News Channel Mortgage

In this changing mortgage environment, there are occasions when a Loan Officer will get a call from a Realtor about helping their buyer secure a mortgage on a property they are buying and the Loan Officer is unable to do the deal for any number of reasons: they are not signed up with FHA or USDA Rural Housing, it is a condotel unit and there aren't many condotel investors left, etc.

Recently, I have seen two different scenarios of the above that are NOT IN YOUR CLIENT'S BEST INTEREST: (1) the Loan Officer tries to convince the buyer to get a different loan type (or doesn't even tell them that another loan would be in the clients' best interest because they wouldn't get paid if they had to send them elsewhere and (2) the Loan Officer calls another company to see if they can do the deal and then asks them to pay A LOT OF MONEY to the 1st Loan Officer just give the realtor the 2nd Loan Officers' name and phone number!

I just closed an FHA deal for a client who wanted 100% financing; he found a house, the seller was unwilling to assist with any downpayment assistance, and the Realtor put the buyer in touch with their company's in house lender. Because the buyer had some money that could be tapped into for the transaction, this lender only talked to the buyer about a 95% conventional mortgage at a rate of 6.625% with mortgage insurance. Based on this, the buyer would have had to put $12,500 down (the sales price was $250,000), and his payment would have been $1,536.86 P+I with $209.79 for mortgage insurance, with a total payment of $1,746.65.

The borrower, unaware that there were other options available, was content with that. However, I write a monthly mortgage article for our local paper and the buyer read it and called me. We then discussed an FHA option (he made too much money for USDA Rural Housing) and I quoted him 6.125% with no points and no origination fee with only 3% down. With the FHA loan, he only had to have a $7,500 down payment and, even with financing the upfront mortgage insurance premium into his loan amount, his monthly payment was $1,576.05 P+I with $101.04 for monthly mortgage insurance, resulting in a total payment of $1,677.08, a savings of $69.57 per month and he made a $5,000 less down payment! Had he invested the 5% that they were quoting him on the conventional loan for a down payment and done an FHA loan at 95%, his total monthly payment would have been $1,563.68 for the FHA loan, including monthly MI, a difference of $182.97 a month.

As a realtor, if you are selling primary homes, make SURE that the mortgage lender you are referring your clients to are able to do FHA and USDA Rural Housing mortgages. It can save your clients a lot of money in both the short and long term!

The second scenario involves a mortgage lender asking another mortgage lender to pay them a fee just for giving a realtor our phone number. I had this happen last week: Lender A called me and said she couldn't do a particular mortgage but would give the Realtor my name and number if I paid her 25 basis points of the mortgage amount. This may not sound like a lot, but in this particular case, it would have been $2,250 FOR GIVING A PHONE NUMBER! On top of the obvious RESPA issues, the first borrower knew that this fee would have to be collected from the borrower - in fact, we have to have them sign a form stating that they know Lender A, who they may never have talked to, is getting a fee for giving their realtor Lender B's phone number! Obviously, I gracefully bowed out of this deal!

My advise to you as a realtor: make sure you know the types of loan your mortgage lender referrals can do! As a buyer, make sure your lender is giving you ALL Of the options available - ask your Realtor what types of loans there are and get educated so that you don't end up paying too much money!

Oh, and by the way: if we get a call and know that we are unable to do the loan but know of someone that can, I can assure you: we will refer you to that person AT NO COST TO YOU OR YOUR BUYER! I feel it is all of our best interest to get real estate sold and closed in this market!

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Rhonda,

All Tax Assessors use sales data to determine value changes for a neighborhood for sure. But they don’t automatically jack the assessement to the most recent sale price on a house by house basis the way CA does. Most States do it the way WA does as far as I know. Otherwise there would be huge variances between taxpayers who live next to each other and receive the same services. Not an equitable system to treat three neighbors quite differently, simply because they bought their homes at different times.

Mike could take cash out with a 2nd loan, or liquidate another investment.

Why would Mike NEED to sell? I agree he might WANT to sell, but that is different from needing to sell.

OK, say he moves. He puts the house on the market, does not get an attractive offer, and rents it out, until he can sell. Pretty common in today’s market.

He cannot lose a job he doesn’t have.

If he gets ill, he liquidates other investments to make the loan payments.

OR, he gets an incredible offer, and sells above market value, and still wins, even with the prepayment penalty.

