Beginner's Information: September 2007 Archives

i was sold a bad home mortage who do you talk to

That was a search I got the other day. The answer depends upon where you are in the process.

If you've just applied, not yet signed the actual loan papers, go talk to another loan provider. It's not like you're committed to the company, and it's not like it never happens. Even the most ethical loan provider loses loans between application and funding. It happens. Go make certain that you are getting the best loan for you. In order to do this, you need to actually discuss your situation with several loan officers - and I mean really discuss it. Ask the hard questions. I've got a list of questions here. Apply for a back up loan, in case you are lied to.

If you've signed the final papers but are in the recission period, contact the escrow company and rescind in writing. Walk it in, don't rely upon a fax or registered letter. Mind you, if it's the last day and after closing time, a faxed recission before midnight will prevent it from taking place - if the escrow company actually gets it. Faxes go astray. This is one reason why you want to contact the escrow company, who is paid to be a neutral third party. I've heard stories of people who supposedly contacted the loan provider and it somehow "got lost" and the loan got funded. Bad situation to be in, and the legal presumption is not in your favor. Now you've got to prove that you sent the recission in time, and that they should have known not to fund your loan. This is hard.

The most common time to realize you've "been had" before the loan funds is right when you get the final loan documents to sign. That's always the moment of truth, and there are few legal protections in advance of that moment. Many people think that the federal Good Faith Estimate or California Mortgage Loan Disclosure Statement mean more than they do, when the fact is that there are very few regulations upon the accuracy of either document, and unethical loan providers are adept at not running afoul of them. And if you trusted that provider and didn't apply for a backup loan and now you are likely to lose the deposit you put down, well the provider is the scumbag, but the person in the mirror helped put you into this situation.

If your loan is already funded, you can contact your state's Department of Real Estate and your lawyer, but odds are extremely poor of those folks being able to do anything that changes the situation. There basically have to have been major rules broken to invalidate the contract, and those unethical providers who pull this garbage are adept at not breaking those few rules which really will land them in trouble. I've had a fair number brought to me to see if I could tell them how to fix it, and the form response is, "If your lawyer and the Department of Real Estate can't help you, all I can do is take the situation today as a starting point and see if selling or refinancing from this point forward put you in a better situation." In other words, the only way to reliably fix the problem is another (hopefully better) loan, or if that won't help, selling the property. The lender is not going to amend the contract because you've got a bad deal. The seller is not going to say, "Oh, I'm so sorry that you had a bad experience!" and restore you to where you were before you bought. This is why you need to make certain that what you're getting is a good deal before you are stuck with it. I'm trying to produce the knowledge that makes this possible here, but you still need to sit down and really talk the matter over with several professionals, and make the effort to find out if a proposed deal is real or nonsense. I am sorry to report that there is no easy way to do this, but you might want to start with these five articles of mine.

If you go in alert with your eyes open and do your homework, you can avert the vast majority of problems before they affect you. If you are one of those who won't do this, then you will be placing yourself in one of three categories: Those with an unreasonable amount of pure dumb luck, those poor schmoes who've been had but know better now, or those poor schmoes who've been had and don't realize it.

Caveat Emptor.

Racial Gap in Loans Is High in California.



I can give a variety of reasons for this.



First off, especially in Los Angeles but to a lesser extent throughout the state, there is a huge "Spanish speaking only" community. When you limit yourself to speakers of a language which isn't the nation's primary business tongue, you limit your ability to find loan officers who will treat you honestly and fairly and find you the best possible loan. I speak reasonable spanish myself, but not nearly enough to do a loan.



Second, those who speak spanish only are ripe pickings for unscrupulous loan officers and real estate agents. Because they do not understand english, the language the regulations are written in, they have less understanding of what is a complicated and confusing process for anyone who is not a practicing professional. In fact, I can name a lot of alleged professionals who speak english and are nonetheless limited in the comprehension of the process to judge by the evidence.



Third, those who speak spanish only have a lesser understanding of their rights under the law, and since the vast majority of all loan documents are in english (a few lenders are starting to generate a few documents in spanish, but not every document, and it will never be the main copy of anything), they have a lesser understanding of what they are agreeing to.



