A lone calculator’s saving graces

A lone calculator’s saving graces

Kenneth R. Harney

May 30, 2014

WASHINGTON – When you need a mortgage – whether to buy a house or refinance – what do you do? More than likely you jump online and check out competing quotes on sites that let you compare multiple offers, including interest rates, annual percentage rates (APRs) and monthly payments.

That’s smart. But there’s a problem. From the information presented, you often don’t know enough about how much competing lenders intend to charge you in loan fees – origination, underwriting, processing, and various others including so-called “garbage” fees – until you actually apply and see your good-faith estimate several days later.

These fees are supposed to be woven into the APR. But sometimes differences in APRs that appear trivial – a few decimal points – can significantly affect your payments over time. Worse yet, you usually don’t know how these fees will affect your total payouts over the period of time you’re likely to retain the loan.

So even though you think you’re astutely picking the right mortgage, you end up with one costing you thousands of dollars more.

But now there’s a way to squeeze more information out of what’s displayed online – before you hand over your Social Security number, property information and credit details to any lender. Best of all, it’s free and has no commercial ties to banks, investors or anybody else who’s got money to lend.

It’s a new loan-shopping utility, debuting this week, that uses algorithms to “see through” the typical rate, APR and monthly payment quotes online. It discloses the amounts of fees that are rolled into the quote package and what they mean to you in terms of total payouts over the time you expect to be in the house or keep the mortgage.

It’s called the Loantech “My Loan Cost Calculator” (www.loantech.com). Here’s how it works. Say you’re shopping for a $300,000 fixed-rate 30-year mortgage. You’ve got three competing offers from lenders online that look pretty good- Lender A is offering 4 percent, a monthly payment of $1,432 and an APR of 4.055 percent. Lender B is offering the same 4 percent rate and a $1,432 monthly payment with an APR of 4.191 percent. Lender C quotes 3.875 percent with a $1,411 monthly payment and an APR of 4.042 percent. These are actual quotes of lenders pulled off the widely used HSH.com mortgage shopping site May 22.

The payments and rates are identical from two of the three and the APRs don’t look all that far apart. How to choose which is best? To which lender should you submit your Social Security number, the address of the property, and other personal financial details?

It depends on your main objective. Are you trying to-

- Minimize total monthly payments over time?

- Minimize lender loan fees and charges?

- Maximize principal payoff?

- Minimize total interest and fees?

To produce answers, the calculator directs you to choose one of the above and pick a specific time period – say, 10 years, which is roughly in the range of the traditional average holding period for a mortgage of seven to eight years. Holding period is important because the shorter the time you keep your mortgage, the greater the impact of the fees that a lender charges you upfront.

Let’s say you want to pay the least in total interest and fees over the coming 10 years. According to the Loantech calculator, Lender B should definitely not be your choice. Even though its quoted interest rate and monthly payment are identical to Lender A, Lender B – a well-known national bank – plans to bludgeon you with $6,803 in loan-related fees compared with Lender A’s more consumer-friendly $1,983. During a 10-year period, you’d pay Lender B about $5,000 more in total interest and fees.

Of course, the key tipoff, even without the calculator, is the APR differential. But who knows how much of a ripoff in dollars is involved over a specific time period? That’s hidden.

David I. Ginsburg, who owns Loantech – an analytics firm best known for its audits of mortgage escrow accounts and adjustable-rate loan-payment calculation errors by banks – says he created the algorithms that run the calculator to remedy a major drawback in most online mortgage quotes- “Until now,” he said, “there was no easy way for loan shoppers” to pierce the APR curtain “to determine the amount of [loan] fees” lenders were tacking onto deals.

Now there is.

Condos becoming FHA no-lending zones

Condos becoming FHA no-lending zones

http://www.arcamax.com/homeandgarden/thenationshousing/bio Kenneth R. Harney

May 23, 2014

WASHINGTON – For young first-time buyers, people with modest down payment cash, or seniors who want to tap their equity using a reverse mortgage, it’s a growing problem- They cannot use Federal Housing Administration financing in condominiums.

It’s not that these buyers and unit owners can’t qualify on credit and income grounds for a loan personally – they often can. Instead, it’s because the entire condominium development is ineligible. As the result of policy changes at the federal level and decisions by condominium boards of directors, thousands of communities have essentially become prohibited lending zones for FHA in the past several years.

The agency has banned so-called “spot” loans and will only insure mortgages on units in condo projects that have passed a certification process that examines budgets, reserves, insurance coverage, percentage of renters compared with owners in the development and delinquencies on payment of condo fees.

FHA says that its revised procedures weed out fiscally weak, poorly managed developments and reduce taxpayer exposure to future losses. Condominium boards, on the other hand, argue that some of FHA’s evaluation criteria are too strict and that the certification process is bureaucratic and costs them money they’d prefer not to spend.

