More borrowers tap mortgages of last resort

More and more mortgage seekers spurned by banks and other traditional lenders are turning to high-cost loans known as "hard-money mortgages." Once thought of as a last resort for strapped borrowers, these products — also called "private-money mortgages" — have different lending standards than traditional mortgages and carry higher interest rates and fees.

These days, however, they are attracting a larger, more-affluent group of consumers.

Seattle Funding Group, a Bellevue firm that is one of the largest hard-money lenders on the West Coast, has installed a new phone system in part to handle the calls flooding in from consumers desperate to fund new-home purchases and cash-out refinancings.

"Now that subprime has basically disappeared, the hard-money lenders are pretty much the only source of capital for many people," says Daniel Yeh, a mortgage-industry analyst at the Scotsman Guide, a trade publication based in Bothell.

Hard-money lenders range from individuals and small groups of investors to small firms that get their capital from individual investors who pool their cash in search of higher returns.Here are a few things to know about hard-money mortgages:

• Hard-money lenders protect themselves by requiring borrowers to have substantial equity in their collateral — either a home, investment property or a business — of 30 percent or more.

• Interest rates are generally in the low teens, and fees can be as much as 5 percent of the loan's value.

By comparison, the rates on traditional 30-year fixed-rate mortgages now average around 6 percent, and fees generally top out at 3 percent.

• Though hard-money mortgages can stretch to 30 years, borrowers tend to use them as a short-term tool. Most are paid off within two or three years as borrowers find lower-cost, traditional mortgages to replace the hard-money loan.

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source: seattletimes.nwsource.com

Rules tightened on credit reports

Q: I'm uneasy about providing my Social Security number on a rental application. Should I worry about sharing that information?

A: You are right to worry about providing personal credit information.

Last month the Federal Trade Commission reported that 8.3 million U.S. adults had been victims of identity theft in 2005.

In response to consumer concerns, the federal government has focused on the use and abuse of credit-report information.

The Federal Fair Credit Reporting Act regulates who may obtain your information, how it may be used, and what penalties can be levied against those who flout the law.

The site can be accessed at www.ftc.gov.

Several sections apply to landlords, including the circumstances under which credit information may be collected.

According to the FTC site, credit reports can be requested only for extending credit; reviewing or collecting a debt; applying for employment; underwriting insurance; or in connection with some other legitimate business transaction.

A rental application is a legitimate business purpose, and landlords are allowed under the law to request a credit report.

Do you have to provide your Social Security number on the rental application? No.

But to run the credit request, the applicant's full name, current address and Social Security number must be provided to ensure the validity of the report.

On the plus side, new laws have turned the tables on those requesting credit information, requiring landlords to provide their own professional and personal data before dashing off and running credit reports on others.

As a result, landlords calling for that credit report are held in closer scrutiny than ever before.

While all landlords have to belong to some sort of apartment owners' association or screening service to obtain credit reports, not all services interpret or comply with the FTC rules in the same way.

What happens when a prospective tenant fills out a rental application?

Generally, when a call is made by the landlord or his or her representative to the credit-screening office, the operator asks for the specific information that identifies the account holder and name of the individual calling.

If the numbers or information doesn't match up, the request may be rejected.

The only drawback?

Not all landlords belong to a credit service that requires them to submit proper credit-use paperwork.

How can you tell if that's the case? Simply ask.

Whoever requests the credit report should know the answer.

Finally, always ask for a copy of the processed credit report.

Not only is it free, but it provides proof it was actually run and includes the name of the person to contact if you have any questions about the report.

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source: seattletimes.nwsource.com

Mortgage broker fees in need of reform

The Mortgage Reform and Anti-Predatory Lending Act of 2007 (HR 3915) is winding its way through Congress. According to the bill's sponsor, Rep. Barney Frank, D-Mass, one of its important objectives is to prevent mortgage brokers from steering borrowers into higher-cost loans.

Brokers steer borrowers into high-cost loans so they can collect a rebate from the lender. Lenders pay rebates on high-rate loans, and charge points on low-rate loans. Points are upfront payments to — and rebates are upfront payments from — the lender. A rebate retained by the broker is called a "yield spread premium," or YSP.

On Nov. 7, wholesale lenders quoted the following prices to brokers for a 30-year fixed-rate mortgage: 6 percent at zero points, 5.75 percent at 1.25 points, 6.25 percent at 1 point rebate, and 6.5 percent at 2 points rebate.

This means that the lender wants to be paid 1.25 percent of the loan amount for 5.75 percent loans, and will pay 1 percent or 2 percent rebates for 6.25 percent and 6.5 percent loans, respectively.

Brokers who operate with full disclosure, including Upfront Mortgage Brokers, tell the borrower their fee, and allow the borrower to select the rate/point combination they prefer.

