Someone is watching buyers

Jun 21, 2013 Kenneth R. Harney

WASHINGTON — You can call it Big Brother. You can call it high-tech snooping. But be aware: If you are applying for a mortgage in the coming weeks, you can be sure that your credit will be checked and re-checked — possibly monitored daily — to make certain no hints of new debts pop up before you close on the loan.

Just as the federal monitoring of phone traffic that’s been in the headlines lately was a direct outgrowth of 9/11, pre-closing credit monitoring is a byproduct of the housing crash. Lenders are terrified of being forced to “buy back” loans from investors Fannie Mae or Freddie Mac because borrowers had more debts than they disclosed at the time of application.

As a result, virtually all banks and mortgage companies now use some form of commercially available program to keep tabs on credit files between the date of your loan application to your settlement. One of the three national credit bureaus, Equifax, offers a popular service that monitors applicants 24/7 and can detect even subtle hints that a home purchaser is planning to add on new debt before the closing.

Say your mortgage application was just approved. In the documents you laid out all your credit obligations and just barely passed the lender’s crucial “debt-to-income” ratio test. You’re feeling upbeat about the prospect of moving to a new home and you start thinking of things you need to buy: Furniture for the living and family rooms. New beds. TVs. Audio equipment.

So you visit a couple of stores and take up their offers for low interest-rate credit lines. You apply for what could come to as much as $14,000 worth of new debt, all to be paid off monthly.

Ping! In Equifax’s computer maze, your credit “inquiries” to merchants trigger alerts. Your lender or mortgage broker is notified immediately that you are pursuing additional credit. And in this case, that $14,000 in potential new payment obligations could knock your debt-to-income ratio over the cliff.

Lenders say clients can mess up transactions in all sorts of ways. Annie Austin, a senior loan officer with Cobalt Mortgage in Bellevue, Wash., says one borrower went out and bought a new Porsche on credit after getting his loan application approved, despite warnings not to incur new debt before closing.

Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says that although he hands a prudent “do not do this” list to every applicant, some borrowers ignore it or forget that they’ve got credit-related situations they never disclosed, such as co-signed student loans, applications for overdraft coverage on checking accounts, or even that the down payment cash they claimed as their own was actually lent to them by someone else and must be repaid. One borrower, Skeens recalled, had received home purchase money on the side from a “loan club” that would require $600 a month to pay off. Oops!

According to Equifax Vice President Raymond White, undisclosed debts — or fresh inquiries for additional credit never disclosed to the lender — now turn up in “nearly one out of five” mortgage applications. Yet under Fannie Mae and Freddie Mac rules, any increase in the total debt-to-income ratio of more than three percentage points, or that pushes the ratio beyond 45 percent, can put the lender into a vulnerable position. If the mortgage later goes bad, Fannie and Freddie can force the lender to buy it back — financial torture for any bank.

White says that failure to disclose debts on mortgage applications is an equal opportunity problem, seen in all market segments, including well-off borrowers who have excellent credit. Research by Equifax found that people with high credit scores are significantly more likely to have undisclosed debts — or new credit obligations in the works before settlement — than other categories of applicants.

“The higher the FICO score you have,” said White in an interview, “the more likely you are to buy something” — or apply for new credit — that triggers an alert.

It’s counterintuitive, he agrees, and it’s probably because consumers with higher FICOs feel more confident about their credit and may have more resources to handle new debts. But inquiry pings from auto or boat dealers can still mess up their home purchases or refinancings.

Bottom line: From application to closing, don’t shop for new credit. It’s entirely possible someone is watching. And you are suddenly a person of interest.

Read more at http://www.arcamax.com/homeandgarden/thenationshousing/s-1343698?print#4MbR0 DtvoBrim9vl.99

Lawmakers Criticize CFPB’s QM Rule Despite Praise for Revisions

by Victoria Finkle JUN 18, 2013 3:50pm ET

WASHINGTON – Lawmakers and industry officials continue to issue warnings about the impact of the Consumer Financial Protection Bureau’s ability-to-pay rule, despite recent efforts by the agency to amend certain provisions to assuage industry concerns.