So, maybe the credit union or a retail bank is a good scenario, I don’t know, I cannot offer those solutions. Maybe it’s better than what I proposed, in Hypothetical Solution #1 or #2. Maybe it’s not? Maybe they would have a prepayment penalty too, or their loan costs could be higher, or interest rates higher, or loan parameters more restrictive.

But I still think both solutions presented (one with a prepayment penalty, and one without) were worthy of consideration, and would consider both carefully for myself, as well as any client.

A credit union could not likely provide the range of options you or I could offer, as wholesale mortgage brokers, with our access to multiple lenders.

And, like you, if a different lender, be it retail, or wholesale, presents a clearly better solution for the borrower than what I have available, I would recommend that my client take that route.

When I bought my house on North Lake in West Hill Auburn, the very next day I had a note taped to my front door from someone w/the assessors office wanting to confirm my sales price…which I thought was odd because they could just check out the excise tax affidavit.

This statement of Kary’s has been bugging me all weekend.

“when you buy it they might reassess based on the sales price.”

First of all, “might reassess” is just lame. They do or they don’t…and they don’t unless…

This is mega important to home buyers. In CA, the assessment DOES change when someone buys a house. In WA…NOT!!!

In CA you can have two neighbors with the same house with one assessed at half the value as the one next door, simply because it has changed owners more times. A very unfair system and WA does not do that.

Easy to prove out. Just go to Rivertrail in Redmond and you will see that two 1,544 models will both be assessed at $369,000 regardless of whether the owner is an original owner or the townhome sold 4 times at increasing prices over the same 10 year period.

The exception is New Construction and Major Remodel. When it comes to new construction it is often anyone’s guess what market value will end up being. We’ve all seen a new construction start out asking $1.6M and end up selling for $1.3M. So assessed value of new construction is highly influenced by purchase price.

Same is true for a mega remodel, which is why my property increased so much. The previous owner bought it as a small tear down. Instead of tearing it down, he expanded it and lived in it for 11 years. The assessment increased, but without a market sale to prove out the market value of the remodel, it remained artificially low. One of the reasons has to do with view considerations. As a small bungalow, the assessor’s office didn’t show any views, which was always incorrect even when it was a bungalow.

The market sale not only substantiated a value increase, it also highlighted the fact that there is Lake Washington, Mt.Rainier and Seattle City Skyline views. In fact I’d like to see the breakdown of the new assessment to make sure sure they noted the view considerations. I’m more concerned that it continues to be too low than I am that it is too high, even though it went up 40%.

The average buyer who is buying a resale house that has not had siginificant changes as to remodel should not be led to believe that his purchase price is going to increase his taxes above that of his neighbor. This ain’t CA and it just isn’t so.

So Kary…no…I don’t read the PI Blog. I’d rather read Seattle Bubble. Get black and white. Does every house’s assessment automatically go up based on purchase price after a sale. NO!!! For God’s Sake NO!!! Unless WA just adopted CA methods and I haven’t heard about it.

Sorry, I’ve been holding that in for two days.

Roger,

3% prepayment penalty on $880k = $26,400. I could never advise that for a client…even though the prepayment period is just one year, if something unplanned happened, Mike would be screwed out a chunk of change.

You state: “If Mike envisions a scenario that the loan would end in a year, then of course it does not make sense to do anything AT ALL” the key word here is ENVISIONS.

Often times people don’t envision a job transfer/opportunity, illness or other reasons they may need to sell or obtain cash out for an emergency purposes.

My original advise to Mike, and others with loan amounts over $567,500 is to check out credit unions for more competitive rates in the true jumbo market w/out prepays.

Rhonda:

Regarding prepay penalties.

Sure, I too am generally against prepayment penalties, UNLESS THEY BENEFIT THE BORROWER!

Pardon the shouting, but I am sick of lenders, brokers and originators saying they never did certain practices, like it’s some kind of badge of honor, even if the practice benefitted the borrower!

A prepayment penalty makes GREAT sense in this hypothetical scenario, and in many others.

Of course prepayment penalties have been abused. So has morphine, but no one is suggesting we don’t use it on the battlefield in the hands of trained medics.

The prepayment is needed if the broker is to pay ALL of the costs of the transaction, for two reasons.

1. The lender requires a prepayment penalty whenever the rebate is larger than 1%. I think this is an excellent policy, incidentally. The prepayment penalty is 3% of the outstanding balance.

2. The lender would require repayment of all the rebate paid to the broker (if the loan ended earlier than 1 year), thus the broker would be out all of the compensation for his work AND 3rd party costs.

