TV Mini-Series: “The Borrowers” (Episode 1)
FADE IN:
♪ Ring Ring.
OMC: “Hello, this is Mike from Ocean Mortgage Capital – How can I help?”
CLIENT: “Hi – My Friend would like to take $50,000 of equity out of her home to buy a business. Can you tell us what her home is worth?”
OMC: “Well, we can help to arrange a cash-out refinance of her home, but she should really speak with a realtor or appraiser about valuing her house. Her realtor should have access to some sales comparables, and she could also check Trulia.com or Zillow.com to get a preliminary indication of value.”
CLIENT: “Thank you – I’ll tell her.”
OMC: “Okay – and if she concludes that the value would support her loan request, then I would be happy to pre-qualify her. I would need to ask her about her income to confirm she is comfortably able to make the required mortgage payments.”
CLIENT: “So then I should tell you that her husband lost his job recently, but he had been working with a good company for at least 15 years.”
OMC: “Well, her husband’s prior employment experience should help him with his interviews and support his job search. Hopefully he will land something soon. Is your friend presently employed to help support their mortgage request?”
CLIENT: “No”.
OMC: “Not only does your friend and/or her husband need to show they presently have ‘the ability to repay’ from their earnings, but they will also need to show that their income is likely to continue for the next three years.”
Here’s the Point: Instead of setting yourself up to default on a mortgage, make sure your income comfortably supports your ability to make your monthly loan payments and other obligations.
IDEA: Let’s Hide a Few Assets!
Very Bad Idea.
A mortgage broker will help compile your mortgage application paperwork so that:
- your financial condition is accurately depicted,
- the lender will be able to more easily and efficiently review your file, and
- you are portrayed in the best possible light.
The whole idea is to present a thorough, well-organized package to expedite a sound credit underwriting decision for your benefit.
A good broker should make it so easy for the underwriter, that practically all of their work will be completed for them in advance – which they will very much appreciate. This includes identifying any and all risks, and the corresponding mitigants that will, ideally, allow the underwriter to quickly approve your loan request.
An incomplete, disheveled submission not only reflects poorly on the broker (who should be keenly focused on their reputation), but it will underscore the fact that you are just not ready to obtain a mortgage.
The absolute worst thing is to omit critical information from the submission. Sometimes a borrower will not disclose certain assets they own – thinking that the additional equity or liquidity are not required.
“My reported net worth is sufficient without having to disclose my other rental properties”
Lenders run ownership reports designed to uncover everything. If you sign a loan application that is obviously missing material assets, it will be an uphill battle once the error is discovered. Inadvertent omission is one thing, but intentional omission is likely to be perceived as fraud by the lender.
Here’s the Point: Asking your mortgage broker to hide something from the lender is tantamount to fraud, and there is no place for that in any industry.
Brokers Are Back
The Mortgage Bankers Association reported that retail banks (Wells Fargo, Bank of America) held 75% of the U.S. mortgage market before the Housing Market Crash of 2007. This ratio has now reduced to 50%, after the tightening of regulations from the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010. The other 50% of mortgages are extended by “nonbanks”, which are mortgage lenders who do not take federally insured deposits from consumers to make loans.
Like retail banks, some nonbanks lend directly to the public (Quicken Loans, Rocket Mortgage). But nonbank lenders also include “wholesale lenders”. Wholesale lenders offer the most competitive interest rates because they use mortgage brokers to originate loans (and therefore do not have the corresponding overhead costs).
United Wholesale Mortgage (UWM) is the largest U.S. wholesale lender, closing $22.9 billion of mortgages in 2016. UWM reports that mortgage brokers handled 35% of all U.S. residential mortgage closings in 2005. After the housing crisis, this ratio bottomed at 10%.
Mortgage broker loan originations are now back up to 14%, with UWM projecting an increase to at least 20% by 2020. This market share growth is supported by what the public is embracing again, which is that only mortgage brokers:
(i) help consumers shop among many well-developed capital sources for the best mortgage rates and fees
(ii) have a multitude of mortgage products from which to choose (far more than any one lender), and
(iii) do all the consumers’ legwork and negotiate for the fastest loan execution.
Here’s the Point: Consumers are taking notice that only mortgage brokers shop the best mortgage lenders in the nation – which means a better interest rate and a faster closing.
Time To Move On
When searching for a mortgage, how many times have you given your lender or broker a chance to overcome a miscue – or allowed them to redeem themselves by providing you with better service? You believed they were genuinely trying to help you. So – you decided to give them the benefit of the doubt once, maybe twice… but then you realized you should have trusted your instincts and found someone else right off the bat.