Since toughening its financing rules and requiring certification of entire projects four years ago, the number of condo developments approved for FHA financing has plunged by more than half. As of mid-month, it stood at just 10,020 communities, according to an FHA spokesman. Industry sources estimate the total number of condo projects nationwide is around 144,000.

FHA financing is important because of the special niches it fills. Among the three major federal lending intermediaries – Fannie Mae and Freddie Mac are the other two – FHA is the most flexible on credit issues. It is also lenient on debt ratios and allows down payments as small as 3.5 percent.

As a result, FHA for decades has been the go-to mortgage option for moderate-income purchasers and has been a key resource for African-American and Latino buyers, many of whom have made their first purchase in a condominium development.

FHA also plays an outsized role in the reverse mortgage market for seniors 62 and older. Its insured reverse mortgage product accounts for more than 90 percent of all borrowing in that field, allowing seniors to extract needed cash from their home equity to support their retirement expenses.

But with the sharp decline in FHA-approved condominium projects, many buyers and unit owners are finding themselves financially frozen out. Equally troubling, unit owners who want to sell find the pool of potential buyers reduced – along with the market value of their property – because FHA mortgages are banned.

Seth Task of Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says a condo unit client his firm represented recently was forced to sell for $10,000 below what she had been offered by a buyer who was pre-qualified for an FHA loan – a loss solely attributable to the condominium’s non-certified status.

Situations like this are becoming more frequent, housing industry experts say, and the lack of FHA financing eligibility for entry-level-priced condo units is partially responsible for the decline in first-time buyer participation in the real estate market.

But now a movement is getting underway to reverse this shrinkage. At this month’s spring legislative conference of the National Association of Realtors here in Washington, California brokers and agents unveiled a campaign to convince condo boards to re-think their objections to FHA certification – for their unit owners’ sakes.

The primary focus, said Mike DeLeon, president of the Orange County Association of Realtors, which debuted an educational video at the Washington conference, is to show reluctant condo boards of directors “the positive benefits” of certifying with FHA. The video stresses “keeping [condo unit] values at their highest” by widening the pool of potential purchasers; helping existing unit owners tap their equities for retirement; and the relatively low risk of default presented by today’s FHA buyers.

Is there a broader message here for condo boards nationwide? Maybe not so much for those in the high-priced market segments FHA rarely serves – but even their owners are cut out of FHA’s dominant reverse mortgage program.

For most other condo developments, however, the message is this- Give some thought to the issue. FHA certification has its complications and costs, but it could be more than worth the effort for your current residents and future buyers.

Appraisers getting some respect

Appraisers getting some respect

http://www.arcamax.com/homeandgarden/thenationshousing/bio Kenneth R. Harney

May 16, 2014

WASHINGTON – Not long ago they were the punching bags of American real estate, accused of rank incompetence, wrecking home sales and failing to pick up on signs of the housing turnaround.

That was then. Today appraisers are suddenly getting much more favorable reviews.

But wait a minute- Have appraisals actually improved in accuracy in any measurable way over the past several years? Nobody really knows. There are no nationally published statistical audits that gauge appraisal accuracy. However, one major industry group regularly surveys its members’ sentiments on appraisals, and lately things have been looking up.

When the National Association of Realtors conducted polls sampling its million-plus members in the spring and summer of 2010, more than 40 percent of respondents reported having problems with appraisals.

Within the realty field, criticism of appraisers was rampant and scathing. Appraisers allegedly too often-

- Used rock-bottom priced foreclosures and short sales as “comparables” for valuing houses where there was no financial distress. Those low appraisals blew up perfectly good sales or forced angry sellers to renegotiate prices with buyers.

- Traveled long distances beyond their areas of geographic competence, and inevitably were out of touch with local conditions.

- Paid scant attention to evidence that local home prices were on the increase, such as pending contracts, numbers of properties that sold for above list or that experienced multiple bids.

Worst of all, critics charged, poorly trained appraisers who had flooded into the industry during the boom years now were getting the bulk of the valuation assignments from appraisal management companies – primarily because they would work for cut-rate fees.

In the latest monthly survey, NAR pollsters found that just 24 percent of members reported having significant issues with appraisal results. Granted, that’s still nearly a quarter of all agents in the sample. But it’s down significantly from where it was a few years ago.

What to make of this? Have there been changes in the appraisal industry itself that might explain the better reviews out of former critics? Appraisers I interviewed in different parts of the country agree on one key fact- The dramatic decrease in foreclosures and short sales during the past 18 months has cut the number of houses with depressed prices that appraisers can choose – or justify – as comparables for any given sale.

