Sunday, July 26, 2009

Homebuyers – You’re Pre-Approved by Payment, not Purchase Price!

Lenders do a terrible job of educating homebuyers that they’re actually approved for a monthly payment, not a purchase price. Why don’t pre-approval letters make this clear?


July 26, 2009 -- Troy, MI – A homebuyer follows instructions and jumps through the hoops (which are many today) necessary to get a pre-approval letter before looking at homes for sale. They find one they like, at a price their pre-approval letter says they’re good for, make an offer, negotiate back and forth with the seller and finally agree on a price. They’re elated.

Then the rug gets pulled out from under them and they’re told they don’t qualify for this house and all their efforts were in vain.

What’s even scarier is that often the homebuyer doesn’t find out they don’t qualify for the property they got their hopes up for, until weeks into the formal approval process, sometimes only days before the target closing date.

Why does this happen?

The lender they were dealing with didn’t do a very good job of explaining how the mortgage industry actually approves homebuyers. Even if they did, it was just one of the numerous topics discussed and the homebuyer forgot about it. Then, the lender didn’t double-check the pre-approval requirements for the specific property.

Because of issues like this, it’s extremely important that homebuyers understand the following:


Let’s study the pre-approval process to understand why.

A homebuyer only makes so much money per month, which means they can only afford to spend a portion of that income on a monthly housing payment. The rest of their income goes towards various income taxes, car payments, credit card payments, student loans, etc. On top of that, unless the homebuyer wants to freeze in the dark during winter, they have to pay utilities to keep the heat & lights on (if you’re outside the snowbelt, think air-conditioning).

If you think about this, it makes sense.

Now, let’s look at an example homebuyer:

Annual Income: $75,000
Monthly Debt Payments: $1,000

How much of a housing payment would this person qualify for?

First, let’s break the annual income down to a monthly basis: $75,000 / 12 = $6,250/month income.

FNMA/FHLMC typically allows 40% of one’s gross monthly income to go towards monthly debt, including a housing payment. The 40% number is called a Debt Ratio. The other 60% of monthly income is allocated for income taxes, utilities, food, clothing, car insurance & gas and other necessities of life.

So, to calculate the maximum amount of monthly debt allowed we calculate 40% of the monthly income:

$6,250 x 40% = $2,500.

But, our example homebuyer already has $1,000 per month in existing debt. That money then, cannot be allocated towards a housing payment. So, we calculate what’s left:

$2500 minus current debt payments of $1,000 = $1,500 for a maximum housing payment

This is what our example homebuyer could afford. Now, they don’t have to spend that much of course. There are also other variables that could allow for a somewhat higher housing payment. For example, if the homebuyer put 20% down, the 40% debt ratio might be allowed to increase to 45% as the higher down payment compensates for the higher debt ratio.

Now that we know our example homebuyer’s maximum housing payment we’re done right? Wrong – houses are sold by price, not monthly payments. So now we have to convert the maximum housing payment to a purchase price.

Here we run into a problem. It’s actually the reason many pre-approval letters are misleading and homebuyers get unpleasant surprises.

The term “housing payment” is not the same thing as a mortgage payment. The mortgage industry considers a housing payment to include the following:

Mortgage payment
Monthly amount for property taxes
Monthly amount for home insurance
Monthly association fees

Property taxes are usually the biggest unknown when pre-approving a homebuyer for a home they haven’t identified yet. Depending on the state your in, property taxes can vary significantly for similarly priced homes. Let’s look at an example:

Loan amount: $200,000
Interest Rate: 5.250% (APR 5.891) no PMI
Home insurance: $900 annually

If we compare these two monthly housing payments to our maximum payment allowed of $1,500, you can see that our example homebuyer would not qualify for property #2 - even though it had the exact same sales price as property #1.

We’ll leave the reason as to why property taxes may vary on similarly priced properties to a future article. For now, just ask your local real estate expert.

How can a homebuyer address this problem? Simple, demand something in writing from the lender you get pre-approved by, that specifically states the maximum payment you’re qualified for. While they’re at it, they should also disclose the interest rate they pre-approved you at. Interest rates change daily and if it takes you a month or two to find a property, higher rates could affect your pre-approval purchase price just like property taxes.

