Consumer agency gets an incomplete grade

Kenneth R. Harney Jan 23, 2015

WASHINGTON – When the federal government’s consumer protection agency for financial matters tells you how to shop for a good deal on a home mortgage, you should follow the advice, right?

Maybe some of it. The Consumer Financial Protection Bureau, which was created in the backwash of the worst national mortgage disaster since the Great Depression, went online with a new interactive mortgage tool last week. The CFPB’s site (www.consumerfinance.gov) offers helpful tips on shopping and has a guide to loan alternatives, closing costs and a “rate checker” feature.

At first glance, the rate checker appears to be a quick way to research prevailing mortgage interest rates in your area. Here’s how it works- You enter the state where you want to apply, a FICO credit score estimate, your desired loan amount and the loan term. The rate checker then displays the local daily rate quotes collected from banks and credit unions by its data vendor, Informa Research Services Inc. of Calabasas, California.

Say you live in Virginia or California and want to see what rate you might get on a $400,000 house purchase with a $40,000 down payment. You input your estimated credit score. Say you’ve got a FICO 680. In Virginia, according to the rate checker readout Jan.16, “most lenders” in the survey would quote you 3.875 percent or less for a 30-year fixed-rate loan. Two lenders offered 3.625 percent and six quoted between 4 percent and 4.375 percent.

In California, most lenders also quoted 3.875 percent or less, one quoted 3.75 percent and five came in between 4 and 4.375 percent. None went as low as 3.625 percent.

But something important is missing here- The various fees and charges that the CFPB itself requires lenders to disclose as part of any mortgage quote to a consumer. As regulator of the Truth in Lending Act, CFPB regulations mandate precise disclosures of loan discount fees or “points” and lender closing charges among others. (A point equals 1 percent of the loan amount.) These are included in the Annual Percentage Rate (APR) – the effective rate applicants will be paying over the life of the loan.

When lenders advertise their rates, they must include the APR along with the base interest rate. There may be other charges that come into the total cost picture as well, such as lender-paid mortgage insurance and investor “overlay” add-ons.

So how big a deal could it be when only the interest rate is provided? In a statement for this column, Quicken Loans, the second largest retail lender in the country, said that quoting a rate alone, with no reference to specific points, fees and the APR, “will deliver a cost estimate that greatly differs from what is accurate.” Steve Stamets, senior mortgage banker for Apex Home Loans, Rockville, Maryland, told me “it’s inherently misleading because you’re not getting all the potential charges” you’re going to have to pay.

For example, said Stamets, a loan officer might violate CFPB rules by quoting a 3 percent rate on a hypothetical $400,000 loan to pull in customers, but not mention that to obtain that rate they will need to pay 5 points – $20,000. Those points could be paid at settlement or financed and included in the interest rate. In the latter case, using one rule of thumb measure, the effective rate on the loan might jump to 4.25 percent, not the 3 percent advertised.

David Stevens, CEO and president of the Mortgage Bankers Association, said in an interview that CFPB’s rate checker’s failure to disclose full costs “violates everything a lender must do” to quote rates to borrowers in compliance with the agency’s own rules. “It’s just a bad idea,” he said. “It needs to come down.”

But the CFPB shows no signs of yielding to critics. In a statement for this column, the agency said the rates quoted “assume” discount points ranging between one half a point to minus one half a point “and a 60-day rate lock,” but do not include lender closing charges. Dave Hershman, a nationally known trainer and author who helps mortgage companies comply with the rules, scoffed at the CFPB’s defense- “Could you imagine (the bureau) allowing a mortgage company to be that nebulous? And to quote rates without an APR?”

Bottom line- Check out the Rate Checker. But remember- There’s much more to a mortgage quote than just the rate.

Not all buyers benefit from lower FHA interest rates

Kenneth R. Harney

Jan 16, 2015

WASHINGTON – If you saw the White House announcement of lower insurance payments on Federal Housing Administration home mortgages last week, you might have wondered- Does this matter to me as a potential home buyer or refinancer? Who specifically will benefit from the decrease in fees?

The Obama administration estimates that by lowering FHA’s annual mortgage insurance premiums by half a percentage point, as many as 250,000 new buyers will be able to purchase a house. That’s great news and overdue. FHA almost priced itself out of competition with giant investors Fannie Mae and Freddie Mac by raising its premiums several times in recent years. FHA made itself too expensive and its market share has plunged.

So who is best positioned to take advantage of the new, more consumer-friendly mortgage pricing? Here’s a quick overview. Start with your FICO credit score. If you’ve got a score anywhere from 620 to 719 and you have a down payment of 5 percent or less, FHA is likely to become your first choice in terms of monthly payments. It will cost you less in principal, interest rate and mortgage insurance charges compared with what you’d pay for a “conventional” loan eligible for purchase by Fannie Mae or Freddie Mac with private mortgage insurance.

Consider this example using data provided by MGIC, one of the major private insurance underwriters. Say you want to buy a $220,000 first home with a 5 percent down payment. You’ve got a slightly below average FICO score between 680 and 699. Before the premium reduction, your monthly payment using a 30-year FHA loan at current interest rates would have been $1,225. The same conventional loan with private mortgage insurance would have cost you $1,168 a month – $57 less than FHA. After the premium reduction, the monthly payment on the FHA loan will drop to $1,138 – $30 cheaper than the conventional alternative.

But what if you’ve got a higher FICO score? On the same 5 percent loan and rate and term assumptions as above, with a FICO score of 729 to 759, your monthly payment should be lower with a conventional loan. You’d pay $1,106 a month compared with $1,138 – $32 more – for an FHA-insured mortgage with the reduced premiums. At 760 and above, the payment drops to $1,092. So FICOs matter.

