Franklin Financial Group Blog

Are you aware that the USDA Rural Development loan is one of the last remaining 100% purchase (no money down) loans left? If you are looking to purchase a home that is located in an eligible area, the USDA may possibly allow you to financing the entire purchase price. There are even provisions where you can finance more than the purchase price if the home appraises for higher than you are paying for it. Limitations apply for how much above the price you can borrow, but for example, you may be able to finance some appliances for the property as part of the deal.

The Rural Development loan helps do what its name implies; develop rural areas. Surprisingly, homes located in an eligible area are not necessarily that far away from suburban areas. I am doing one of these loans right now and the property is located only about 15 minutes (driving time) outside of the I-275 loop around Cincinnati. Of course the closer you get to a metropolitan area, the harder it will be to find eligibile locations.

If you are willing to drive a little farther to and from where you will live, this program may be something worth looking into. For more information you may want to visit the USDA Rural Development website: http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?NavKey=home@1

With a month and a half behind us from when the 2010 Good Faith Estimate (GFE) went into effect, I have had some experience both presenting the revised forms to borrowers and lenders. There has been some confusion with both parties, but it hasn't been something to halt the loan process (too much that is.)

The borrowers that I have presented and explained the new GFE have seemed to get confused initially with a few charges that must be listed according to the new RESPA guidelines, but once they understand why those items are listed and that they may not be applicable for their loan, they seemed to be okay with the new reporting method.

Lenders I have sent the form to are the ones that still either have some confusion regarding the forms, or more appropriately create additional confusion for brokers like myself, due to the fact that lenders' interpretation of the form can vary, and therefore so can how information is disclosed from one lender to another. The main hold up I've experienced is that until the new GFE is provided to the lender and is completed according to their interpretation, the actual underwriting process of the file can be held up. This can lead to longer processing periods and thus longer time periods from application to closing.

The new form requires additional time and attention both at preparation and deliverance. Accuracy is imperative due to the form protecting the borrower, and if errors are made when preparing the form, the originating company will be the one who compensates the borrower for the errors. This can be overcome by knowing the details of the transaction for the area the property is located. I am bound to provide an estimate of the costs of a loan to my borrowers, which cannot increase (some fees at all, some no more than 10%) by or at closing. To me this is an acceptable practice. I just don't feel we needed three pages to do what we could have done with one. Regardless, we do so there's no use fighting it.

Achieve and overcome. That's all any of us can expect of ourselves. Best wishes.

As of January 1, 2010 the new Good Faith Estimate (GFE) required by RESPA is now in effect. As a consumer you will now receive the new 3-page GFE as opposed to the previous 1-page form. Additionally, due to the requirements of what is required on the new GFE and how that information is disclosed to consumers, the form will probably be issues at least twice during every loan process. Additionally, there will probably be two additional forms sent to borrowers reflecting Shoppable Service Providers and an Acknowledgment of the final 3-page GFE.

What this means is more information being provided to consumers which can become confusing. If you are a consumer applying for a mortgage after January 1, 2010, make sure you consult with your mortgage professional regarding the new form and how to best understand it. The revised GFE was designed with the intent to provide more accurate closing cost charges for mortgages to borrowers. While the intent is sound, it is my experience that when you triple the amount of pages for one disclosure, often the result is "overload" to someone who does not review these disclosures on a daily basis. Since the form was revised with the consumers' best interests in mind, it is you as the consumer who needs to provide feedback of your personal experience with the new form, and any others you will receive, when obtaining a mortgage loan. Feedback should be sent to your local elected official. If you would like to find your local elected officials, please visit the following site, which will point you in the right direction: http://capwiz.com/namb/dbq/officials/

Wishing everyone a prosperous 2010!

The 2010 RESPA changes to the Good Faith Estimate (GFE) are certainly a bit confusing at first, and that is to someone in the lending industry. I can't imagine what they will be like for the consumers. After multiple training sessions regarding the changes, I now understand how to make the new GFE a part of my business. Certain fees on the form, once provided to a borrower, cannot change at all (zero tolerance) and some can change slightly (ten percent tolerance) between disclosure and closing or settlement. Additionally some fees must be listed on the GFE that may not end up being paid for by the borrowers at closing, but due to being included will certainly at first look make borrowers feel as if if their closing costs are higher even though they may not.