If Mike envisions a scenario that the loan would end in a year, then of course it does not make sense to do anything AT ALL. That did not seem likely with the evidence presented (why even look or ask, if you think you would end the loan in less than a year).

So, let’s look at the same loan as above, with no prepayment penalty. As I originally stated, there were many other good solutions to consider. BTW, I would ALWAYS present a no pre-pay option, and divulge exactly what the prepayment penalty is.

The rebate would need to be lowered, so Mike would need to pay some, or all, of the loan costs. On the plus side, his rate would be lower, too. On the minus side, he’d have loan costs to recover.

Let’s look at

Hypothetical Solution #2

Loan Type= 5 yr ARM, not interest only
Rate= 5.75%, 3rd party loan costs paid by borrower, hard to estimate on the fly for this loan size, but for this scenario let’s assume $3,000 (title, escrow, appraisal are all higher costs at this loan size, includes lender’s underwriting fee), no prepay penalty, broker compensation to come from lender, APR 5.79%, rate may change until locked.

Payment= $5,152.95 ($883K at 5.75%, payment does not include taxes or insurance, I increased the loan amount to cover closing costs)
5 year savings= $24,555 ($409.25 x 60 mos.)

contrasted to Hypothetical Solution #1

Hypothetical Solution #2 has a greater monthly savings of $52.58. Divide the loan costs of $3,000, and you break even (recover the additional costs) at month 57.

Paying loan costs is a form of a prepayment penalty…that is, you strand the costs of the loan transaction if you do not stay in the loan long enough. In this case, if he refinanced in month 12, we would lose $2,369.04 ($3,000 - 12 x 52.58).

I hypothesized (though I did not originally write it down) that Mike truly wanted a 30 yr fixed, and that sometime between month 12 and month 60, an attractive scenario would occur to enter into a 30 year fixed, and he would not wish to strand the investment in loan costs.

This is why I state again…Consult a professional. There are multiple possible treatments for every problem, and it is important to go over those solutions with the borrower, so we can truly understand what matters most to them, and what solutions may be available. We all want easy, fast answers to important questions, but usually they are not sufficient.

Borrowers, consult a professional

The next step, after signing the purchase contract, was to obtain a mortgage for my condo purchase. Again, my 'friend,' Suzie, the real estate agent, was more than happy to bring me to her lender. (Many years later I discover that my best option would have been to get an FHA mortgage -- fixed rate, with low down payment.) But I was 24 years old and it was 1985, and I didn't know what I was doing! Suzie did!

Since John, the lender, was a friend of Suzie's, surely he wouldn't steer me wrong. I signed a mountain of papers, gave John all my employment and paystub info. Before long I was approved! Wow! It was exciting and scary at the same time. My monthly payment was $984. The lender said I only had to pay $684 each month! Cool! "That will really save me money," I thought.

I went to an attorney office to complete the loan closing. Suzie was there. I got my keys -- the condo was mine!! Vistas of Vienna here I come!

Six Months Later
What a nitwit! I get a notice from the lender telling me the payment is going up. My payment isn't $684 anymore. I was getting used to that. Hmmm. The notice also shows my mortgage balance -- it was more than I originally borrowed. That just doesn't make sense.

Another Six Months Later
Second notice from the lender. The payment is going up, again! This time the loan balance is even higher. What is going on!

After several phone conversations and close reading of my loan documents, I learn that I obtained a loan with negative amortization. Those lower payments I was making each month -- it wasn't a gift. They let me pay a lower amount (essentially a lower interest rate) but it didn't cover the amount of interest due on my loan. They added it to my outstanding principal balance. It was a 6-month, adjustable rate mortgage -- meaning the payment could go up (or down) every 6 months!

Later I began making my full interest and principal payments. I didn't want my balance owed to keep growing! It was helpful in the early years as far as my cash flow went, but it sure would have been smart to be better informed up front.

I’m reading this morning’s Seattle Times and on the front cover of the RE page (lower left corner) they have an upcoming feature:

“Get answers to property tax questions. Confused about your latest King County property valuation? Check in with Barbara Alsheikh, King County tax adviser, who will answer your questions starting noon Tuesday. Submit your questions now at seattletimes.com/realestate”

This should be good!

I’m reading this morning’s Seattle Times and on the front cover of the RE page (lower left corner) they have an upcoming feature:

“Get answers to property tax questions. Confused about your latest King County property valuation? Check in with Barbara Alsheikh, King County tax adviser, who will answer your questions starting noon Tuesday. Submit your questions now at seattletimes.com/realestate”

This should be good!

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