Gee, I hope the preceding helps the "Spanish only" lobby of separatists understand what they're setting up for the people whose benefit they are allegedly advocating.



But more importantly than all of the preceding, real estate and loans are "sales connection" businesses. Because most people do not shop for homes or home loans in a rational fashion. "I can't be rational! This is far too important for that!" Seems silly, but it's true. People buy or do business with you because you have made them more comfortable, or because they think you can do something nobody else can or will for them. They do business because they connect with you on some level, not because what you're offering is the best thing out there.



Identity politics exacerbates this. There are agents out there (often but not always necessarily of the same ethnicity) whose niche market is "black folks", or "spanish speakers" or "Koreans". Some people will do business just because youre the same, or because they feel some kind of cultural connection. Others will do business because you helped their brother, or friend, whether said brother was the toughest deal in creation or the easiest thing you ever did. And if you brother had to do something, or had something happen, it's only normal it should happen to you, too - right? One of the standard phrases in the sales lexicon is "My you were tough, but we got it done! How about some referrals." This by itself is not evil. But if you've taken advantage of someone as if they were a tough loan when in fact they were not and could have gotten a better deal from someone else, you're lining your pocket at your client's expense. Everybody deserves to get paid for a job well done. But when my contacts in the escrow and title business tell me about people who only serve this ethnic market or that ethnic market who have six percent state of California limits on their compensation externally applied to every single loan they do, or how these people consistently have a sales compensation a full percent above the market, that tells me something: that these alleged professionals are taking undue advantage of their target market. Many of these people they are targeting literally have no way of knowing there is something better out there. Are their tactics illegal? No. Unethical? In at least some cases. Taking advantage of client ignorance? Definitely.



The process of purchasing, selling, or refinancing real estate is byzantine, with rules and regulations that get more complex every year. The average citizen has difficulty understanding the things that may be relevant to their particular transaction (I've had to explain to lawyers how they got taken in their previous transaction). To most people, the whole thing is like some immensely complicated magical ritual. Place the proper documents at the foot of the underwriting god, dance three time sunwise and four times widdershins round the appraisal every day for a fortnight, pray with the high priests of insurance, and you get your house.



It has elements in common, I will admit. But the processes of real estate sales and real estate loans are coldly, brutally, logical once you understand them. Unfortunately, the odds of understanding are stacked even further against those who are apart from the majority of society. Those who are concerned with minorities having inferior loans would have more success in connecting the people to the mainstream of society than in considering further burdensome anti-discrimination legislation.



Caveat Emptor

This is something I probably should have covered quite some time ago, as it's part and parcel of the system that's abused. Here are sample rates from one A paper lender, picked at random, that were in effect a few days ago. These are Fannie and Freddie conforming 30 year fixed rate mortgages with full documentation of the loan. The first number is the cost for a 15 day lock, the second for a 30 day lock, and the third for a 45 day lock. A positive number means it costs that number of discount points to get the rate. A negative number means that the lender will pay that many discount points for a loan done on those terms. Now, I want to make the point that these are wholesale rates, but I didn't feel like translating them to retail. I don't work for free any more than anyone else, nor does any other loan provider.

rate 5.625 5.750 5.875 6.000 6.125 6.250 6.375 6.500 6.625 6.750 6.875 7.000

15 day 1.50 1.00 0.375 0.00 -0.50 -1.00 -1.50 -1.75 -2.25 -2.50 -2.75 -3.50

30 day 1.75 1.25 .625 0.25 -0.25 -0.75 -1.25 -1.5 -2.00 -2.25 -2.50 -3.25

45 day 2.00 1.50 0.875 0.50 0.00 -0.50 -1.00 -1.25 -1.75 -2.00 -2.25 -3.00

As you should notice throughout, there is a 0.25 spread in costs between locking in any particular rate for 15 days as opposed to 30, or 30 days as opposed to 45. This is because it costs them money to have the money standing around doing nothing waiting for your loan to fund. The difference in costs between a 15 day lock and a 45 day lock at the same rate is half a point. For most people, the column you want to pay attention to is the thirty day column. Two weeks from a standing start is not enough to do a refinance, and even a purchase is iffy. But you want a rate locked in when you start the process, or you really have no idea whether it will be available when you get to the end of the process. Indeed, many providers work on a "promise the moon and wait and hope" basis, hoping the rates will drop. That's why you want a written guarantee of a rate at a given price on a given loan type.