Another change to the form is that fees that have been itemized on the present GFE will now be consolidated into "blocks" of fees as totals. Personally I feel that itemizing is less confusing and shows more detail, but apparently the powers that be felt otherwise.

If borrowers "float" a rate (don't lock it in) at first, they will be provided on GFE, then when they lock their rate they will be provided another final GFE. Certain fees on the initial and final GFE cannot change no matter what. I do like this part of the changes as it allows borrowers to obtain their figures initially and then see the final numbers as they relate to certain interest rate. I think this is better and full disclosure, however I don't feel that the new 3-page GFE is necessary to do this when it could have been done with the old 1-page GFE. I have asked this question before, but what happened to the Paperwork Reduction Act passed by the same Government now requiring three times the paper for one specific form, generated often multiple times for each borrower on a mortgage loan transaction?

Change is not always easy and the RESPA changes for 2010 are certainly at first not going to be. As a matter of fact, in order for everyone in the lending transaction to make sure they are RESPA compliant, additional time per transaction should be expected to be required. As a result, mortgage loans that could were being closed in about 30 days may now take at least 45 to 60 days (or longer). If you are a seller, buyer, realtor or mortgage industry professional, be ready to be more patient and understanding as these changes begin to happen.

Consumers are the ones who are focused on being protected by these new changes. If you are a consumer and have questions or concerns about the new RESPA changes, please visit the following website:  http://www.hud.gov/offices/hsg/ramh/res/respa_hm.cfm. Here you can find further information and be able to contact HUD should you wish to.

The subject of this email is meant to be humorous, and is not necessarily what I believe. Having said that, I used the title to lead into an issue I will now discuss. As mentioned in a previous blog, and one of the most talked about issues in the mortgage industry right now, HUD has new RESPA changes going into effect as of January 1, 2010. One of the most talked about (and confusing) changes is how fees related to the mortgage transaction will be listed on the new Good Faith Estimate. Mortgage Brokers who can both charge fees to a borrower up-front, and receive compensation by the lender in the form of a yield spread premium, must divulge the total amount of their compensation, whether it is paid by the borrower or the lender, or both. How it will be viewed is entirely new and without explanation can lead a borrower working with a mortgage broker to believe they are paying much more in fees than they actually are when compared to working directly with a lender or banker. The problem is lenders and mortgage bankers also receive compensation that is very similar to a broker's yield spread premium, but lenders and bankers do not have to disclose the amounts to borrowers. This disparity has been going on for a long time, and personally (yes I am biased) believe how the brokers disclose is actually much more open and honest to borrowers. As a borrower you can make the determination on your own, but I cannot see how a borrower would disagree with me.

Anyways, in regards to the new Good Faith Estimate, I met with one of the lenders I originate loans through to discuss how things would work after January 1, 2010. They had just come from a meeting to discuss the disclosure of fees, and were not yet given instruction on how the changes would be handled on broker-originated loans. They did not seem to understand how brokers must disclose the yield spread premiums, and as a result were questioning whether or not the premiums would be allowed. I went on to explain how we as brokers will be required to disclose it and that it is acceptable and allowed. As a broker the lenders I am set up with have all provided webinars and education/training (some of them on multiple occasions) so that we can better understand the changes and be ready to apply them when required.

Mortgage brokers must learn a multitude of programs and different ways of doing loans with regard to using various lenders. Brokers therefore are being provided more training and guidance than a lender might provide to its internal origination staff. Think about it, if each of lender provides the brokers they are set up with multiple training sessions on the changes, the amount of information brokers have access to by far exceeds that available to one company's internal staff. Personally I have access to over 20 lenders, so if each of them gave me just one training session, I have 20 times to review the changes. The new changes have only been known for about 2 months, so I doubt there is a practical way for one lender or banker to provide training 20 times to its origination staff in 2 months.

