My Favorite Banker Blog

I have been listening to some laughable adverstisements by a local broker as to why you should work with a mortgage only company. "that you wouldn't go there to buy a cd so why go to a bank to get a loan"

It makes me chuckle everytime I hear it except for the small glimmer of concern I have for people who may actually to believe that to be true. I am going to walk through the failure of that reasoning and give a couple of other fairly powerful reasons to consider working with a bank.

1. The "mortgage only companies" well what they mean by that is that they are mortgage origination only companies. 9 out of 10 mortgage only companies are either brokers meaning they act as a missleman and never lend any money, or they are correspondent lenders menaing they lend the money and immediately transfer the servicing. So in esscence they are your buddies for a month and then you never interact with them again. What happens to the loan well typically it ends up being serviced by you guessed it a bank. So the irony is by this companies own logc of course you would only go to a bank for your mortgage, because they are the only ones ultimately lending the money for your loan and the ones you pay everymonth. So I guess if I was as low level in my reasoning I would run an add telling you to only go to a mortgage only company if you wanted to buy something from someone who doesn't actually own it.

2. Since a bank does actually service the loan and underwrite the loan they are really the only ones who actually control the money. A broker sends the loan to a lender who underwrites it. A correspondent lender still typically underwrites to the bank they sell it to's standards. Even a bank still conforms to Fannie Mae Freddie mac and FHA underwriting standards, but typically we have some concessions etc that can save you time and money and add a little flexibility to the underwriting process.

3. Banks can offer you a true debt management solution. Since your "mortgage only"  companies can't do personal loans, credit cards, or offer savings product you will never talk to a representative from that company who can cut 5% of the rate you are paying on a card or 7% off your personal loan or even a percentage point off your car loan. Now of course we cant always deliver that savings it all depends on the rate market, but wouldn't you like someone to ask and take a comprehensive approach to managing your debt?

4. Almost all of the banks have caps on what can be charged to a borrower basically they puposely limit their own profitability because not only do they want to do your mortgage they want you to think well enough of them to purchase other products as well. No broker that I have ever heard of caps their profitability on a loan to anything other than what the bank they are selling it to caps it at. By being a smart shopper you will never run into this, but if tracking the rate markets isn't your thing or if you are a first time buyer and know what you don't know well why take the chance?

5. Because we want all your business whether it is savings products or other debt products ( as mentioned above) we often provide discounts that these one channel companies can't/ For example Fifth Third offers a cost discount on all of our first mortgage products if you pay via a direct withdrawal from a Fifth third account. Our home equity products typically receive a .25% rate reduction for the same thing.

http://www.detnews.com/apps/pbcs.dll/article?AID=/20080620/METRO/806200346

This is great, but this is the most basic an d obivous type of loan fraud, and I am still not sure why people bother as they will alsways get caugh. How they profit is by buying a home getting a inflated appraisal and then refinancing and pocketing the cash. Their are multiple versions of this scam using "stra buyers" etc... but it all amount to the same thing over leveraging the home and walking away.

The real fraud and the fraud the goverment and lending institutions seem unable or unwilling to address is the far more common fraud for comission. This is/was the coaching of clients ( whether mortgage brokers/mortgage bankers" coaching client or lenders coaching brokers on how to "structure" the loan to fit their guidelines. Using stated incomes for people who knew exactly how much they made, how to state asset information etc... This is were 90% of the issues today arrive from. Were these people evil or purposely decptive. I tend to doubt it. They simply did what they were told to get paid.

How can that happen you ask well the global money spigot was turned on and flowed into the mortgage industry. Why have sufficient quality control when you are getting paid so much for your volume and your competitors are constantly lowering the bar? Additionally I am sure ceo's everywhere simply looked around and said "we make more by keeping our auditing limited than we can possibly lose". This is the fundamental flaw in the system. There are more than enough laws on the book to have stopped this, but there was no money or manpower to enforce it. We can hear all the claims that the FBI had bigger fish to fry, but even if we were not at war, and didn't have the need for the constant vigilance against terrorism do you really think the money would have been allocated here? If you do well I have a bridge to sell you.

There has to be accountability at all levels. The threat of punishemnt has to be real for borrowers who commit fraud ( such as signing documents that overstate their income) mortgage originators who are caught commiting acts of omission and the lenders themselves who have their sales reps push certain loan structures.

In the last year Fannie Mae and Freddie Mac have added several different pricing adjustments that effect you when you are buying a home. They are the somewhat hidden story of what goes into your rates.

They always make these adjustments to account for different risks involved in your loan based on portfolio performance etc.

Here are a couple of new ones.

Credit score adjustors: It used to be that if you were approved by Automated underwriting as long as you didn't have a score below 620 your terms were pretty much the same no matter how far above 620 your score was. Now there is a relatively complicated structure which has multiple adjustments based on your score and what percentage of your homes value your loan is. If you owe less than 60 % of the value of your home for example there are no adjusters. The higher percentage you owe the larger the adjusters are. It makes sense the lower your score and the less equity you have the higher the risk. The adjusters for score can be as much as 2.75 points for those with under a 620 borrowing anything over 70% of their homes value.

Cash out Adjustors: Again this used to be a pretty much flat charge of a .5 point if you took more than $2000 cash out of your loan on a loan that was over 70% of the homes value and less than 80% and a little more if you did it to 90% of the value. Again this is now something that is effected by your credit score. If you are at a 700 score or above they actually reduced the cash out adjustment for those below it increased from between .25 point to as much as 1.25 points. DID YOU KNOW? That if you pay off a second mortgage or home equity loan that wasn't used to purchase your home it is considered a cashout transaction.

As you may guess interest only loan pricing adjusters have gone through the roof as well.

Most of the other adjusters remained the same you still pay a .25 point for escrow waivers and from 1.5 to 2.5 points for Investment properties.

So what is the solution other than having a higher score. Well FHA loans lack many of these adjusters, and they are a great product despite some of the disadvantages such as a 1.5% charge for upfront mortgage insurance. Another option is to work with a lender such as Fifth Third that offers a quality second mortgage or home equity product.

Finally in case I lost you I expressed all these adjustments in terms of points. A point is 1% of the loan amount so on a $100k loan 1 point is $1000. These costs can either be paid up front in discount points or we can use a rate premium to pay some or all of the cost for you.

One of the biggest misconceptions I run across as a lender is the confusion over who qualifies for MSHDA. MSHDA is designed for first time buyers. However that just means you can't have owned a home in the last three years. Which opens the door to a lot of home owners. You can also use this program if you are buying in what is called a targeted area. You can find links to look that up in the MSHDA section of my site http://www.myfavoritebanker.com.

There is not a single better program currently for Michigan home buyers. Rates are currently at 5.625% for the standard program.

One other often over looked program for buyers working with little money down is Rural Development. Why is it overlooker....well many lenders aren't familiar with it and many Real Estate agents simply don't like it much. It is one of the few tru zero down programs left and you don't have to pay mortgage insurance!!!

The key to rural development is property eligibility. This can be a huge hang up because you prequalify for the loan, but find that your dream home is just out of the limit. You have to check every home you look at to determine eligibility. You may also find yourself very suprised at just how many homes outside of major metro areas do qualify.