Among the more interesting of the Federal Reserve proposals for amending the Truth in Lending Act (TILA) is one to expand the disclosures required at application. The purpose is to encourage borrowers to shop before they commit themselves.

The major new disclosure is one called “Key Questions to Ask About Your Mortgage”. The heading atop the list of key questions states “The only way to make sure you get the best possible loan terms is to talk to several lenders: SHOP, COMPARE, NEGOTIATE”.

This is a great idea, except that the 7 questions posed by the Fed will be answered in the same way by every lender. I will illustrate with answers to the first 3 questions that would work for every lender.

Fed Question: “Can my interest rate increase?”

My Answer: It can if you select an adjustable rate mortgage (ARM).

Fed Question: “Can my monthly payment increase?”

My Answer: It can if you select an ARM, or a fixed-rate mortgage (FRM) with an interest-only option.

Fed Question: “Will my monthly payments reduce my loan balance?”

My Answer: It will unless you select an FRM with an interest-only option, or an ARM with an interest-only option or a negative amortization option, and you take advantage of the option.

I could do the same with the remaining 4 questions. The problem is that the questions apply to mortgage types or options rather than lender operating policies. Since with minor qualifications all lenders offer the same types of mortgages and options, they will all answer the 7 questions in the same way. The answers would be useless to borrowers trying to select among different lenders.

To help borrowers select from among different lenders, the questions must apply to lender operating policies, not to their mortgages. There are important differences in operating policies that borrowers currently have no way of knowing. The following are 7 questions that I would want the answers to if I were selecting a lender.

Q: Do you allow your loan officers (LOs) to charge “overages?’

Comment: I would not want to deal with an LO who has a financial incentive to over-charge me. An overage is a price higher than the price the lender shows on its price sheets, which show the prices the lender will accept. Overages are usually shared with LOs, encouraging them to charge what the traffic will bear. Some lenders do not allow overages, and this disclosure at the point of application will give them the edge they deserve.

Q: Do you have a financial interest in, or a financial arrangement with any of the third parties providing services to your borrowers?

Comment: I would not want to deal with a firm that referred me to title agents or other service providers in which they had a financial interest. Over-charges on third party services are chronic, and lender deals with service providers are a major reason. The RESPA restrictions on payment of referral fees has had no impact but a disclosure requirement would. Note to home purchasers: this is also a good question to ask your Realtor.

Q: Are any of your mortgages (other than HELOCs) simple interest, or convertible into simple interest?

Comment: I would not knowingly take a simple interest mortgage because it accrues interest daily, eliminating the benefit of having a payment grace period. It has never been a required disclosure, and some borrowers have been surprised to find themselves with one. In some cases, borrowers have been converted to simple interest after their loan was sold because their note could be interpreted as permitting it.

Q: What must a borrower do before you will lock the price of their loan,

and will you provide a written lock confirmation?

Comment: I would not deal with a lender that did not have well-defined rules regarding exactly when I was able to lock the price, with confirmation of the lock in writing. Ambiguity that in effect allows the lender to lock when it wants to lock can seriously disadvantage borrowers who have no place else to go..

Q;: What fees must a borrower pay to lock, and under what circumstances are they refundable?

Comment: This is another essential part of a lender’s lock policy.

Q: When you lock the price of a mortgage, do you also lock the total of your fixed-dollar lender fees?

Comment: I would not deal with a lender that did not include all its charges in the lock. Most lenders lock only the rate and points, leaving fixed-dollar fees outside the lock. This practice makes the borrower vulnerable to fee escalation as the loan goes to closing. The Fed recognizes the problem in its reform proposals, but its remedy is to require that the lender raising its fees issue another TIL statement. All that does is give borrowers advance notice that they will be fleeced at closing.

Q: What proportion of your loan officers are certified financial planners?

Comment: Most replies in the short-run will be zero, but this puts the borrower on notice that the LO really isn’t qualified to offer financial advice. In the long-run, it may stimulate lenders to upgrade the quality of LOs.

- By Jack Guttentag

Jack is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania.  Comments and questions can be left at http://www.mtgprofessor.com

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Interest rates were a little lower this week, but only for the relatively small group of prime borrowers who qualify for the best rates. There are no signs yet of any easing in the tough eligibility standards that have resulted from the financial crisis. These standards are unreasonably restrictive, and prevent all too many consumers from purchasing a home or refinancing their current mortgage.

Much of this can be laid at the feet of Fannie Mae and Freddie Mac, who have substantially increased the rate penalty for not being a prime borrower. Anyone with a credit score below 740 pays a risk premium. Want to take cash-out of a refinance, the premium is bigger, and if the house is rented, the premium increases even more.