So to answer my question if mortgage brokers are better than lenders or mortgage bankers, I would have to say at times yes, and at times no. There are many qualified individuals on both sides, so there really is no way to definitively say one way or the other. From a total disclosure standpoint, when working with a mortgage broker, you as the borrower will continue to see the total picture in regards to what you are "paying for". If you work with a lender or mortgage banker, there is still going to be something you are "paying for" that will continue to be hidden from you. This does not seem like a level playing field, but that is life is it not?

It is clear I was never an advocate of the HVCC, and I'm still not. As a matter of fact each day I think I dislike it more than the day before. The funny thing is my dislike of the HVCC is mostly driven by what it is doing to my customers, who are always my first priority. Since I have openly communicated my concerns about the HVCC, I thought it prudent to support my thoughts. The following are a couple of examples of how my actual customers paid the price of the HVCC.

First was the "Jones" family (for privacy I've changed the name). With rates being low they wanted to refinance their current first mortgage to save some money each month. We designed a program to do just that. Everything was going as planned until we received the appraisal. The appraiser brought the value of the home in $5,000 less than what we hoped for. With this lower value my borrower was now going to have to pay Private Mortgage Insurance or PMI. Being a licensed Realtor, I was able to access the local Multiple Listing Service (MLS) and found some sales comparables (comps) that the appraiser did not use. I adjusted the comps I found to match how the appraiser adjusted the ones they used, and felt I had provided proof that our subject property had been undervalued. Since the HVCC does not allow me to have any contact with the appraiser, I submitted my research to the lender who passed it along to the appraiser. The appraiser was unwilling to adjust the value they came up with. They essentially felt threatened by my challenge of the "opinion" of value, and took no consideration of the fact that I was providing information obtained professionally from the same place they had access to. The point is an appraisal is simply an "opinion" of value and I had provided enough evidence that the value could have been determined to be $5,000 or more higher (which was a 3.25% variance of what the value they set). No appraiser is "that good" where their value can be deemed 100% accurate. Anyways, the end result was our new loan amount was over 80% of the value of the appraisal and my customer ended up paying the monthly PMI which eroded much of the savings on the loan. The customer now has to make extra principle payments to get to 80% or less of the appraised value, for the PMI to drop off. They also may have to pay for another appraisal when they reach 80% of the appraisal used for the refinance loan. This prolongs the time in which they could be saving money and hurts them in the long run.

The next example was for the "Smith" family (again I changed the name to protect my customers privacy). On this loan, you probably guessed it, our subject property was undervalued. The appraiser brought the home in $50,000 less than we believed it to be worth. As a result, the interest rate the borrower was going to get was higher than we had originally planned for. So again, I was able to access the MLS and provide comps the appraiser had overlooked. I even went a step further to provide my research to another appraisal company to get their opinion on how I was looking at things. The second appraiser agreed with my findings and felt the comps I found supported a higher value. One of the comps I found that the original appraiser had overlooked, was on the same street and had sold within the last few months. It sold for $75,000 more than what the original appraiser estimated our value at, and was very similar to our subject property. My research provided evidence that our subject property could have been given an "opinion" of value that was $50,000 - $75,000 higher (actually the second appraiser commented as high as $100,000 higher than the original appraised amount). The result on this loan, after my research was submitted through the lender as a challenge of value to the original appraiser was that the value was increased by $25,000 (7.14% higher than the original value). While still lower than what another appraiser could have come in at, the adjusted value was high enough to get the loan done as originally planned (I actually gave up some of my service release premium, or commission, so the borrower would get the rate they were expecting). In the end the customer got what they were hoping for, but were put through a lot of extra time and frustration to get there. Had I been able to deal directly with the appraiser, I could have dealt with the value issues up front and saved my borrowers much of what they endured.

