Since January 1, 2010 the compensation a mortgage broker derives from getting a loan for a borrower is disclosed in a manner to HELP the borrower decide which mortgage offer is best. Although well intentioned, this legislation has clouded and confused the very decision process it was intended to help. The compensation I make is is NOT a meaningful way for someone to determine their best offer. Only the borrower's rate, monthly payment and closing costs matter in making this determination. This disclosure process was supposed to improve 'transparency', a word no doubt selected to cast suspicion. The benefit to broker's clients is to find the least expensive source of funds for their loan/financial scenario. If brokers improve value to the consumer while getting paid for the effort they spend in creating the added value, they both win. When was the last time you were told the amount of gross income you paid for a can of peas, a gallon of gas, or a new car, and you were still able to determine the best price? The consumer does not need this and in fact without it, the process would be much less confusing and make it easier for the consumer to determine the best offer.
FICO, founded in 1956 as Fair Isaac by engineer Bill Fair and mathematician Earl Isaac, provides consulting services and enterprise decision management systems. They developed the FICO scores, a measure of credit risk, which are the most used credit scores in the world. FICO scores are available in the United States from Equifax; Experian; TransUnion; and PRBC. FICO, like Band-Aid or Kleenex, has become a generic symbol of credit worthiness. Home loan scores can range from 300-850 and are a statistical calculation based upon payment history (35%), credit utilization (30%), length of history (15%), credit type (10%), and recent credit checks (10%). Items stick around for seven years; bankruptcy for ten. The score is intended to predict the liklihood the borrower will have a 90-day late in the next 2 years. Maxing out a card, a 30-day late payment, debt settlement, foreclosure (150 point ding) or bankruptcy (150-200 point hit) all negatively impact FICO. Sometimes folks wonder about whether or not a short sale hurts your credit score as much as a foreclosure (see other articles in this blog), it depends on whether the borrower stays current on their payments and how the lender reports the sale (try for "debt repaid in full"). My thanks to Rob Chrisman and Wikopedia for much of this content.
These comments are from my credit reporting company that works daily with these opportunities.
Most loan modifications we've seen so far under the various Stimulus plans have been interest rate reduction as opposed to principal reduction so that is the experience on which the following comments are based.
What we are seeing with most interest rate loan modifications is that the borrower is instructed by the creditor not to make any payments until the modification process is complete. This can take up to nine months. Once the modification is complete, the delinquencies are removed. The drawback is that even though the delinquencies are removed, the "remarks" on credit reports will read "payment plan in place". This is similar to "consumer credit counseling". We are seeing scores effected similar to the effect of a recent collection account, somewhere around 60 and 100 points, depending on the borrowers overall credit picture. We have also reviewed files where the borrower was instructed to pay until the process was complete. While exactly opposite in structure, the result is the same, damaged credit due to the remark line "payment plan in place".
I am unsure as to how the banks are going to report the credit when the modification is a principle reduction. Currently, it is up to the creditor as to how they decide to report it. Until we see some actual history, we really can't speculate how they will report except to say that it is very likely to be an adverse mark on an individual's credit.
In any of these scenarios the borrower did not meet the obligations of the original contract and therefore their reported credit must reflect that reality so the next credit grantor is aware of the situation.
The best advice that can be given when working out the details of a loan modification with the bank, is to clarify how the loan will be reported by the credit agencies once the loan mod is complete. Again, if coded negatively and attached to a mortgage, it will likely create problems through automated underwriting even if scores remain within guidelines. It is essentially a mortgage that hasn't met the obligations of the original contract.