The private mortgage insurers, attempting to recover some of their losses on defaulted loans, now require a credit score of 680, which is only slightly below the national average. That means that almost half of all borrowers don’t qualify for mortgage insurance, and therefore can’t get a loan without putting 20 percent down.

Yes, life can be unfair, but instead of drowning yourself in self-pity, we recommend you start down the road toward becoming a prime borrower. The chances are very good that low rates for prime borrowers, and low house prices, will continue for some time, so if you can manage to shift yourself into the prime category within the year, the deals will still be there.

That means learning to understand why your credit score is not as good as it should be, and exactly what you need to do to raise it. That takes a little time. It also means understanding why you don’t have the cash needed to buy a house, and how to establish the control over your finances that are needed to accumulate cash. Developing the budgets and savings plans required for this also takes a little time. But you will have a mortgage for a much longer period, and if you are a prime borrower, you will save a ton.

The writer is mortgage lender with over 20 years of experience and one of the founders of www.home-account.com . Comments and questions that require response jack@home-account.com

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Is the recession over?  Well the HOUSING recession, which is what matters to us at Home-Account, definitely isn’t over.  It would be easy to argue that the general recession isn’t over, either, but who wants to be a party-pooper?

In terms of the housing market, though, we are probably a year or more from being in the clear.  What matters aren’t just rates and approvals but the rebuilding of a healthy and profitable mortgage industry and that hasn’t happened yet.  Mortgage

losses for the banking industry should continue to run at high levels for an extended period of time. Third-quarter loan losses on mortgages should be higher than in the first and second quarters. Non-performing residential mortgage loans will continue to build.

Economic data, while somewhat more encouraging lately, is far from definitively turning the corner. We are currently in the seasonally strong period for home prices and this may be helping the most recent data more than many experts would like to admit.

Housing affordability has improved markedly for all homebuyers, but real mortgage rates remain high.

Eighteen percent of mortgage defaults in 4Q2008 were from strategic defaulters, (those who could pay but were so underwater they decided not to pay). Others estimate the current number is 26 percent. This is alarming in light of estimates that 30 percent of all homeowners will be underwater within 12 months according to Zillow.com.

Foreclosures hit another record high in June — 1.5 million homes were foreclosed on. The rise in foreclosures, pre-foreclosures and real estate owned by banks presents a huge headwind for home prices.

As Yogi Berra said, “It ain’t over ‘til it’s over.”

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Mortgage rates were up a little last week, according to Freddie Mac, and house prices seem to be firming a bit according to the Case-Schiller figures for May, which is the most recent month for that housing index.  The Obama Administration is starting to cautiously talk about the recession slowing and maybe even ending later this year.  Does this recovery extend to the housing and mortgage markets. too?

No.

Fewer than half of all mortgage applications are closing.  Fewer than half of the projected four million mortgage modifications will actually happen. That means there are two million or more foreclosures yet to come — an incredible downward pressure on home prices for another 6-12 months.  Case-Schiller futures trading points to a housing low sometime in 2010, which is at least earlier than it appeared to be six months ago, but still not soon enough to validate the Obama optimism, which feels a bit like whistling in the dark.

And all the while mortgages become harder and harder to get.  New appraiser rules are pushing-down appraisal values.  This may be perfectly proper, but it will hurt loan closings.  New mortgage broker rules applied this week need clarification but will generally make loans more, not less, expensive, further driving-down closures.  Loan fees are higher, not lower.

All signs point to a need for further economic stimulus, maybe this time aimed at the people who actually need it (and have been paying for it all along) — American home owners.  We’ll see.

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Mortgage rates eased slightly higher last week after being down the previous three.  We’ll see this brownian motion in the future, too.  From a policy standpoint, both the government and industry will be grappling this week with the implications of a recent Government Accountability Office report on mortgage modifications and the blow-back from new Fed rules for mortgage brokers.

The GAO report, which came out last Thursday, says what we at Home-Account stated two months ago — that the Obama Administration has no hope of achieving even half of the five million modified mortgages it has been talking about.  The rules took too long to put in place, loan servicers have taken too long to ramp-up to do modifications, and on some level the banks don’t appear to want it at all, even though modifications are clearly in their financial interest compared to the cost of foreclosures.  The upshot that conspicuously ISN’T in the GAO report is that this means an inevitable second spike of foreclosures in the months ahead, further delaying any national housing recovery.

The new Fed rules for brokers are covered in a blog post here at Home-Account, but suffice it to say the Fed is entering new regulatory territory and is unlikely to get the positive results it is seeking.  Where they are seeking greater transparency what the Fed is likely to get are marginally higher mortgage costs for consumers and an overall lower percentage of mortgage applications actually closing.  Great.