Real estate agents also need to understand this issue to better assist their homebuyers. Agents should contact their homebuyer’s lender with the property taxes and any association fees to confirm the homebuyer does indeed qualify for the specific property, before writing an offer.

Understanding the process, putting specifics in writing and relying on true professionals can remove many of the unpleasant surprises in the pre-approval and home buying process.

Sunday, July 19, 2009

Witch Hunt or Consumer Protection? - 178 Loan Mod Companies Pursued by Government.

Loan Modification companies seem to be the latest mortgage industry group in the crosshairs of government officials.

-- DETROIT, MI – Over the last several weeks I’ve noticed a substantial increase in the number of loan modification companies being investigated by various government agencies.

All I can say is that it’s about time.

Now don’t misinterpret that statement - I believe that loan modifications may be part of a viable solution in getting our country out of the current housing crisis, although it’s too soon to determine their actual long-term effectiveness.

I also have nothing against loan modification companies in general nor the people that work at them. I’ve met or connected with many individuals that are intent on really helping people and do their best to do so.

Lastly, many homeowners do need some type of assistance as lenders don’t have their best interests in mind when they do loan modifications and many lenders draw the process out seemingly forever.

On the other hand, I’ve personally heard many stories from homeowners victimized by loan modification companies, have heard the same stories from mortgage associates and have read many more on the internet.

From Subprime to Loan Mods
I predicted over a year ago that loan modification companies would become the new subprime “churn & burn” debacle. This was triggered by my observations that many local subprime loan originators were flocking to do loan modifications. I even heard several stories of these originators approaching the same clients they’d put in subprime loans, with offers to now do loan modifications for them.

There really is no barrier of entry to do loan modifications. All you need is a phone and the ability to find clients. Finding clients is easy with so many homeowners struggling with their mortgage payment.

This should all sound familiar as much of it applied to the mortgage industry in general until recently, when state governments started requiring individual licensing of loan originators and the federal government created a national registration system.

When Michigan enacted its Loan Officer Registration Act, April 1, 2009, the state expected 10,000 to register based on past data. To date only 3141 have met the requirements of 24 hours of class time, passed a multiple choice test and background screening. How many of the unregistered do you think are now using their limited mortgage knowledge to do loan modifications?

Desperate People do Desperate Things
One would think that a homeowner, burned by a bad mortgage, would be a bit more cautious when considering a loan modification.

The number of loan mod companies popping up however, prove otherwise. It’s basic supply and demand – the numbers of these companies wouldn’t be expanding if there weren’t desperate homeowners to support them.

So, how do homeowners get burned by these companies? In no particular order:

  • Paying upfront fees for a modification never completed.
  • Being told they’ll get a principal balance reduction, when in reality it rarely happens.
  • Getting approved for a modification that raises their payment or insignificantly lowers it.
  • Following advice to not contact their lenders during the loan mod process, only to get foreclosed on.
  • Not being made fully aware of the possible credit damage, legal issues and tax consequences.

It’s all boils down to these companies over-promising and under-delivering.

What Took the Government So Long to Act?
If I saw this problem coming over a year ago, you’d think the smart people in our government would’ve saw it coming also.

In a recent informal poll of mortgage originators by “Think Big Work Small”, 81% responded that over 50% of those doing loan modifications are “rats”.

Unfortunately, just like with the mortgage meltdown and the banking crisis, the government only seems to act after the damage has already been done. Here’s a list of the agencies currently chasing loan mod companies:

  • Federal Trade Commission
  • United States Attorney’s Office for the Central District of California
  • Arizona Attorney General’s Office
  • California Department of Justice
  • California Department of Real Estate
  • State Bar of California
  • Colorado Attorney General’s Office
  • Idaho Attorney General’s Office
  • Illinois Attorney General’s Office
  • Iowa Department of Justice
  • Kansas Attorney General’s Office
  • Maine Attorney General’s Office
  • Maine Department of Professional and Financial Regulation, Bureau of Consumer Protection
  • Maryland Department of Labor, Licensing, and Regulation, Office of the Commissioner of Financial Regulation
  • Massachusetts Attorney General’s Office
  • Michigan Attorney General’s Office
  • Missouri Attorney General’s Office
  • New Jersey Attorney General’s Office
  • New Jersey Department of Banking and Insurance
  • New Mexico Attorney General’s Office, Consumer Protection Division
  • North Carolina Department of Justice
  • Ohio Attorney General’s Office
  • Oregon Department of Justice
  • Texas Attorney General’s Office
  • Washington Attorney General’s Office

Charges are being filed because of deceptive and/or false advertising (Section 5 of the FTC Act), charging upfront for services before rendered, unlicensed activities, mail fraud, attorney misconduct and several others.