In places such as Las Vegas, Phoenix and California’s Central Valley, where distressed properties once accounted for large percentages of all sales in the wake of the housing bust, today they are far fewer. Gary Crabtree, an appraiser in Bakersfield, Calif., says such sales now “only comprise about an 11 percent share” of transactions. As a result, “there are plenty of arm’s-length” sales for appraisers to use as “comps.”

Pat Turner, an appraiser in the Richmond, Va., area, said the sheer number of appraisers has plunged in recent years “and a lot of the less-competent, poorly trained [appraisers] have left” the business in the wake of the recession. One industry group, the Appraisal Institute, estimated the number of appraisers is declining by 3 percent a year. The steady shrinkage of the industry, Turner believes, could be contributing to perceptions that appraisals are more accurate today.

Gary Kassan, a Los Angeles-area realty agent with Pinnacle Estate Properties, disagrees. “My personal belief is not so much that the incompetent appraisers are gone,” he said in an email, “but rather that they have better comps to work with.” With prices on the rise, “they have more latitude and are more comfortable stretching the comps to bring the appraisal in at sales price.”

Whoa. Stretching the comps, eh? Appraisers insist that’s not the way it works – they’ve got to justify every conclusion in their valuation reports and are subject to reviews by lenders and underwriters.

But Jayne Allen, an appraiser in Charlottesville, Va., says realty agents’ views on what constitutes a “good” valuation and what’s a deal-killer are keyed to whether the appraisal supports the contract price.

“At this point,” she said, “I do not believe that … appraisers [are] providing ‘better’ valuations.” Rather it’s that more appraisals are validating the number on the contract, thanks in large part to the sharp decline in distressed sales sitting on the market as potential comparables.

Bottom line for you as a seller or buyer- Though there are no guarantees that an appraiser will confirm the price on your sales contract, the odds are better this spring that your deal won’t fall apart because the appraiser came in with a low-ball valuation tied to distressed comps.

A case for looser credit scores

A case for looser credit scores

Kenneth R. Harney May 9, 2014

WASHINGTON – Are lenders’ credit-score requirements for home purchasers this spring too high – out of sync with the actual risks of default presented by today’s borrowers? The experts say yes. What experts? The developers of the credit scores used by virtually all mortgage lenders. Executives at both FICO, creator of the dominant credit score used in the mortgage industry, and up-and-coming competitor VantageScore Solutions confirmed to me last week that mortgage lenders could reduce today’s historically high score requirements without raising their risks of loss. In the process, many prospective buyers who currently can’t qualify might get a shot at a loan approval.

Consider this- Consumer behavior in handling credit is subject to change over time, often keyed to regional or national economic conditions. Credit scores that were acceptable risks in the early 2000s – say FICOs in the 640 to 680 range – turned into larger than anticipated losers when the recession hit. Now that the housing rebound is well underway and federal regulators have imposed tighter standards on income verification and debt ratios, the high credit score “cutoffs” that virtually all mortgage lenders imposed in the scary aftermath of the crash are stricter than necessary.

FICO scores run from 300 to 850. Lower-risk borrowers have high scores, higher-risk consumers low scores. Early in the last decade, a FICO score of 700 was considered good enough for an applicant to get a lender’s best deals or close to it. Today a 700 FICO just barely makes the grade – 50-plus points below the average score for home purchase loans at Fannie Mae and Freddie Mac, the big investors.

In an interview, Joanne Gaskins, senior director of scores and analytics for FICO, said that statistical studies by her company have demonstrated that “the risk of default on more recent mortgage vintages is better than at the onset of recession” – essentially real risk has reverted back to the early 2000s. A lot more people pay on time. As a result, she said, lenders can afford to “take a look” at their current strict scoring requirements and consider lowering them without sacrificing safety.

To illustrate how consumer behavior has improved, Gaskins cited one internal study that examined mortgage default data through 2011. At a FICO score level of 700 in 2005, roughly 36 borrowers paid their loans on time for every one who went into serious default. In 2011, by contrast, for every one defaulting mortgage borrower, roughly 91 paid on time. That’s a huge decrease in risk to the lender.

VantageScore Solutions has documented a similarly dramatic improvement in mortgage borrower payment behavior. In an article scheduled for publication this week in Mortgage Banking, a trade journal, Barrett Burns, president and CEO of VantageScore, offers an analysis based on scores of 680 and 620 from 2003 through 2012. Vantage’s latest (3.0) scoring model uses a high risk to low risk scale of 300 to 850.

According to Burns, the probability of default at both score levels was lowest in 2003-05, then soared between 2006 and 2008 as the economy began deteriorating. By 2012, both scores were just slightly higher than 2005.