Do you stay the course at this stage? The next time you don’t see eye-to-eye, or you are not receiving the kind of attention you expect and deserve, save time by being upfront and honest with them!
Imagine applying for a mortgage in-person, and being given a detailed list of exactly what would be required for the underwriter to make their decision. You gathered and provided all of the items on the list, and were told that no further information would be needed – and that a decision would be forthcoming shortly. A week later, and without explanation, they send you a new list with 10 other items they would need to proceed (all of which were entirely new items with little connection to what you had already provided).
As seemingly crazy as the above example sounds, unfortunately in the mortgage industry this sort of thing can happen all the time. But it is the way in which it is communicated to you that matters the most – which boils down to the basics: experience and customer service.
Here’s the Point: Save time by trusting your judgement when you think the service you are receiving could be better.
Will You Trust Me?
Isn’t that really the key question we are asking our clients when we meet them for the first time? Yet most of us are, appropriately, not so candid with our word selection. We would all acknowledge the importance of that initial greeting: the eye contact, the handshake, and the opening dialogue – all of which could be very different depending on our instincts and sense of the other person.
We get better at this with experience, or even perhaps with age. The question is whether we are consistent, or if we sometimes lose a little focus and leave an unintended impression.
Don’t forget how essential it is for your client to interview you. If you are a mortgage broker, lender, accountant or financial consultant, your client prospect needs to decide whether they can trust you with highly confidential information – i.e., their tax returns, social security number, bank statements, pay-stubs, divorce papers, bankruptcy documents or all of the above. If you make one odd gesture or leave them with a tiny bit of uncertainty, they are not likely to call you back – nor should they.
But if you are a borrower or investor looking for a trusted advisor, it’s a two-way street. Your prospective advisor is interviewing you for the same purpose. Leaving an impression that you have not been entirely forthright may require you to settle for a less professional or inexperienced advisor.
You will know if an acceptable level of mutual trust has been gained.
Here’s the Point: Trust must be earned, not expected – and it won’t be immediately or fully granted, regardless of your reputation.
Immigrant Lending: An Odd Discussion With A Banker
“Mike, I’d like to refer you a typical immigrant client who doesn’t have a social security number and runs a ‘cash business’ – and I think you know what I mean”.
“No, actually, I don’t know what you mean. Does their business generate a lot of cash earnings that they do not report to the IRS?”
“Well, I didn’t say that – but okay”.
“Sorry, I can’t help you – I don’t risk my reputation by recommending that my capital sources conduct business with someone who illegally evades taxes. Moreover, I think it’s offensive to imply that immigrants typically operate cash businesses to evade taxes”.
“Well then what exactly do mortgage brokers do?”
Before quickly ending my conversation with the banker (for obvious reasons), I indicated that I would be happy to work with self-employed people who legally minimize their taxes with legitimate expense deductions. Also, I would be happy to source mortgages for those who have not yet become U.S. citizens, do not have U.S. permanent residency, or even have not yet qualified for a social security number.
Surprised?!
As long as a “foreign national” or non-U.S. citizen can evidence an adequate two-year foreign or domestic credit history, there are capital sources who will gladly underwrite their mortgage. In fact, it is a preferred business platform because statistics prove that these borrowers work hard to repay their debts – and tend to have solid liquidity and reserves. One key issue is that all required documents written in a foreign language need professional translation.
Here’s the Point: Not having a social security number or green card doesn’t mean you can’t qualify for a mortgage – but you must be properly reporting your income.
Since When Do Builders Dictate Your Loan Terms?!
Do you really want to build your own house? The planning, budgeting, change orders, cost overruns, time commitment and anxiety… but, admittedly, it still may be the most economical way to own a home.
Then there are ramifications behind financing either the construction of a to-be-built home, or the acquisition of a home nearing completion. If you own the land, then you would need a construction loan – and your land investment would likely act as the equity or down payment for your lender. Construction loan draws would reimburse the builder as the home reaches certain levels of completion. Once completed, the construction loan would convert to a standard mortgage.
If you are buying a speculative or partially completed home, then standard purchase mortgage guidelines should apply after you sign the builder’s purchase contract. Once the builder completes your home, your mortgage lender provides you acquisition financing (loan closing would coincide with receipt of the certificate of occupancy).
In either case, builders also hope to profit from your loan. They do this by offering attractive financing incentives, such as covering a portion of your loan closing costs if you use one of their affiliate or approved lenders. But be careful, because when they say: “We will cover closing costs if you use one of our approved lenders”. Not only will your interest rate likely be higher, this really means: “We will not provide any closing cost credits unless you use our affiliate lender” (thereby essentially “tying” you to their loan source).