The Obama administration really needs to step up and address this issue quickly. The crooks and sharks need to be forced out of the industry to protect homeowners. Honest professionals also need protection - from overzealous government agencies. It’d be a real shame if those that were actually doing good things for homeowners were put out of business, fined or jailed.

An easy to implement option would be to allow loan modifications to only be done by licensed mortgage companies and attorneys. The mechanisms are already in place across the country to control this.

A better solution would be for the administration to create a national solution instead of letting all 50 states come up with their individual plans.
For a list of the loan modification companies currently be investigated, click here and then click on “preview”.

Monday, July 13, 2009

Are Loan Modification Programs Working?

Many financial experts say they aren’t, quoting old data to support their statements. The latest data may force them to change their tune though.

DETROIT, MI – The Obama administration continues to push loan modifications as the best way to address the nation’s growing housing crisis. Many so called financial “experts’ though, disagree with this focus.

It’s interesting to note that the administration recently announced that due to disappointing numbers for its Home Affordable Refinance Plan (HARP), the program was being expanded to allow refinances to 125% of a homeowner’s property value, up from 105%. To be eligible for this program though, homeowners must be current on their mortgage and qualify with required FICO credit scores, income and assets.

The disappointing numbers for HARP are a sign that many homeowners don’t qualify for it because they’re either too far upside in their homes or they’re behind on their mortgage payments. This makes loan modifications their only option - hence the administration’s focus on loan mods.

So, what about all the naysayers against loan modifications?

Well, they all quote studies that seem to “support” their claims that modifications aren’t working due to the high number of homeowners that default on their loan modifications.

One of these studies was done by the Federal Reserve Bank of Boston, published July 6, 2009. The study had some valid points:

1. Lenders are reluctant to modify mortgages. Only 3% of seriously delinquent loans have had modifications.
2. Percentage-wise, lenders are modifying FNMA/FHLMC and mortgages held on their books the same.
3. 30% of delinquent loans become current with no intervention by the lender.
4. Most modifications result in an increased loan balance as back payments are rolled into the loan amount.
5. More and more modifications are being done and resulting in lower homeowner payments.
6. 26% of modified loans in the 4th quarter of 2008 resulted in lower payments.
7. Payment decreases before the 3rd quarter of 2008 ranged from 10-14%.
8. Payment decreases in the 4th quarter 2008 averaged 22%.
9. 30-45% of modified mortgages redefaulted within 6 months of a modification.

These are all interesting statistics. The financial “experts’ all seem to focus on the fact that 30-45% of modified mortgages redefault, while ignoring one important fact – only 26% of the loans modified resulted in a lower payment!

Why would a lender expect a homeowner that’s already defaulted on their current payment, to be able to afford that same payment or a higher one? Anyone citing this report’s redefault rate without taking that point into consideration should stop calling themselves an “expert”.

A more recent report (through 1st quarter of 2009) from the Comptroller of the Currency Administrator of National Banks, shows something a bit different:

1. A significant increase in the number of modifications made by servicers. Up 55% from last quarter. Payment plans decreased in favor of loan modifications.

2. Servicers implemented a higher percentage of mods that reduced monthly payments than in previous quarters.

3. Modifications with lower payments continued to show fewer delinquencies each month following modification than those that left payments unchanged or increased payments.

4. Modifications during the first quarter of 2009 resulted in lower monthly principal and interest payments on 54.1 percent of all modified loans

5. The percentage of modifications that reduced payments by 20 percent or more increased to 29.3 percent of all modifications made in the first quarter of 2009, up 19.2 percent from the previous quarter.

6. Modifications that increased monthly payments declined to 18.5 percent of all modifications during the quarter, down from 25 percent in the fourth quarter and 33.5 percent in the third quarter.

One very important statement from the report: “The number of modifications recorded in this report does not reflect actions taken under the Administration's "Making Home Affordable" program, which was announced in March and began to be implemented after this reporting period.”

