Matt directly:

Matt Young
MDC Financial Service Group
(619) 325-4101
matt@mdcgroup.net
www.mattyoungloans.com