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The Federal Reserve last week proposed new rules to go in effect this week that are intended to curb certain abuses of mortgage brokers by limiting broker compensation and increasing transparency in the entire mortgage process.  But as well meaning as the Fed may be, these changes will hurt brokers, won’t homeowners very much, if at all, and may lead to a reduction of competition and therefore higher mortgage costs.

The basic idea behind the new rules is that mortgages and the mortgage process are complex and brokers can take advantage of this to make more profit from the homeowner than originally expected.  So the new rules take two basic actions: 1) they give homeowners three days, instead of the current one day, to look over the final paperwork before closing the loan; and, 2) they require that the final closing documents list all costs within a slim percentage of the original Good Faith Estimate.  Final costs can be LOWER than expected under the new rules, but they aren’t supposed to be HIGHER, thus keeping unscrupulous brokers from shifting unaware homeowners into a different mortgage that makes more money for the broker.  No bait and switch.

While this all looks fine on the surface, it shows a naive lack of understanding of the mortgage business on the part of the Federal Reserve which, after all, hasn’t traditionally touched this sector.

The first problem with these new rules is the likely effect they will have on mortgage rate locks.  When a homeowner “locks” a rate it is typically for up to 30 days, though often less.  If the loan doesn’t close by the time the lock expires, that rate is gone.  Giving homeowners three days instead of one to read the paperwork inserts an almost automatic two day wait in the process without an accompanying two day extension of the lock.  This will increase, perhaps dramatically, the percentage of mortgages that fail to close.  Remember that at this time most mortgages DON’T close (only about 35 percent of loans actually close) and this process will make the condition even worse.

Those who are determined to buy or refinance a home may well be forced by these new rules into multiple cascading Good Faith Estimates that will just increase the complexity, overhead, and cost of their eventual mortgage.

The answer probably isn’t to make the paperwork examination process shorter, however, but to extend the lock, though the Fed is reluctant to do that because of possible financial implications for the lender — implications that would again make mortgages more, not less, expensive.

Extending the process by another two days also makes it more difficult to fairly calculate the Annual Percentage Rate for the loan — that actual cost of borrowing that takes into account all the tiny details including the cost of carrying the loan for those extra two days.  The result of this mandated uncertainty is that APR estimates will tend to go up and loans will look less attractive than they really are.

This latter effect is an artifact of the new rule that penalizes brokers for setting estimated closing costs too low but doesn’t penalize them for setting them too high.  So the result will be estimate inflation when it comes to those closing costs.  Where the broker thinks the appraisal might cost $350 they’ll put $400 just to be safe.  Where the interest payments to carry the loan until the first payment might be $700, maybe $800 or $850 will be used.  And while this seems harmless it isn’t in two respects: 1) inflated numbers tend to be self-justifying (final numbers will rise over time to meet the projected closing budgets), and; 2) all lenders aren’t equally subject to these new rules, as I explain below.  The competitive environment suggests that lenders not required to release as much information under the new rules will either gain more business as a result or — more likely — will increase their own charges to keep pace, therefore making mortgages cost slightly more overall.

None of this might matter if the new rules were broadly successful in accomplishing their true underlying task, which is showing homeowners just how much the broker is making from the loan.  True it gives a little insight into broker fees (while pushing them slightly higher in the process) but it has no such effect on banks that lend directly like a CitiBank, Wells Fargo, or Bank of America.  Nor does it have any impact on correspondent lenders — mortgage companies who fund loans through their own lines of credit then sell them on again within 24 hours generally to those same big banks.

This is because neither of these other two classes of lenders is required, for example, to disclose the size of their Service Release Premium — what they are paid to hand over the loan to a new servicer.  How much are these other lenders — who represent the major of U.S. mortgages — making on loan origination?  There is no way of knowing.

So prices go up, failed closings go up, the big get bigger, and both brokers and homeowners are squeezed.

This is progress?

cringely Blog closing costs, Federal Reserve, Good Faith Estimate, mortgage brokers, mortgages, rule changes

Mortgage rates were down marginally last week accord to Freddie Mac — the third week in a row for this trend.  What we feel with some certainty is that this week rates aren’t likely to start back up.

Meanwhile the issues of slow refinance activity and glacial mortgage modification rates that we’ve seen for the last several months are being made worse by most of the big banks recently announcing billions in profits.  Remember these are the same banks that were bailed-out with taxpayer money at the same time those taxpayers generally WEREN’T being bailed out.