As Obama’s plan is the most aggressive loan modification attempt to date, focusing on reducing homeowner payments to 31% of monthly income, the numbers should start turning even more positive.

Even without those numbers, statistics from the 1st quarter of 2009 show improvements in loan modification performance after previous quarters showed a trend to the negative:

What can we conclude from all this?

While it’s important to note that we’re far from out of the woods on the housing crisis and we don’t have enough recent data to really draw any long-term conclusions on the benefits of loan modifications – we do seem to be heading in the right direction.

For all the free-market advocates out there railing against bailing out upside homeowners – your arguments went out the window when the government bailed out the banks. If we can bailout upside down banks, how can we not bailout upside down homeowners?

For those who believe we have to lower mortgage balances to effectively modify mortgages, I disagree that we have to do so. It would be nice as I’m upside down in my own home, but I think it’s more important to lower house payments.

People buy cars all the time where as soon as you drive it off the dealer’s lot, you’re upside down in it. I don’t hear anyone asking for a bailout on their car loan. Why do they continue to pay on their upside down car? Because they need transportation and they can afford the payment.

Why are people losing their homes? Because they can’t afford the payments. Statistically, most people are emotionally tied to their homes. Most won’t do the logical thing and walk-away from their upside down home anymore than they would walk-away from their upside down car. Give them an affordable payment and even if they’re upside down, they won’t walk. Bring the payment down to their local rental rates and they won’t be able to live anywhere cheaper. Yes, their will be a small percentage that move in with relatives or move to a lower income area, but most will stay.

It seems the so called “experts” live in their own little worlds and seem to have their own agendas. Few actually report unbiased facts, instead preferring to only focus on what supports their positions while ignoring all other facts. Heaven forbid they actually take the time to digest & think through the statistics.

The media is just looking for sensational headlines to sell more advertising. Very little actual research seems to happen these days. What’s more, they all seem to regurgitate the same stories, propagating incorrect stories, fooling the public into believing them because of the repetition.

So be forewarned not to buy into what you read in the headlines or what so called experts tell you. Click on the links I’ve provided and read the material for yourselves to come to your own conclusions.

# # #
Drew Sygit writes and speaks about the mortgage & real estate industries. He holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor. He’s presented, spoken and/or written for HUD, Financial Planning Association, Financial Planners Association of Michigan, Michigan Association of CPA’s, Institute of Continuing Legal Education, Oakland Real Estate Investors Association, North Oakland County Board of Realtors and numerous industry publications. He also publishes his own blog: He can be reached at

Wednesday, July 1, 2009

125% Refi's Announced! The Government Finally Gets it

The government appears to be finally understanding how many Americans are upside down in their homes.

As I've been predicting for months, the FHFA just announced today that they will be allowing FNMA & FHLMC to refi underwater homeowners up to 125% of their property's value.

Previously the cap was at a joke amount of 105% LTV, resulting in President Obama's hyped Home Affordable & Stability Plan being way behind on the estimated number of homeowners it was meant to help.

Whether or not the government should be doing this is up for debate.

The argument against is all for letting the free market work its magic. Get the pain over now and let the economy recover.

Those for government intervention argue that the nation's housing market is "too big to fail". If the government bailed out the "fat cats" on Wall Street, then it should bail out ""Joe Six-Pack" also.

Since we've already started down this slippery slope, it would have been better if they would've done away with the appraisal requirement on refinances all together. A new appraisal hasn't been required on an FHA Streamline refi since 1984. Now with FNMA/FHLMC owned by the government, what's the difference? If it works for FHA, it'll work for FNMA/FHLMC.
Either way, this county's mortgage debt is backed by the government and if payments can be lowered, less homeowners will foreclose. People have to live somewhere.

As a side note, think about what doing away with appraisals on refiances would do to HVCC appraisal issues!

Now, keep in mind that this will take awhile to be implemented as a lot of software needs to be rewritten.
Also, the when the government approved the 105% LTV, FNMA & FHLMC both added pricing hits, which offset some of the gains of lower rates. I would hope they don't do the same this time.

Lastly, let's hope FNMA & FHLMC allow more lenders and brokers to do these loans. Right now, FHLMC forces homeowners to only go to their current lender. These lenders are pretty backed up, some taking 60-90 days or more to close these loans causing many homeowners to miss low rate opportunities.