TRID! And other ingredients of Alphabet Soup…

This week we are closing our first loans under the new disclosure rule known as TRID. It became effective October 3rd of this year. TRID is the result of the Dodd-Frank Act of 2008 and the creation of the Consumer Financial Protection Bureau (CFPB). It is a result of rule making that called for there to be an integrated disclosure that addressed the regulatory requirements of the Truth-in-Lending Act (TIL , TILA or TILDA) and the Real Estate Settlement Practices Act (aka RESPA). In fact that is what TRID stands for, TILA-REPSA Integrated Disclosure. Gone are Good Faith Estimate (GFE, we sure do love our acronyms in the mortgage industry) and the Truth-in-Lending disclosure. Those are not things any more. The information contained in both those forms has been cleaned up, condensed and polished into the new Loan Estimate (LE) form. A sample of which can be found here.

Dodd-Frankly (see what I did there?), I like the new form. It addresses many of the issues I had with the GFE form. I believe the LE to be cleaner, more concise and, most importantly, clearer to the consumer (I also like alliteration). It deemphasizes the hogwash metric of APR which can be manipulated and lacks transparency to the average consumer and focuses on the questions most likely to be asked: Rate, Term, Payment and Cash-to-close. It clearly states the lock status of the loan and breaks down fees in reasonable manner. In fact I only really have three qualms about the form:

  1. It introduces another hogwash metric: Total Interest Percentage (TIP, see what I mean about acronyms?) which shows “The total amount of interest that you will pay over the loan term as a percentage of your loan amount.” This will generally be a very large percentage on a 30 year loan, something in the neighborhood of 60%-80%. While I do believe it is important for a home buyer to understand the cost of financing over a long term I believe that this percentage is somewhat misleading as it makes some very broad and unrealistic assumptions; e.g. that not a single dollar of additional principal is paid, ever, and that the loan is carried to term (that is, never paid off early due to refinance or sale). I’m just guessing here but I don’t believe that those two conditions apply to more than 1/10th of a percent of home buyers nationwide.
  2. In section G it refers to the funding of the escrow (aka impound) account as “Initial Escrow Payment at Closing” which is a seemingly cumbersome manner of labeling it. I believe that the term “Payment” should not be included there as it could be mistaken with the actual “Payment” on the loan. Perhaps, Initial Deposit into Escrow Account would have been clearer.
  3. It highlights whether a given loan has a Prepayment Penalty or a Balloon Payment (both of which are important to know) without allowing for a Negative Amortization feature or an Interest Only feature. In a world of Qualified Mortgages (QM, more on that in a latter post) I know that it is unlikely that we will see those for primary residences (which I have decidedly mixed feelings about) but I think that we might see some variations on those products for Investment Properties but the LE is simply not equipped to deal with such products. This speaks of the narrow mind-set by the rule makers and the general nanny mentality that seems to be prevalent at the CFPB and in legislature. But enough of my opinions…\

TRID also brings us a new closing form, the Closing Disclosure (CD). I will be discussing that in my next post.

If you have any TRID or LE questions, please comment below or on Facebook (see sidebar), otherwise; thanks for reading!

How are credit scores calculated?

Credit Score words on a report card with stamp and number 760 to illustrate creditworthiness of an applicant hoping to borrow money in a loan or mortgage

How credit scores are calculated

FICO® Scores are calculated from many different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your scores are calculated.

Your score considers both positive and negative information in your credit report. Late payments will lower your scores, but establishing or re-establishing a good track record of making payments on time will raise your score. Credit scores also take into account public records such as bankruptcies, judgements and tax liens.

How a credit score breaks down

Calculate credit score pie chart, how it is calculated.

  • 30% – Amounts Owed
    • Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low score. This look at the proportion of your available credit versus your open credit. Are your credit cards maxed out? Using more than 50% of your available credit suggests a higher risk as borrower and therefore a lower score. Try to keep your usage under 10% or 30% for higher scores.
  • 35% – Payment History
    • The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the most important factors in a credit score.
  • 10% – New Credit
    • Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.
  • 15% – Length of Credit History
    • In general, a longer credit history will increase your score. However, even people who haven’t been using credit long may have high FICO Scores, depending on how the rest of the credit report looks. It takes into account how long your accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all accounts. It also looks at how long it has been you used certain accounts and how long specific accounts have been open.
  • 10% – Credit Mix
    • FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.