Now this is a fairly broad spread rate sheet, as the company is willing to take clients through a large range. On the other hand, at a 5/8ths point hit for 1/8th percent rate below 5.875, they are telling you that they really would prefer to keep their customer's rates locked in for 30 years above that. On the other hand, since most people dispose of their old loans about every two years, most folks shouldn't want to pay those costs, which will take much more than two years to recoup from the lower rate. It's much the same phenomenon as insurance companies guarding against adverse selection (only those folks who have major health problems buying health insurance, for example).



Which loan is the best for you? Don't know without more specifics. It depends on approximate loan amount, your life plans, your proclivities, and your financial situation.



But the devil is in the details, and one of the most common devils is details is a provider forgetting the adjustments. Adjustments generally mean that the loan will be more costly than the basic rate/cost tradeoff outlined above, so "forgetting" to post the adjustments on a Mortgage Loan Disclosure Statement is one of the easiest and most effective ways to lie in order to make your loan look more attractive by comparison. Since most providers don't guarantee their estimates, they can do this with basic impunity, but make no mistake - they know what the price is really going to be. If they won't guarantee their estimates, ask them why not. Here are the possibly applicable adjustments for this category:



Loan amount under $60,000: half a point

Loan amount $60k up to $100k: quarter of a point

cash out loan, 70-80% LTV: half a point

cash out loan, 80-90% LTV: three quarters of a point

Investment property 50-75% LTV: one and a half points

Investment property 75-80% LTV: two points

Investment property 80-90% LTV: two and a half points

No Impounds fee: quarter point

2 units 90-95% LTV: half a point

Manufactured home: three quarters of a point (they also have an absolute maximum CLTV of 80%)

Loan distribution

80/15/5 quarter of a point

75/20/5 quarter of a point

Interest only one and one eighths points

if CLTV over 90%: additional quarter point

97 percent of purchase price financed: three quarters of a point

100 percent of purchase price financed: one and a half points

2/1 Buydown two and a half points

Stated income FICO 680-699: half a point

Stated income FICO 700+: quarter of a point

(actually, these are small hits for stated income, indicating to me that I can likely do better elsewhere for a full documentation client!)



So let's see. If you are doing a cash out to 75 percent loan stated income and have a credit score of 690, you add one point to the costs listed above.



If you have an investment property duplex at 90 percent LTV, you would add three points (investment property loans are relatively expensive, as you can see, and it isn't restricted to this lender. They are riskier loans)



Doing 100% financing on a $50,000 home: Two points.



One hopes you get the idea. To leave these out is a tempting omission for the less ethical providers. Just because they are left out does not mean you won't pay them. You will. Usually they will spring them on you with the final closing documents and hope you don't notice. Surprise!



(Between this profession and being a controller for twelve years, people should not wonder why I think that's one of the ugliest words in the language).



Indeed, during my six weeks at the Company Which Shall Remain Nameless, I had no fewer than three screaming arguments with my supervisor over telling prospective clients the truth about adjustments. They didn't want me to. I have this thing about telling clients the truth as best I know it.



Why do they do this? At signup, you have little emotional buy-in. At final loan docs, you are signing so much stuff that even a marginally skilled person who's trying to distract you will be successful a lot of the time. The industry statistics say that over fifty percent literally never notice, at least until much later, after the transaction is irrevocable. And somewhere around eighty five percent of those who do just want the process to be over so badly that they will sign anyway, not to mention the fact that in the case of a purchse, they probably don't have any choice at that point. They need the loan to get the house, without which they lose the deposit, and there is no more time remaining in the contract with which to go out and get another loan. In order to combat this, do the smart thing, and apply for that back-up loan at the beginning. With two loans ready to go, your bargaining position is much enhanced, and the odds are much better that one of them will honor the original quote or something similar. If you can't find a backup loan provider, an alternate tactic is to find someone who will guarantee their loan quotes in writing, but very few will. A quote that is not guaranteed is so much hot air. They might intend to deliver, but the reason they won't guarantee it is usually that they don't intend to deliver it.



Caveat Emptor.