Mortgage Lenders, Do the Right Thing

“Integrity is doing the right thing, even when no one is watching.” – C.S. Lewis

The mortgage industry brought trouble upon itself when too many people in the industry weren't doing the right thing, and no one was watching.  Now everyone is watching, the CFPB, OCC, and each of the states’ regulators.  The prefaced C.S. Lewis quote makes the distinction that integrity is doing the right think simply because it is the right thing to do, not because you will otherwise get into trouble.  The mortgage lenders that are still around today likely were well-intentioned during the housing bubble, and did the right thing when the regulators weren't looking.  But now we are in a position to not only do the right thing, but document and prove that we do the right thing.  This adds costs which are ultimately charged to consumers.

In our business, we will be in trouble with our regulators and our customers if we don’t follow the alphabet soup of laws and regulations that we face:  RESPA, ECOA, TILA, HMDA, ATR, MDIA, UDAAP, HOEPA, FCRA, etc.  But when we apply C.S. Lewis’ definition of integrity to our core values, then we follow these rules because it is the right thing to do.

Each of us in the mortgage industry has the responsibility to understand the rules and abide by them.  Ignorance of the rules is not a valid excuse to violate them.  The CFPB has made that clear.  

Today we are taught to do the right thing because of the plethora of ways for us to get into trouble, but ultimately if we do the right thing because it is right for the consumer, I believe (translated "I hope") that we will escape the wrath of regulators.

Mixed Messages From a Schizophrenic Economy

Initial jobless claims fell to 302,000, better than expected.  That’s great news, right?  The economy is bouncing back, right?  Not so fast, my friend!

The initial jobless claims report is just another mixed message from our schizophrenic economy that stumbles through a weak recovery.  There are positive signs for unemployment, inflation, and job creation.  But GDP growth, wage growth, labor force participation, and labor productivity all remain weak.  What’s a Fed Chairwoman to do?

As QE winds down, Fed Chair Janet Yellen and the rest of the Federal Reserve Board want to begin the inevitable process of raising short term interest rates, but they won’t until the economy shows that it can stand on its own two feet.  The risk of relying completely on past statistics and waiting too long is that inflation may sneak up on us and get out of control.  That could give the economy an entirely new set of problems.

The Fed has a very difficult challenge ahead of it.  When they decide to raise rates , it will impact all of us.  But with so many weak indicators of the economy, it will be extremely difficult for them to raise rates anytime soon.

In Suburbia

“Let’s take a ride, and run with the dogs tonight, in Suburbia.” 

I have no clue what the Pet Shop Boys meant with that line of their 1986 hit song, “Suburbia.”  It seems to me that one would either take a ride with the dogs, or run with the dogs, but not both.  But regardless if you are riding or running, more people seem to be doing both in “Suburbia,” more commonly called “the suburbs.”

This reverses a prior trend that showed that America’s big cities have grown faster than their suburbs in recent years.  A report from the U.S. Census Bureau shows that fourteen of the nation’s 20 biggest cities saw their growth slow or populations decrease in 2013.  Only 18 of America’s 51 metropolitan areas with populations greater than 1 million people had their cities grow faster than their suburbs.  That’s down from 25 in 2012.  So now it’s Suburbia that is growing faster than the urban core of cities.

Why the change?  Just recently we were discussing the appeal of condominiums in the core of major cities.  While those projects are selling well, it seems that greater growth is attributed to single family homes with yards and fences.  Most of us that grew up in the west grew up in a suburb.  That trend continues, especially for families with children.  That’s good news for home builders, and the economy since the construction of single family homes creates more jobs than multi-family projects.

Ducks in a Row

We’ve all used, or at least heard, the expression, “Get your ducks in a row.”  Generally it is in the context of organizing so that we are prepared for a meeting or event.  Why ducks?  And why would ducks need to be in a row?  More on that later.