What other factors might influence you to opt for an FHA loan over a competing conventional mortgage and vice versa? There are several important issues to consider. FHA is more flexible when it comes to underwriting. Take debt-to-income ratios. Conventional lenders using private mortgage insurance typically will not approve you if the ratio of your recurring monthly debt payments to your documented monthly gross income exceeds 45 percent.

FHA, by contrast, may stretch that if other aspects of your application – steady income, reasonable financial reserves – look strong. Some lenders say they can squeeze their FHA applicants through with debt ratios higher than 50 percent – one lender told me he’s done 56 percent. Plus, FHA is more sympathetic in the way it treats one of the biggest obstacles facing many millennial applicants – student debt. According to Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., buyers whose student debts have been deferred for 12 months or more won’t have them factored into the application, whereas conventional lenders include them.

Some downsides of FHA? Tops on the list- It charges borrowers an upfront premium of 1.75 percent that typically gets tacked onto the principal they’re borrowing, financed over the term of the loan. FHA could have, but did not, lower that fee.

Why’s that significant? Because unlike private mortgage insurance, which by federal statute can be canceled once a borrower’s equity position reaches 20 percent of the home’s value, FHA’s premiums on most loans continue for the life of the mortgage. That add-on to principal stays with you for years beyond the date you’d be able to cancel your private insurance payments, which in some scenarios can be as early as four to five years. Put another way- You will build equity in your home faster with a conventional loan compared with FHA.

Bottom line- If you have a FICO score well above 720, and you’ve got money for a 5 percent down payment and a debt ratio below 45 percent, conventional is probably your better bet. But if your FICO is in the 600s and you have some complications to your application or debt issues, FHA will probably treat you kindlier.

A looming battle over home appraisals

Kenneth R. Harney

Jan 9, 2015

WASHINGTON – Could a controversial new program set for launch nationwide this month by giant mortgage investor Fannie Mae lead to slower and costlier home sale closings and more disputes over prices between sellers and buyers – busting deals when the appraised value comes in below what the parties agreed to in the contract?

Fannie Mae doesn’t think so, but many appraisers are worried that the new program might mess up the marketplace. How? Here’s a quick overview of the issue and what it could mean to you as a seller or buyer-

Starting Jan. 26, Fannie plans to offer mortgage lenders access to proprietary home valuation databases that they can use to assess the accuracy and risks posed by the reports submitted by appraisers. The Fannie data will flag possible errors in the appraiser’s work before the lender commits to fund the loan, score the appraisal for overall risk of inaccuracy, and may provide as many as 20 alternative “comps” – properties in the area that have sold recently and are roughly comparable to the house the lender is considering approving for financing but were not used by the appraiser.

Lenders can then forward Fannie’s alternative comps and risk scores to the appraiser or the management company that hired the appraiser requesting explanations and changes to the appraisal. Professional appraisers rely on comps as key indicators for value. If houses “A” and “B” in the neighborhood sold within the past three months for $250,000 and are similar in size and features to the house under consideration by the lender, the appraisal should come in close to that number, absent any dramatic recent marketplace changes. But if the appraiser values the house at the contract price of $300,000 agreed by the seller and buyer, the valuation may be judged too high. Excessive valuations create the risk of future losses to lenders and investors if the borrower defaults and the house goes to foreclosure.

On its face, the new Fannie program appears unassailable. Lenders and investors have an inherent right to be sure the appraisals they use for their funding decisions are accurate. If Fannie has developed a high-tech tool to help lenders spot risky appraisals upfront, where’s the problem?

Start with delays to closings and higher costs. Appraisers say if they have to justify piecemeal why they chose the comps for their valuation rather than those selected by Fannie’s computers, it will add days – a week or more in extreme cases – to closing times. Meanwhile, sellers and buyers who had planned on dates for moving may suddenly find themselves knocked off track because the appraisal report was flagged. Realtors’ commission payouts also will be delayed.

Mike Turner, an appraiser in Northridge, Calif., told me it will be “an utter waste of time” if he has to explain point by point why he didn’t use the comps supplied by Fannie.

Pat Turner, an appraiser in Richmond, Va., and no relation to Mike, told me appraisers will have to raise their fees to compensate for the additional time. “You think I’m going to do this for free?” he asked. “Hell no!” He predicted his fees could jump by $150 to $200 or more simply because of Fannie’s new program – all paid for by consumers at settlement.

Another problem- Fannie Mae won’t give appraisers access to the “black box” databases it uses to produce risk-rating scores. A national petition sponsored by the Illinois Coalition of Appraisal Professionals is now circulating, demanding transparency. Critics such as Mike Turner charge that Fannie’s data will not be able to recognize differences between adjacent neighborhoods – a key factor in valuations – because it is based on census tract groupings, which may include mixes of lower-priced and higher-priced homes from different neighborhoods. He believes the risk-rating system inevitably will be biased toward lower-priced comparables – something he says appraisers “will figure out quickly” – and will therefore reward appraisers who choose less-costly properties for their comps.

“Lower-risk comps will tend to kill deals,” he predicts, forcing sellers and buyers into needless disputes when appraisals come in below the agreed contract price.

For its part, Fannie says appraisers’ concerns are overblown and that if widespread problems arise, it will make adjustments. Andrew Wilson, a Fannie spokesman, denied that the system will be biased to the down side. “It’s going to flag mistakes,” he said, “and frankly everybody should want that.”