These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different.

 

Importance of categories varies per person

Your credit scores are calculated based on these five categories. For some groups, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history.

The importance of any one factor in your credit score calculation depends on the overall information in your credit report. For some people, one factor may have a larger impact that it would for someone with a much different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO® Scores.

Therefore, it’s impossible to measure the exact impact of a single factor in how your credit score is calculated without looking at your entire report. Even the levels of importance shown in the scores chart are for the general population, and will be different for different credit profiles. When I run someone’s credit I have access to a credit simulator that can approximate the effect on your score made by particular actions but it is only an estimate.

 

Your scores only look at information in your credit report

Your credit score is calculated from your credit report. May accounts you might pay on time every month do not report to the credit bureaus. Things like rent, cell phone and insurance are not counted when calculating your credit score. However, lenders look at many things when making a credit decision such as your income, how long you have worked at your present job and the kind of credit you are requesting.

 

 

Do you have a question about what you can do to improve your credit? Give me a call and make an appointment for a no-cost consultation!

What’s this LTV thing?

Mortgage percentage changes concept with house and loan percentage symbol. Illustration isolated on white.

LTV, three letters that mean so much when it comes to applying for a mortgage. What do they mean? Loan-To-Value.

The LTV is the ratio of your loan amount to the value of your property. That means that that if your home is worth $300,000 then a 80% LTV would mean a loan amount of $240,000. Seems straight forward enough, right? Well it is and it isn’t. The math is easy. You simply take your loan amount and divide it by your value and convert the result to a percentage (by moving the decimal two spaces to the right and slapping a % on it). The complicated part is figuring out what LTV limits apply to you. Here the rules get a little more conditional and circumstantial. Quick disclaimer here, by the way: Everything I’m saying here is a broad generality and subject to change.

If the loan is a “Purchase” loan for a home buyer then LTV rules depend on the type of loan product. For the sake of simplicity and time I will limit the discussion to Conventional and FHA financing (these are the most common loan products used to purchase a home). Please note that on a home purchase, LTV is based on the lower of the sales price or the value.

If someone is buying a home with an FHA loan then the maximum LTV is 96.5% (meaning the balance of the purchase price, 3.5%, is the minimum down payment). Buyers can always put more down if they choose. There is a small break on the monthly mortgage insurance (more on that in a latter post) at 95% LTV (5% down). FHA loans are generally limited to properties you occupy as your primary residence.

If someone is buying a home with Conventional financing then things become a little more complicated. 97% LTV is possible but not all buyers are eligible for just 3% down. 95% LTV (5% down) is the general rule for a maximum loan-to-value ratio. If a buyer would to go with an 80% LTV (20% down) then mortgage insurance would be eliminated. These LTVs go down if the property has multiple units and/or it is not a primary residence.

Now if the loan is a “Refinance” for a current homeowner looking for new financing the rules can be a little different. There are two different kinds of refinance (refi) loans: Cash-Out refinances where some of the equity in the property is converted to debt and Rate & Term refinances where the rate and/or the term of the loan are changed.

On an FHA Rate & Term refinance one can generally go up to the original 96.5% max. That can be based on the current value or, if you do a streamline refinance, it can be based on the original purchase price and the borrower saves on the cost of the appraisal. If it is a Cash-Out then the max LTV is limited to 95% LTV. Unless your loan amount is over $417,000. Then the Cash-out limit is 85%.

With a Conventional refinance then you can do a Rate & Term refi up to 95% on a single unit property that you occupy as a primary residence and 80% for a rental property. A Conventional Cash-Out would be limited to 80% LTV for a primary residence and 75% for a rental property.

Is that clear enough?