Mortgage professionals have been accused of pressuring appraisers to falsely inflate values. While I agree that this was done in the past, I was not attempting to do this in either example. I had a predetermined loan amount I was working from, which was based on my professional research done as a licensed Realtor, as well as my knowledge of the markets in which my borrowers lived. I was trying to get higher values on both loans because my research showed me that I was not being unrealistic or falsely inflating the values, and that the values that we believed in would benefit my customers in both cases by saving them money per month. This indirectly benefits the lenders they end up with because the lower the monthly payments, the lower the debt to income ratio risk becomes.

My borrowers were told their homes were worth less than what quite possibly someone else (another appraiser) could easily have appraised them for. This frustration felt by the borrowers may have been avoided had I been allowed to order the appraisal myself and provide my research up front. Appraising homes is not an exact science. It is someone's "opinion" of what a home is worth. There's no way to see exactly what a home is worth, or what someone is willing to pay for a home, unless the home is sold. Therefore, it is impossible to anyone to be 100% accurate on an appraisal for a refinance loan.

The price my borrowers (and many others like them) paid is that undervaluation of their property did (or almost did) cost them money each month. In addition, the loan process was extended due to the additional time necessary to challenge the original values. The new loans had lower rates and payments than the old ones we were replacing, so each day that passed before we closed was costing my borrowers money. While I can't place a monetary amount on what my borrowers endured throughout the process, they still "paid" for it in some fashion. Had my borrowers chosen not to complete the refinance (or been able to) due to erroneous information, they would have lost out or paid the price. Also, had they chosen for me to go to another lender, they would have had to pay out of pocket for another appraisal. I'm glad it worked out for my borrowers in both cases, but many are not so fortunate.

The HVCC is not helping consumers but rather costing them more money out of pocket and removes their ability to choose who (and sometimes how much)to pay for a critical part of their loan process. It is harming lenders who are losing opportunities for good loans that can replace some of the bad ones they had on their books. It is however benefiting appraisers and appraisal management companies who are getting paid no matter how accurate (or inaccurate) the information is that they provide. I feel it harms much more than it helps and should be gotten rid of as quickly as possible. If you agree please contact your local elected officials and let your voice be heard. The following is a link you can click on to find yours: http://www.usa.gov/Contact/Elected.shtml

There is no way to predict with complete certainty when mortgage rates will rise. Recently however, the Fed has announced that while it will not increase the quantity of MBS purchases, it is planning on extending the end date into the first quarter of 2010. The greater the amount of MBS purchases that take place, the lower interest rates will go. It makes sense therefore that as the Fed slows its MBS purchase quantity to eventually fulfill the program, that rates will begin to move higher. There have been signs and announcements recently that the economy is improving which could normally cause a rise in mortgage rates. With inflation remaining down, mortgage rates have also remained quite low.

While guidelines remain stringent to qualify for a mortgage loan, now is still a great time to refinance or purchase a home and take advantage of such low interest rates. With the deadline of the $8,000 first-time homebuyer credit program approaching, there is even greater incentive to act sooner than later. Private Mortgage Insurance (PMI) companies have begun to loosen their restrictions in some areas, thus allowing for insurability on higher loan-to-value (lower down payment) loans.

If you have been considering pursuing mortgage financing, you should contact a mortgage professional to discuss all options available to you at this time.

On May 1st, 2009 the Home Valuation Code of Conduct (HVCC) went into effect. The main focus of the HVCC is that the appraisal done for a loan must now be ordered by the lender, not the originator. The belief is taking the originator out of the process will make the appraisal process more accurate and overall better for everyone. Prior to this date, many industry professionals voiced their opinion about it, good or bad. Personally, in its present form I did not, and still do not, think it is a sound solution to the appraisal process within a loan origination. I thought it would end up costing the consumers more money in the long run (see my blog from February 20th, 2009) and voiced this opinion with my local Congresswoman's office. Now, after a week with it being in place, I realize my initial thoughts were absolutely correct!