Burns notes that while auto lenders and credit card banks have adjusted their underwriting standards to these important changes in borrower risk, “the mortgage industry has been hesitant.” In an interview, Burns emphasized that mortgage lenders could expand home purchase possibilities for large numbers of consumers simply by lowering score cutoffs. They wouldn’t have to loosen up on their standards on down payments or debt ratios – just their scores.

A research study last year by the Urban Institute and Moody’s Analytics estimated that every 10-point reduction in mandatory credit scores on mortgages increases the pool of potential borrowers by 2.5 percent. A 50-point cut in score requirements, researchers found, would increase potential home purchases by 12.5 percent – more than 12.5 million households.

At least one major bank has concluded that lowering scores is the way to go. Wells Fargo recently announced reductions in minimum acceptable scores for conventional loans to 620 from 660. The bank had earlier lowered the acceptable score threshold for FHA loans to 600.

Could this signal the start of some fresh thinking on credit scores, a trend that other large lenders will pick up on? Let’s see. If they do so, it should be a win-win for everybody involved.

Cash-outs stage a comeback

Cash-outs stage a comeback

Kenneth R. Harney May 2, 2014

WASHINGTON – The name itself conjures up images of ATMs- cash-outs. You may associate the term “cash-out refinancing” with the frothy and dangerous days of the real estate boom, when some owners turned their hyperinflating houses into money mills, leveraging their equities to the hilt. That didn’t end up too well for many of them.

But now that equity holdings in homes are surging again, cash-out refinancings are coming back into vogue – this time under much tighter controls by lenders and used for saner purposes by borrowers than they were last decade.

Giant mortgage lender Quicken Loans estimates that about one-quarter of new refinancings are cash-outs. Federally chartered investor Freddie Mac reports that cash-outs grew to 17 percent of all refinancings in the first quarter of this year compared with 14 percent the same period in 2013.

A cash-out refi means that the homeowner extracts more money in a replacement mortgage than the current balance, rather than simply lowering the rate and keeping the principal amount the same as it was before the transaction.

Say you have an existing loan with a $200,000 balance. Thanks to rising home values, your property is worth $400,000. If you have a need for cash and good to excellent credit scores, you might be able to negotiate a refinancing into a $250,000 or $300,000 new fixed-rate mortgage. Putting aside transaction costs, you’d end up with roughly $50,000 to $100,000 in cash at closing for whatever use you have in mind. During the height of the boom years, according to Freddie Mac data, in 80 percent or more of all refinancings borrowers opted to pull out some cash. Freddie defines a cash-out refi as one where there is an increase in the principal balance of at least 5 percent over the previous balance. In the wake of the bust and recession, when owners in this country lost close to $6 trillion in equity, cash-outs have been far fewer and tougher to obtain.

Even this spring they’re just a fraction of total refinancing volume, but the purposes that borrowers plan for the cash they’re extracting have changed dramatically. Whereas a decade ago people were pulling out extra money to pay for consumer spending – cars, boats, vacations – bankers say today they’re focused on more financially sound uses.

Bob Walters, chief economist for Detroit-based Quicken Loans, says his firm is seeing “a lot of debt consolidation” using cash-out refinancings. The same is true at Insignia Bank in Sarasota, Fla. CEO and Chairman Charles Brown III says “sophisticated” borrowers concerned about rising interest rates are consolidating high-cost credit card, mortgage and other floating-rate debt into fixed-rate home loans. The replacement mortgages often carry 30-year rates anywhere from the low 4 percent range to just below 5 percent, depending upon the borrowers’ credit and income profiles.

Cyndee Kendall, Northern California regional mortgage sales manager for Bank of the West, says a typical cash-out refi client today has a floating-rate second mortgage or equity credit line plus a first mortgage with an above-market rate and wants to roll those debts into a single, fixed-rate jumbo mortgage. They do it, she says, to better manage their cash flow and protect against anticipated interest-rate increases as the Federal Reserve tapers its Treasury securities purchases.

Paul Skeens, president and owner of Colonial Mortgage Co., a lender in Waldorf, Md., is seeing another frequent use of cash-outs- Recession-era real estate investors now cashing in their chips. People who bought a house for little or no cash at bargain prices during the recession, and who have built up equity during the past few years through loan amortization and property appreciation, now want to extract cash to make new investments.

A recent client, for example, did a $170,000 cash-out refinancing on a house he purchased with a 3.5 percent FHA-backed mortgage in 2011. The client paid off the $147,000 FHA loan balance and took out a new conventional mortgage of $170,000. After transaction costs, he walked away from the refi with about $20,000 in cash, which he plans to use for a down payment on another investment house. The rate on the new loan- 4.875 percent for 30 years.

Cash-out refis aren’t the right financial option for everybody, of course. A home equity line of credit may be more flexible and cheaper. But for fixed-rate debt consolidation or pulling money out of a successful investment, a cash-out refi is worth a serious look.