If the broker's fee is 1 point, for example, the borrower who wants the 5.75 percent loan will pay 2.25 points — 1.25 to the lender and 1 to the broker. If the borrower selects the 6.25 percent loan, the broker's fee will be covered by the lender rebate.

Indeed, a borrower strapped for cash might select the 6.5 percent, or go even higher to get a rebate large enough to cover all miscellaneous lender and third-party charges.

"No-cost" loans are created using the lender rebates offered on high-rate loans. Legislators don't want to enact any rules that will deprive borrowers of this valuable option.

Most brokers don't practice full disclosure because they can make more money by pricing opportunistically.

Most often, they quote the highest rate they think the borrower will accept, and pocket the rebate, usually without the borrower's knowledge. The borrower may discover it after the fact in closing documents, if they know where to look.

The challenge to legislators is to eliminate opportunistic pricing without eliminating rebates. The obvious remedy appears to be a disclosure requirement — mandate that brokers disclose their fees upfront, as Upfront Mortgages Brokers now do voluntarily.

For a disclosure requirement to be useful, however, borrowers need information about broker fees at or before their first contact with the broker, which is earlier than any enforceable rule can provide it.

Incorporating the fee in the Good Faith Estimate of Settlement (GFE), which is the rule in California, is too late because the borrower has already applied for a loan.

Furthermore, even if early disclosure were feasible, borrowers who don't understand the process would not be helped.

Fortunately, there is a better rule. It is simple, easily enforceable and would help the naive as well as the informed borrower. The rule is that lenders must credit all rebates to borrowers. The borrowers would then have to authorize the payment to brokers.

The broker in my previous example, who would like to pocket a 2 point YSP on a 6.5 percent loan, could no longer do it behind the borrower's back.

Loan officers working for lenders also price opportunistically. If they are ignored while brokers are constrained, brokers will move en masse to net branches, a type of entity designed to convert brokers into loan-officer employees, while allowing them to operate much as before.

Assume a lender has the same cost of funds as the broker above. If they try to make 2 points, their price on the 6.5 percent loan would be zero, same as the broker, except that the lender has no YSP to report — its markup is it own business and need not be reported to anyone.

Neither a YSP disclosure rule nor the YSP credit rule I proposed above would apply to them.

However, lenders are constrained in their markups because, while some borrowers will pay the high markup, others will shop around and find a better deal. So what many lenders do is price conservatively but give their loan officers the discretion to charge more than the posted prices if they can.

These opportunistic price increments are called "overages," and like YSPs the borrower doesn't know about them. Curbing YSPs without curbing overages would be a mistake.

Overages could be eliminated very easily by the following rule: Loan-officer employees of lenders must charge the prices posted by the lender.

Some lenders don't allow overages, and some brokers disclose their fees upfront. Both groups are a minority, because the adoption of consumer-friendly practices is costly when competitors are not obliged to follow suit.

Good legislation converts the best practices of the industry into rules for all. Next week I will examine whether the current version of HR 3915 does this for YSP abuse.

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source: seattletimes.nwsource.com

Tests subprime borrowers must pass for an interest-rate freeze

It may be the only test you flunk if you score too high: It's called the "FICO Test" and it is a key element of the sometimes arcane new guidelines governing which homeowners qualify for "fast track" interest-rate freezes on their subprime mortgages, and those who don't.

The rate freeze and loan-modification program, announced Dec. 6 at the White House, is a voluntary, nongovernmental effort by major lenders, mortgage servicers and bond investors to provide alternatives to foreclosure for homeowners facing unaffordable payment resets during the coming two years.

Of the estimated 1.8 million subprime borrowers facing payment jumps, the plan is expected to help 1.2 million of them into either an expedited rate freeze, a refinancing or a modification that makes their current loans more affordable. The rate-freeze aspect of the program has attracted much of the media attention, but the precise details of how it works and who is eligible have been less widely publicized.

Here is a quick overview of the tests that subprime borrowers will need to pass to qualify for an interest-rate freeze, generally for five years. Tops on the list is the FICO test. In this particular exercise, scoring high is bad. Scoring low keeps you in the game. If your FICO credit score was under 660 when you applied for your loan, and — here's the kicker — it hasn't improved by more than 10 percent in the meantime, you pass the test.

In other words, if you've got a FICO of 675, which in a traditional mortgage-application context should qualify you for reasonably good terms, forget about a fast-track rate freeze. Your credit is too good, and you flunk. On the other hand, if you've got a FICO score of 610 or 620 — subprime credit territory by most lenders' standards — then you pass.

The idea, according to Tom Deutsch, deputy executive director of the American Securitization Forum and one of the principal drafters of the plan, is to weed out borrowers who may be creditworthy enough to successfully pursue a refinancing, i.e., those with FICOs above 660.

The fast-track rate freeze plan, Deutsch said, is aimed at pinpointing borrowers whose credit probably won't qualify them for a refinancing, and who are also unlikely to afford future payments on their current mortgages.