, here is what one very experienced and knowledgeable underwriter wrote to me: "It used to be that we could 'underwrite' a loan and use common sense to navigate individual circumstances and actually make a decision that a loan was a good credit risk. Then DU and LP (computerized underwriting systems) came along and gave us the laundry list that had to be followed. We were still able to manually underwrite loans for those transactions that did not fit the box. Then the bottom fell out of the business and everyone got scared and new rules came out. Investors and Wall Street were to blame for allowing individuals who were not telling the truth to buy homes. Today investors are pre-underwriting loans prior to purchase and we have to 'march to their tune' including getting pieces of paper that seem ridiculous, but since we need the investor to purchase the loan, we obtain them anyway. Only the most qualified borrowers with all their ducks in a row get loans these days. Manually underwritten loans are subject to scrutiny such as we have never seen before and frankly, we do not have the courage to paint outside of the lines because we cannot afford to have a loan purchase refused. Today, it takes two to three times as long to underwrite a loan and we have checklist upon checklist that help us make sure all of the i's are dotted and the t's are crossed. I have been doing this for over 30 years and frankly we are back to the rules of the early 80's or worse when it comes to documentation."
ARE YOU HAVING TROUBLE EXPLAINING RESPA TO BORROWERS?
If RESPA changes are the final blow - swaying you to consider a simpler career path, say neurosurgery or something, you are not alone.
I have to vent for a minute, because I know you are with me on this one. Let’s see….
A new borrower comes to you because his Realtor told him that you are a fabulous loan officer and he needs to get pre-approved and get a Good Faith Estimate.
You look the new borrower square in the eye and have to say, “Wonderful! But I can’t give you a Good Faith Estimate because you haven’t identified a property. But I can give you this other “Non-Binding Settlement Estimate” form that my legal department has authorized, that has a 2-page disclaimer stating that you can’t hold me to any of these figures.”
So the new borrower, with a confused look on his face, takes your new form and goes back to his Realtor. The Realtor calls you trying to figure out what you said to the new borrower who now, doesn’t feel so confident about you or anything else in this transaction. You explain. The Realtor calms down.
The new borrower comes back with an identified property and says; “Now I want a Good Faith Estimate.” You prepare one, in perfect accordance with the new RESPA procedures and hand it to new borrower. He gasps. “This is $3,000 more than the previous estimate you gave!”
“Oh, don’t be alarmed,” you say in your most toddler-calming voice. “This isn’t what you are really going to be paying. This is just how I have to disclose it to you.”
The new borrower gives you a sideways suspicious glance, “But what about all the fees the seller is paying on my behalf? I can’t find a credit on this form for those.”
“Don’t worry…it will all work out at closing. This is how we protect you now. We give you inaccurate information all the way up until you actually close on the property. Isn’t that fun! Kind of like a surprise party!” you happily chime - beaming like an idiot while beads of sweat run down your torso.
The new borrower marches out to his car in tearful frustration and calls the next lender on his list.
Scalpel anyone?
Copyright - 2010 - LoanOfficerMagazine.com
In case you were wondering, you can find HUD's official pronouncement on the "root Causes" of the foreclosure crisis in their 60+ pages at:
http://www.huduser.org/portal/publications/hsgfin/foreclosure_09.html
You can click on this link for my summary of this situation as portrayed on this slide from a 2007 presentation: GREED
Today I took my second National Mortgage Licensing Exam, this one for my Oregon license continuation. The first National exam was in conjunction with my Washington State license. The SAFE (Secure and Fair Enforcement for Mortgage Lcensing) act now requires all states to license mortgage loan originators. I believe in this process and embrace the national system as it starts to level the playing field. First it forces consistency in all states for the qualifications that originators must have. Second, it forces loan originators working for banks to be tested and licensed in a similar manner.
Loan originators working for Banks have not been licensed by states in the past because banks are federally regulated. With the advent of the national license system, the bank originators will, for the first time, be required to meet the same requirements as independent mortgage brokers such as myself.
I have long held that those dealing with the largest investments most individuals make in their lives should be licensed. I have also believed that it is ridiculous to have each state license mortgage originators when most of the laws that apply to our business are federal. Perhaps someday we will achieve having a single national license but at this stage of our licensing evolution we have separate state licenses (Washington and Oregon in my case) that are granted after testing separately in each state even though most of the exams are based on federal law.