Here’s the Point: When financing a property purchase from a builder, always compare the loan terms offered by the builder’s “approved” lender to those from other unaffiliated lending sources.
Would You Lend Money to Donald or Hillary?
You may have been conscientiously deliberating which candidate to vote for over the past several months. Your selection might become clearer if you contemplate this title question – as if you were a lender deciding whether to extend them a loan! Not voting is always an option, but not likely a decision that would sit well with you (even though reports suggest this option is seriously being considered by many voters).
When a client applies for a mortgage, the assignment is either accepted or declined – with concrete rationale behind either decision. But a lender electing to entirely avoid making the decision to either lend or not – may be compared to not voting. Imagine a lender choosing never to return your phone call to give you their credit decision. In this analogy, not voting (or not providing a credit decision) doesn’t help either candidate (or borrower) – nor would it likely help yourself.
There is no excuse for lender/voter unresponsiveness. Borrowers/candidates deserve prompt, reliable feedback which, from a lender’s perspective, is generally based on the following 5 “C’s” of credit:
- Credit History (Repayment History & Credit Score)
- Capacity (Ability to Repay & Earnings Stability)
- Capital (Down Payment & Liquidity)
- Collateral (Property Type & Value)
- Conditions (Loan Terms & Purpose)
The first one above was formerly entitled “Character” – which arguably is still the most important factor. But by telling a client their loan was declined because of “Character” (or lack thereof), the decision could be judged as discriminatory.
Here’s the Point: Don your lender’s cap and consider the key factors that would be used before advancing money to either candidate – and focus particularly on “character” before making your decision.
Student Loans Matter
The Wall Street Journal recently reported that 43% of the 22 million people with federal and private student debt are not
making their monthly loan payments. This includes those who are in default (more than twelve months late), delinquent (more than one month late), or received permission to postpone their payment due to economic hardship. It’s no wonder lenders have tightened their related underwriting requirements!
Some say the consequences of simply assessing a higher default rate of interest is not harsh enough. Others say student borrowers are more apathetic now because they are in the same boat with 10 million others – and the problem is just too large to penalize everyone.
A lender cannot generally repossess a borrower’s car or other assets in the event of a student loan default. But to recoup losses, the government is now garnishing wages and withholding tax refunds once students commence a job after graduation.
When seeking mortgage pre-qualification, applicants have not been required to include deferred student loan payments in their debt-to-income ratio calculation – provided the deferral was for more than 12 months beyond the proposed mortgage closing date. Now, FHA lenders will generally use the known monthly payment or 2% of the student loan balance – versus conventional lenders using the greater of the actual monthly payment or 1%. Assuming a $37,000 deferred loan (the average U.S. student loan balance today), suddenly having to include a 1% or $370 monthly projected payment would certainly have an adverse effect on a mortgage qualification ratio.
Here’s the Point: Even when your student loan is deferred, lenders are now likely to take the projected monthly payments into consideration when qualifying you for a mortgage.
Foreclosure? No Problem
It is surprising how many people have zero remorse after a foreclosure. There are those who think nothing of going through the process again to advance their self-interest, with little regard for either their ability to repay or their reputation with a lender. For this reason, lenders do not zealously arrange mortgages for post-foreclosure loan applicants without a thorough screening process.
It doesn’t take long to deduce moral character and integrity. If it is evident the “incident” will never happen again, there are reputable private lenders who are willing to provide a new mortgage – even one day after the foreclosure is finalized (at interest rates that are reasonable under the circumstances).
The Federal National Mortgage Association (FNMA), the ultimate buyer of a conventional loan advanced by a mortgage lender, requires borrowers to wait seven years after title has transferred in a foreclosure proceeding. However, the Federal Housing Administration (FHA) requires that just 3 years elapse before they insure the mortgage advanced by an FHA lender – whereas the Department of Veterans Affairs (VA) needs only 2 years to elapse before guaranteeing the mortgage of a VA lender.
As long as the Certificate of Title is produced evidencing that the 3-year anniversary requirement has been met, a post-foreclosure borrower may obtain an FHA mortgage. And the loan application can be made in advance so that borrowers are ready and able to close on a timely basis, regardless of how the foreclosure is reported on a credit report by the credit bureaus.
Here’s the Point: After a foreclosure, an FHA mortgage is the most common type of conventional financing used because only 3 years need to elapse from the Certificate of Title transfer date.