Now for the second test: If you want an expedited rate freeze on your mortgage, you must be "current" on your loan payments. That sounds fairly clear — but "current" in this context does not mean you always pay on time. Rather, it means that you're not more than 30 days behind right now, and you haven't been more than 60 days late anytime during the past 12 months.

An alternative, and more generous, standard used in the program allows homeowners to be no more than 60 days late at the moment, and no more than 90 days late during the past year. That may not be everybody's definition of "current," but it works for a fast-track rate freeze.

Next comes the "LTV Test." LTV stands for loan-to-value ratio — essentially a measure of how much equity you've got or the size of the down payment you made.

Here again, doing "better" gets you busted. To succeed on the LTV test, you should have minimal equity in the house — under 3 percent.

If you have more equity than that, goes the reasoning, you are less likely to default on the loan, and you're more likely to qualify for a refinancing. So you're out.

There are two final tests, both relatively straightforward: You have to occupy the house as your principal residence; and your monthly payment must be scheduled to increase by more than 10 percent after the scheduled reset.

Assuming you pass these tests, and your mortgage servicer thinks there is a "reasonably foreseeable" prospect that you would default on your loan without a rate freeze, you are in.

The rate freeze you receive, by the way, won't necessarily be limited to just five years. It all depends on your mortgage servicer's evaluation of your financial situation.

But what if you're part of the expected majority of subprime borrowers who flunk one or more of the tests to get a fast-track rate freeze? There's good news: You're still in the game. You may qualify for some other form of customized loan modification — a payment restructuring plan, a partial forgiveness of past arrears, a postponement of part of your debt or, in rare cases, even a rate reduction.

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source: seattletimes.nwsource.com

Seven ways to sell faster and for a higher price

With home sales down sharply across much of Western Washington, anxious sellers are wondering what they can do to land a full-price sale. Generally the tips they get are obvious: declutter and clean up the home and don't overprice it.

But now Redfin, a Seattle-based online real-estate brokerage, has thrown some research at the issue.

The result is seven recommendations its CEO, Glenn Kelman, says help make homes sell faster for more money.

"Starting in the fall we were struggling to sell our own listings just because the market has changed," Kelman says. "Since we wanted to develop a comprehensive way to improve our results, we hit the books."

Besides consulting academic research, Kelman dived into proprietary Multiple Listing Service numbers and also profiled buyers' interests by analyzing their visits to Redfin's site.

Redfin's recommendations:

• When thinking price, think Internet. Some 84 percent of buyers use the Internet to search for homes, according to a new study by the National Association of Realtors. The Web sites they troll customarily allow them to search by price in $25,000 or $50,000 increments. That can work for or against sellers.

For example a home listed for $351,000 likely will be seen by many fewer lookers than if it were priced at $349,950.

That's because the higher number will be excluded by buyers who set $350,000 as their maximum.

A Redfin analysis of its own traffic in the San Francisco and Seattle markets shows that moving from one price band down to the next can increase Web traffic 7 percent.

• Price conservatively. Kelman says sellers who underprice by $5,000 risk losing up to that amount.

But overpricing can cost more. He cites a 2002 study of 3,490 California home sales.

Those that never had to reduce their asking price sold for 97 percent of it (any further discounts came in negotiation with a seller).

Those that had to hang the "price reduced" sign out front to land a buyer ended up selling for 88 percent of the initial price.

• Make Friday go-to-market day. Kelman says a home's listing debut is by far its most important marketing event. In analyzing its own Web site traffic for 119,079 listings in seven metropolitan areas, Redfin found that homes that debuted on Friday had 7.7 percent more Web visitors in their first seven days than those that debut on the slowest day, Thursday.

• Stay engaged. Redfin cites three Midwest-area studies showing that sellers who remain actively involved throughout the process get better results.

Kelman says that can mean spending money to improve the home's condition before listing it, asking the real-estate agent to document a marketing plan before agreeing to a fee, and remaining actively involved in pricing and negotiations.

• Blanket the Web. Any house listed by a Realtor will show up on a couple of Realtor-related Web sites.

But Kelman says an online presence shouldn't end there. It studied 121 of its own listings in four big cities, including Seattle, and discovered that posting them additionally on Craigslist generated nearly seven more visits in two months. In Washington, D.C., Redfin homes did even better: They got 12 visits.

• Don't move too soon. Agents say it's more challenging to sell a vacant home at full price.

Redfin backs this up, citing a study of 3,490 California homes sold empty. The study found they were 9.5 percent more likely to undergo a price cut. The possible reason: Buyers thought the owners were anxious to sell.

• Watch neighborhood foreclosures. A report last month from the Center for Responsible Lending estimates that a foreclosure costs neighboring homeowners $5,000 when listing their property. Thus, Kelman suggests owners wait to list their homes until nearby foreclosures are off the market.

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source: seattletimes.nwsource.com