Loan Officer Tip - New Rules for Mortgages

On the Today Show this morning, there was a segment on "The New Rules for Mortgages - Recession Proofing Your Life". They discussed the 3 C's for getting a mortgage in today's market:

1. Credit - You must have a good credit score.
2. Capacity - You need to be able to pay back the loan and verify income.
3. Collateral - Put money down (at least 20%).

These "new rules" are not new concepts by any means. In fact, they have been a part of my training curriculum from day one. It is our job as loan officers to continue providing great loans for our borrowers that ensure making a positive life-change. How do you close a great loan? By mastering the monetary benefits, "scrubbing" their credit and verifying income (refer to Series 2: The Vermillion Selling System).

Loan Officer Tip - Homeownership Obsession

Although the mortgage industry is an ever-changing and cyclical industry, the mortgage industry will always be in existence. The fact is, although the mortgage and financial sectors are constantly in flux, the desire for homeownership is constant; it is the American Dream! A broker's job is to make sure their client is receiving the best loan for their situation - and ensure this will not put them into a worse situation which could lead to foreclosure.

There's a saying that says, "If you do what you've always done, you are going to get what you have always gotten." This is usually a true statement. However, in today's new market, it is not. The truth is, if you do what you've always done, you are going to get less than you used to get. Changing times call for changing methods. How do we ensure a good close? Create intrinsic value for your client! Not only will you ensure a close, you'll create a client who will return in the future!

The Homeownership Obsession
From: Washington Post
July 30, 2008

The real lessons of the housing crisis have gotten lost. It's routinely portrayed as the financial system run amok; the housing market became a casino. The remedy, we're told, is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger truth: Our infatuation with homeownership, embedded in dozens of government policies, has turned housing -- once a justifiable symbol of the American dream -- into something of a national nightmare.

As a society, we're overinvesting in real estate. We build too many McMansions. They use too much energy, and their carrying costs, including mortgage payments, absorb too much of Americans' incomes. We think everyone should become a homeowner, when many families can't or shouldn't. The result is to encourage lending to weak borrowers who are likely to default. The avid pursuit of a few more percentage points on the homeownership rate (it rose from 64 percent of households in 1994 to 69 percent in 2005) has condoned enormously damaging policies.

Does every house need a "home entertainment center"? Well, no. But when you subsidize something, you get more of it than you otherwise would. That's our housing policy. Let's count the conspicuous subsidies.

The biggest favor the upper middle class. Homeowners can deduct interest on mortgages of up to $1 million on their taxes; they can deduct local property taxes; profits (capital gains) from home sales are mostly shielded from taxes. In 2008, these tax breaks are worth about $145 billion. Next, government funnels cheap credit into housing through congressionally chartered Fannie Mae and Freddie Mac. Long perceived as being backed by the U.S. Treasury, Fannie and Freddie could borrow at preferential rates; they now hold or guarantee $5.2 trillion worth of mortgages, two-fifths of the national total. Finally, the Federal Housing Administration insures mortgages for low- and moderate-income families that require only a 3 percent down payment.

Congress's response to the present crisis is, not surprisingly, more of the same. The legislation enacted last week adds new subsidies to the old. It creates more tax breaks; most first-time home buyers could receive a $7,500 tax credit. It expands the lending authority of Fannie Mae and Freddie Mac. Previously, the permanent ceiling on their mortgages was $417,000; now it would be as much as $625,500. And the FHA would be authorized to support, at much lower monthly payments, the refinancing of mortgages of an estimated 400,000 homeowners who are in danger of default.

More subsidies may -- or may not -- stabilize the housing market in the short run. But there are long-term hazards. Make no mistake: I'm not anti-housing. I believe that homeownership strengthens neighborhoods and encourages people to maintain their property. It's also true, as economist Mark Zandi shows in his book "Financial Shock," that today's housing collapse had multiple causes: overconfidence about rising home prices, cheap credit, lax lending practices, inept government regulation, speculative fever, sheer fraud.

Still, the government's pro-housing policies contributed in two crucial ways.