This may put pressure on the Obama Administration to sweeten the pot for existing mortgage holders, so we expect new initiatives to be announced in the coming weeks.

What those initiatives will include is what we have to figure out by next week.

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Mortgage rates are continuing to trend down this week, driven both by the bad economy and simple inertia.  Its as though the mortgage industry were waiting for a shoe to drop — and so they are.

The Obama Administration has been subtly reworking its mortgage proposals.  Everything that used to be there is still there, but not to the same scale.  The Public Private Investment Partnership, for example is still in operation and the principle firms were announced this week, but the program that was supposed to buy up to $1 trillion in distressed mortgage securities now looks to be limited to around $30 billion, tops, because of specific limits on buyer leverage.  That’s a more than 97 percent decline in what was supposed to be a key program for mortgage industry recovery.

The Administration has to come up with something else — another program to benefit homeowners — but until then the market waits and waits.  How can it do anything else?  If the new answer is forced principle reductions that’s a HUGE blow the owners of mortgage securities.  Or will Obama have the nerve to even take that path?

Nobody knows.  And so we wait.

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One casualty of the mortgage crisis that we’ve covered here before is the jumbo mortgage — loans over $417,000 in some jurisdictions and over $729,000 in others.  If you are (or were) a millionaire with a big house and a big mortgage, chances are it was a jumbo.  In the mortgage bubble days jumbos generally carried a half-percent interest rate premium over conventional (non-jumbo) loans. Then all heck broke loose and jumbos disappeared entirely only to reappear recently, though after a somewhat different fashion.

Lenders are leaping into the jumbo mortgage business and offering aggressive rates — easily as aggressive as in the bubble days in terms of rate premiums.  But there’s a catch.  The catch is that jumbo mortgages today are a lot harder to qualify for than they used to be.

Want a jumbo loan?  Then be ready to make a 30-40 percent down payment on your new house.  This immediately eliminates refinancing most of the older jumbo loans in California, for example, where more than half of the mortgages were already of jumbo size.  If your jumbo mortgage is underwater don’t expect to be able to refinance — or even to apply for a mortgage modification, since the Obama plan, for example, doesn’t even cover jumbos.

The reason lenders are jumping into jumbo mortgages is because under these terms it is a great business.  Wall Street still won’t touch jumbos for securitization, but that doesn’t matter because the banks are tending to hold these loans in their own portfolios.  And for good reasons: 1) the lenders have plenty of equity down so the properties are worth more than the loans against them; 2) it costs little more to foreclose on a jumbo than on a conventional loan so for the lender the downside is the same while the upside is much larger, and; 3) under current Fed policy the banks are making these 6-percent jumbos with 0.25-percent money — a fantastic spread by historical standards.

So welcome back jumbo.  Too bad most of us can’t qualify.

cringely Blog banks, jumbo mortgages, mortgage crisis, mortgage rates, mortgages

The Office of the Controller of Currency released some interesting information last week about mortgage modifications and foreclosures.  It seems that modifications, which were supposed to be increasing in number under the Obama Administration’s Making Homes Affordable plan, have actually been dropping since February.  Fewer mortgage holders have been getting mortgage modifications each month and — if that isn’t a dreary enough fact — the overall numbers are pitiful, far less than the millions projected by President Obama.

So the federal mortgage modification program is, in a word, a failure.

Meanwhile, foreclosures continue to rise, but last week brought sobering news on that front, too: the average foreclosure loses the lender 63 percent of the money they have lent on the property.  This is a testament both to the giddy levels of debt homeowners were taken to before the mortgage bubble burst AND to the obvious fact that lenders are losing a ton of money on all those foreclosures.  And right now, according to HUD, 8.9 percent of U.S. mortgages or more than four million mortgages with a notional value of $892 billion are in foreclosure.  If the loss trend for lenders continues, and there is no reason to believe it won’t, that means they face probable losses of more than $560 billion.

This is terrible news, of course, but in a season of terrible news it actually presents an almost humorous paradox, because the Obama (and previously the Bush) Administration doesn’t seem to have met a banker it didn’t like, which suggests that there will be yet another bailout of sorts for the lenders.  But this time around that can only be accomplished, ironically, by doing something for the borrowers, too.

We expect a new Obama program shortly that will somehow reset many mortgages in foreclosure through the simple expedient of lopping some large amount off the principles of those mortgages.  This is an impossible task, of course, because it will simultaneously alienate all the mortgage holders who AREN’T in foreclosure.

Look for such a new program to appear in a few days, with an extra spin cycle thrown in for good measure.

What then?  We haven’t a clue, but it should be interesting to watch.

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