But wait, there’s more! There’s break points to consider, especially as it pertains to pricing out an interest rate for a given loan. As the LTV increases, the risk that the loan will default increases (this is borne out by statistics). A 90% LTV loan is more likely to go into foreclosure than a 70% LTV loan, all other variables being equal. So, with that in mind banks generally assign higher pricing to higher LTV loans. Here’s where break points come into play. The industry, by and large, puts things into buckets (and not just LTVs). LTVs tend to be seen in buckets that span a 5% range.  So LTVs between 90.01% and 95% all fall into the same 95% bucket. An 83% loan is priced the same as a 81% or 85% loan. That means for every 5% you put down you’ll likely get a pricing improvement. Exactly how much changes from day to day and situation to situation. This general rule holds until about 60%, everything lower tends to fall into the same, <60%, bucket.

This important for borrowers to know so that they can gauge the magnitude of the effect of additional down payment when buying a home or how much of their equity then can borrower against when refinance.

Confused? Have questions? Please post a comment or on my Facebook page (see right sidebar) and I will answer to the best of my ability.

 

 

Saturday Appointments, A.K.A. Russian Roulette

The word "SATURDAY" written in vintage wooden letterpress type.

So, I am available  by appointment on Saturdays. I realize that people’s weeks are busy and it is simply easier for some to meet on the weekend.

Every time I set one I cringe. Not because I am coming in on a Saturday. That isn’t a big deal. I cringe because I know that there is an even chance that I’ll be stood up. I’ve been burned in the past so I take steps to protect myself. I confirm the appointment the day before. I give them my cell number and ask that they please let me know if they can’t make it.

I’ll even call the morning of the appointment to confirm that they have the address/directions. I know that if they don’t answer or call back I’ll be sitting in the office waiting it out.

It boggles my mind.

The best times are when I have a 10am appointment and I hang around the office until about noon. I’ll get a call at 2pm because the client is outside my office wondering why the door is locked. When I tell them I waited two hours and they didn’t answer when I called; so I moved on with my day they get in a huff. It doesn’t matter because I don’t want to work with people like that but it still puzzles the heck out of me. What do they think I mean by “appointment only?” What happened to courtesy?

Well, let’s see what’s in the chamber today…

Loan Mods and other things that sound too good to be true…

Loan Modification.

Two words that have haunted my career since 2008.

When they first arrived on the scene they were flashy, like Pink in her Mercedes Benz. Everyone was abuzz and aflutter about getting to lower their payments without refinancing and despite being upside down on their mortgages. It seemed like a great way to help clients. The office I was in at the time signed up with a modification firm that allowed us to get a small fee for referring loan mod clients. The company was started and promoted by a very prominent name in the industry. A top salesperson who did training seminars and hosted weekly training calls. I’d been to this guy’s house for an industry mixer. He was smart, sharp and successful.

I did one. A cousin of one of my best clients (RIP, Charles) paid her fee to the company and I was happy to see the look of hope enter her eyes.

A month later, she was being ignored and she wasn’t getting help. I tried calling the company myself and no one would answer. I emailed the industry guy directly, he promised me he’d look into it. I didn’t hear back. I never got paid. I’d field calls from the client a few times a week that went from sad to hostile. When the hostility started they involved threats of level action at first and then it escalated to her “friends from the ‘hood” coming by my office. She didn’t believe I was never paid and that the company was ignoring my calls.

A few months later I started at the California Department of Real Estate as a Deputy Commissioner. First week there I over heard them talking about the company that I had referred this poor client to… I volunteered that I was familiar with the company and had a previous client who was victimized by what appeared to be loan mod fraud. I was interviewed and had to prepare my first statement for the state. I ended up going along to serve legal documents to the smart, sharp and successful guy. Turns out he wasn’t too smart, he called the state offices and left a very threatening voicemail for the deputy heading the case. Mr. Tops Salesman then got a visit from State Law Enforcement – they don’t take kindly to threats on public servants. It also turns out he was in business with the wrong guy. His business partner absconded with all the money and left a shell of a company that didn’t accomplish much for anyone but him.

Two years of loan mod cases were my penance for sending my client to the wolves.