First, I am working on a few loans which I had ordered the appraisal on prior to May 1st. During the loan process I found I had to switch lenders. The problem is most of the lenders I looked to switch to would not accept the original appraisal I had (which my borrower already paid $250.00 to obtain) and required that they (the Lender) order their own appraisal. This would mean the borrower would have to fork out another $250-$400 depending on the lender who would order the report. There should have been some sort of "grandfather clause" that stated that lenders could not refuse to review an appraisal ordered prior to May 1st (not that they would have to accept it). This would potentially save my borrower, and I'm sure thousands of people in similar situations, a lot of money. Think about 1,000 loans requiring a second appraisal just because of the "timing" multiplied by $250 (conservative) and you get $250,000 that CONSUMERS now have to pay for additionally.

Next, my fear was that when the HVCC required lenders to order the appraisal, often through Appraisal Management Companies (AMCs) that the cost per appraisal would go up. I have also found this to be true as many appraisals I used to order ended up costing the borrower $250-$300. Now that number has gone as high as I've seen at $400. This includes the cost of the actual appraisal to the appraiser who performs the work, money for the AMC to order and manage the appraisal process, and service charges for using a credit card to pay for the appraisal.

One thing I failed to initially consider was the potential risk for identity theft and fraud to consumers when they provide their credit card information to pay for the appraisal in advance. I have yet to see an alternative to providing credit card information to prepay for the report, but that doesn't mean they aren't available. The main thing with credit cards is who knows how secure the lender is, and how secure the AMC is with this information. Identity theft is quite prevalent, and this is another risk factor to be added to the mix. I hope the Government is requiring AMCs to abide by the Red Flag Rule that Lenders and other financial institutions are made to.

So the problems that I have now seen surface are increased charges to consumers due to appraisals from prior to May 1st, increased costs to consumers per appraisal done after May 1st, and increased risk to consumers for having much more exposure to theft and fraud from providing credit card information. Let's not fail to mention that the credit card companies charge very often exorbitant rates, so the cost of the appraisal if put on a credit card will very often cost consumers much more due to the interest on the credit card, if the amount is not paid off immediately.

If you are consumer looking to get a mortgage to purchase or refinance property, you should be aware that most likely you are now going to pay more for your appraisal. I suggest you contact your local political figures and voice your opposition to the HVCC in its present form, unless you don't mind paying more for your loan!

In this economic market, many people see their assets reducing in value by significant percentages. Recently, I have had a few customers who have second mortgages on their homes (whether actual loans or lines of credit) go to someone like their parents and suggest "Mom and Dad" lend them enough money from their retirement to pay off the second mortgage. Instead of paying the money and interest back to a bank, they are now paying their parents the interest. Of course this type of move carries with it the same risks banks have by holding the second mortgages, but if the person who has the loan is willing and able to pay it back as agreed to the bank, it might be a way for Mom and Dad to get a guaranteed rate of return on their money, which they might not get in "the market" right now. Their are tax consequences to consider when doing this, so consulting appropriate attorneys and/or tax advisors is suggested. When you pay interest to a lender on a mortgage that interest is reported as tax-deductible. Here's an example of how everyone can win. Let's say the interest rate on the second mortgage is 9%. If the person paying on the second mortgage is able to deduct the interest on their taxes, and is in the 33% tax bracket, they are "effectively" paying 67% of that interest (100% of the interest paid to the bank minus the 33% tax bracket portion they deduct.) 67% of the 9% interest rate is equal to 6.03%. Let's assume Mom and Dad agree to lend the money to their children at a rate of 5%. Mom and dad would win because now they are getting the rate of return in the form of payments from their children, which while only at 5% is possibly still a higher rate of return than they might be earning on their money in the market. The children win because they are now paying in this example 1% less on the money than they were paying to the bank. They also no longer have a second mortgage recorded on the home, unless a new one is filed and recorded.

Let me reiterate that making a decision like I am describing above should not be made without first consulting with your tax advisor, attorney, or financial planner. If done correctly however there are definite benefits for all parties involved. One benefit I have not mentioned is that this type of conversion will eliminate some of the risk banks are carrying on their books, which will free up money for them to lend back to the public. I am no economist, but it is my belief that this could result in improving the position of some banks, reduce the interest some borrowers are paying on presently and increase the rate of return for investors, all in one move.