First, they raised demand for now suspect "subprime" mortgages. The Department of Housing and Urban Development sets "affordable" housing goals for Fannie Mae and Freddie Mac to dedicate a given amount of credit to poorer homeowners. One way Fannie and Freddie fulfilled these goals was to buy subprime mortgage securities -- many of which have now gone bad. Second, government's housing bias created a permissive climate for lax lending. Both the Clinton and present Bush administrations bragged about boosting homeownership. Regulators who resisted the agenda risked being "roundly criticized," notes Zandi.

Good intentions led to bad outcomes: an old story. Fannie's and Freddie's losses impelled the Treasury Department to propose a rescue; given the companies' size and the government's implicit backing of their debt, doing otherwise would have risked a financial panic. Personal savings have been skewed toward housing. Many Americans approaching retirement "have accumulated little wealth outside their homes," concludes a study by economists Annamaria Lusardi of Dartmouth College and Olivia S. Mitchell of the University of Pennsylvania. Even some past gains from the pro-housing policies are eroding; the homeownership rate has now dropped to 68 percent.

We might curtail housing subsidies without exposing the economy to the disruption of outright elimination. The mortgage interest deduction could be converted to a less generous credit; Fannie and Freddie's expanded powers could be made temporary; the FHA's minimum down payment could be set at a more sensible 5 percent. But even these modest steps would require recognizing that the homeownership obsession has gone too far. It would require a willingness to confront the huge constituency of homeowners, builders, real estate agents and mortgage bankers. There is no sign of either. When tomorrow's housing crisis occurs, we will probably find its seeds in the "solution" to today's.

Qualifying Borrowers In Today's Market - Tip #3

Tip #1 - 5/5/08

Tip #2 - 5/12/08

Verify Credit Worthiness: It is vital that you ensure that the borrower has the credit worthiness to qualify. If the borrower's FICO is less than 620, the availability of financing becomes much more challenging. A common mistake is just “taking an app” and trying to figure out later where to place it. This is a waste of everybody’s time.

Tip #3: Have at least three lender programs that can help the borrower. When there are credit issues, make sure you understand both the causes and solutions to improving it before moving forward.

By employing these techniques, you will qualify less applicants but they’ll be better quality, higher qualified applicants. This ultimately leads to higher conversion and more loans closed. It only takes 1 qualified, committed sale per day to close 15 loans per month! Additionally, you will not be putting the borrowers, or yourself, through the process only to turn them down later.

Qualifying Borrowers In Today's Market - Tip #2

Tip #1 - 5/5/08

Qualifying Affordability: Income is the second key requirement; you must be sure the borrower can really afford the loan. Not just for today, but down the road (particularly when applying for adjustable rate financing).

Tip #2: Qualify your borrowers for a full-doc program with a cushion for future adjustments in payments. Be sure to verify all forms of income on the first call by having the borrower physically read you exact pay stub, W-2 or tax return information.

Qualifying Borrowers In Today's Market - Tip #1

Qualifying Borrowers In Today's Market

The landscape has changed significantly in recent months when it comes to qualifying borrowers for mortgage refinancing. During the recent mortgage boom, nearly every homeowner qualified for a refinance. However, with the reduction in high LTV products, tightening of underwriting guidelines and a drop in property values, the savvy originator will be more strategic and diligent in identifying qualified leads, while the failing originator will employ the old methodologies. Their result will be lots of applications, but no closed loans. Over the next few weeks I will share with you some tips for qualifying borrowers in today's market.

Determining Lendable Equity: The first and foremost qualifying requirement is lendable equity. Simply put; no equity, no deal! With the recent nationwide slowdown in home sales, home values have decreased by at least 10% in most markets. Unfortunately, the borrower (and many originators) still assume property value increases.

Tip #1: Apply an 80/85% rule (depending on FICO score) to the last verified value in determining current equity potential. If there is no equity at an 80/85% calculation, there probably is no loan. This will allow for reduction in value and provide a “cushion” for equity to help the borrower pay off debt and reduce payments, taxes and term.