I then moved to Freddie Mac. Shiny offices and a travel budget. I thought I had served out my sentence and been returned to civilization. I was wrong. Loan mod cases awaited me there. Cases with the same names I had seen while working for the state.  It was Sisyphean labor. No matter how many cases I closed, more appeared. There seemed no end to the ranks of people had, taken, gotten, defrauded, hoodwinked, swindled, victimized, bamboozled, beguiled, shafted and taken to the cleaners by a motley crew of realtors, lenders, attorneys, paralegals and other, less-credentialed, crooks.

You might ask why people would pay anyone when a borrower can simply apply for a modification directly from their bank. A valid question. An astute question, even. The answer, as is often the case, is a complex one that I’ll attempt to condense:

  • Banks don’t want to do loan mods. They require staff that needs training and pay. This staff wouldn’t be making the bank money… instead they’d be making it so that the banks would get less money from the assets they already had. The only reason a lot of banks did any mods at all is because the federal government had them by the proverbial short and curlies and browbeat them into offering mods.
  • Finance paperwork is complex. Many individuals are intimidated by having to complete applications and submit documentation. These folks saw loan mod firms as a convenience and a professional guiding hand.
  • Foreclosure was faster and cleaner for the banks’ balance sheets.
  • Government involvement. Once it came to light how dirty the loan mod system was new rules came in place. Rules came with enforcers, fees and compliance concerns. That meant more money for banks to spend on mods.
  • Low success rate. I don’t remember the exact statistics ( Here’s an article) but a lot of modified loans go belly up anyway. This is a topic that I could spend another hour on… but suffice to say that the institutional side of the industry did not have a lot of faith in loan mods.

Three years of this I endured. Finally, in my final year there, the flood seemed to finally flag. Could it be that I would be free of those two haunting words?

It is now 2014… I almost lost a deal a couple of months ago because a client had previously modified his loan. Turns out that a lot of banks won’t let you refinance a loan that you modified. That seems less than fair. You can buy another house two years after having a modified loan on your credit but it’s very difficult to refinanced the same house.

Today I received a call from a family member of a previous employee who was referred to me because she just got a loan modification that she feels she can’t afford. She is going to have to sell her home of 31 years.

When will it end?

TGIF

Man in Hawaiian shirt and white straw hat walking on Orient Beach in Saint Martin.
Where my mind wanders on Fridays…

Fridays are exciting for a number of reasons:

  1. Casual Attire. Or maybe I should say, even more casual attire. My daily self-imposed uniform during the work week are polo shirts and khakis, like Jake from State Farm. It’s comfortable and doesn’t make me melt in my seat like a long sleeve shirt does. On Fridays, however, I switch to jeans! Sometimes I’ll even wear an Aloha shirt to remind myself there are places with sun and sand where the phone doesn’t ring every few minutes.
  2. Saturday is coming. Need I say more?
  3. Gym. I can usually find time on Fridays to hit the gym, which is rare enough to be celebrated.
  4. Atmosphere. Everyone tends to be a little more laid back on Friday, it makes for more pleasant interactions all day.

Hello world!

Hey there, I’m Edgar and I’ve been bouncing around the mortgage industry for going on 12 years now. I started as an assistant to a loan officer, then became a loan officer. A few years later, during the height of the “crisis” I went to work for the California Department of Real Estate, where I helped regulate Real Estate Agents and Mortgage Brokers all over Southern California. After a couple of years of that I was offered a position with Freddie Mac (the Federal Home Loan Mortgage Corporation) as a Senior Fraud Investigator. There I investigated appraisers, mortgage brokers, real estate agents, banks, loan officers, escrow officers, borrowers, attorneys, fraudsters, sovereign citizens and other colorful characters. Now I’m back on the front lines of the industry – I’m the Operations Manager of a branch and I still take on a few personal clients.

So why I am writing this blog? Well, I got a lot of thoughts and things to say about this business and I think it’s time that I share it with the world – even if it is from a tiny corner of the internet that few are likely to visit. So, follow me down the rabbit hole as I try to tell everyone what it is like to sit on this side of the desk.