When applying for a mortgage, getting one’s “ducks in a row” makes the process move much more smoothly.  One should be sure to keep well-organized personal files with income and asset documentation, so that when the documentation is asked for by the lender, it can be delivered quickly and without much headache.  When completing a mortgage application, have the following documents ready to provide to your lender:

·         Paystubs covering most recent 30 day period

·         W-2 forms for the most recent 2 years

·         Tax returns for the most recent 2 years

·         Bank statements for the most recent 2 months

·         Explanation for any derogatory credit

·         Be ready for some additional documentation if you own your own business

Now that you know how to have your “ducks in a row” for a mortgage loan, let’s get back to the ducks.  I found quite a few explanations for the “ducks in a row” idiom.  One of them is from a newspaper story in 1901 about a game hunter that supposedly killed 42 wild ducks by baiting them with corn in a long galvanized trough and firing just once with a large shot gun.  The more likely and less gruesome origin could be the common image of the mother duck leading a straight line of ducklings waddling in a row, one behind the other.

How Much Can I...?

I sometimes get annoyed when I ask a question and the answer I receive is another question, but I am often guilty of that response myself.  So when I am asked “How much can I qualify for?” by someone that wants to be prequalified for a mortgage, I often answer with a couple of questions.  First, “How much do you pay now for housing?” and “How much are you comfortable budgeting each month for housing?”  From there I work to calculate debt to income ratios to see if the homebuyers budgeting expectations are in line with underwriting guidelines.

It is tempting, but dangerous to find a house and then reverse engineer a budget that is dramatically different from one’s current spending habits.  Don’t get me wrong, it’s great to trim unnecessary expenses out of the budget, but people need to be realistic about what changes they are willing to make about their expenses and how it affects their overall happiness.  Instead of just telling the homebuyer the maximum amount they can borrow and still get approved, we have a deeper discussion about what they can truly afford.

Every new homebuyer should create a household budget, especially when the home purchase results in an increase in their monthly housing expenses.  Consider all expenses when creating the budget.  There are a number of expenses that a lender won’t consider when qualifying a buyer such as tuition, medical insurance, prescriptions, as well as discretionary costs.  These can be major expenses and will impact how much is available to pay for a home.  Depending on lifestyle, travel and hobby expenses can greatly impact a household budget.  Pricey hobbies like golf and skiing, or even pets can take a bite out of a monthly budget. 

At least one of the line items on a budget should be savings.  This can be for retirement, college, or any other financial goal.  All of these costs are real and should be considered by a homebuyer when deciding how much they are willing to pay for the roof over their head.

Bad News in Portugal is Good News on Main Street U.S.A.

Poor Portugal.  First their national soccer team and superstar Cristiano Ronaldo failed to advance past the group stage of the World Cup.  Now concerns over the solvency of the major Portuguese bank, Banco Espirito Santo, is creating waves through the global financial system.  Stock markets are moving downward on the uneasiness.  Coincidently, Cristiano Ronaldo is also a paid spokesperson for Banco Espirito Santo (see BES advertisement).

In this case, and in general, bad news for the stock market and other securities drives investors to the safety of U.S. bonds.  That leads to lower mortgage interest rates for American homebuyers.  So those of you in the market to purchase a home or refinance are in a position to benefit from the struggles of Portugal, Banco Espirito Santo, and Cristiano Ronaldo. 

Condos are Movin' on Up

Condos are “Movin’ on Up”

One of the more dynamic segments of the housing markets is the condo market.  As the overall real estate market recovered from the recession, condos have come back strong.  Many “broken” projects that were victims of poor timing in 2007-2008 have new life and strong sales.  Luxury condo projects in highly desirable locations are in demand.  Likewise, more moderately priced condos allow budget conscious homebuyers entry into neighborhoods where single family homes are priced out of reach.

In order for buyers to obtain conventional financing for condo, the project must be approved by the lender.  In general, here are just a few of the guidelines that lenders must follow when offering mortgages on condos:

·         No more than 50% of the project’s units may be occupied by renters

·         For new projects, as few as 50% of the units must have been conveyed or under contract for purchase

·         No single entity may own more than 10% of the units

·         No more than 15% of the total units can be more than 30 days delinquent on association fee payments

·         Minimum insurance coverage and other requirements apply

Condos may also be financed with FHA and VA home loans with project approval.  Condos are an attractive form of housing for a growing number of people that desire low maintenance living in an urban environment.