The agency issued revisions to the controversial “qualified mortgage” rule late last month that were applauded by a wide range of observers, including industry representatives and consumer advocates.

But lawmakers at a House subcommittee hearing said the rule may still curb access to credit.

“Although these revisions attempt to provide clarity to lenders, the need for these changes highlights the fundamental problem with the ability-to-repay rule. Mortgage lending can be highly subjective business, especially in rural and underserved areas,” said Rep. Shelley Moore Capito, R-W.Va., who chairs the financial institutions subcommittee. “This element of relationship-based decision making is completely ignored by the premise of the rule. It will be nearly impossible for the CFPB to endlessly amend the rule to accommodate the ability of lenders to make these relationship-based loans. Unfortunately, the end result will be some consumers losing access to credit and the ability to own their own home.”

The CFPB issued a final rule in January that requires banks to ensure that borrowers have the ability to repay a loan before extending credit. It also established an ultrasafe class of loans known as qualified mortgages that were protected from legal liability if the loan met certain underwriting criteria. After industry complained that QM was too strict, the CFPB relaxed some standards last month.

But lawmakers on both sides of the political aisle and industry representatives at the hearing raised particular concern about the rule’s impact on lending to low- and moderate-income borrowers, warning that few lenders are likely to provide loans outside of qualified mortgages.

“There are a lot of individuals that you can document their employment and their income – that they paid their mortgage, but they paid some other bills late. So they didn’t have perfect credit,” said Rep. Gregory Meeks, D-N.Y., the top Democrat on the subcommittee. “I’m concerned about those individuals getting locked out of this market – trying to figure out how they can be included.”

Industry representatives emphasized how the rule could take away lenders’ discretion, even forcing them to roll back specialized programs that lenders use to meet Community Reinvestment Act mandates.

“This straightjacket that we’re being put in will limit our ability to design the programs that are necessary and appropriate to meet the needs of our customers,” said James Gardill, chairman of the board at WesBanco in West Viriginia, who testified on behalf of the American Bankers Association. “It takes not only the ability to repay but adequate collateral to support the loan. . We can’t create a straitjacket in how to measure that ability to repay by arbitrary rules that narrow what you can consider. Banks do a balanced approach in measuring credit and that’s what we want to retain, but the rules don’t do that for us.”

As part of its recent revisions, the CFPB extended the timeframe under which small lenders can consider balloon loans as qualified mortgages, but some regulators at the hearing raised concerns about restrictions on the loans.

“This provision effectively limits a bank’s flexibility to tailor products to the credit needs of the community,” said Charles Vice, commissioner of the Kentucky Department of Financial Institutions, testifying on behalf of the Conference of State Bank Supervisors. “This is a portfolio lending issue, not a rural or underserved issue.”

Lawmakers and panelists also debated the Consumer Mortgage Choice Act, introduced in March, which would add certain exceptions to the QM rule’s 3% cap on points and fees, including for compensation paid to mortgage brokers and title insurance. The bill, introduced by Rep. Bill Huizenga, R-Mich., has 43 co-sponsors in the House, though some consumer advocates have pushed back, charging that the legislation would add important loopholes to the rule.

Still, Michael Calhoun, president of the Center for Responsible Lending, and others, including Rep. Maxine Waters, D-Calif., the top Democrat on the House Financial Services Committee, defended the rule and the CFPB’s efforts to clean up the mortgage market following the financial crisis.

“We support a broad box, and I think when you look hard at the particulars of this rule, it created a broad box,” said Calhoun, noting as well that the agency has made concerted efforts to meet industry demands in crafting the rule.

10-year loans more appealing

By KENNETH R. HARNEY Jun 14, 2013

The refinancing boom may be cooling down, but the move to shorter mortgages – especially 10-year loans among pre-retirees – appears to be accelerating.

Some community banks say 10-year mortgages, once an insignificant niche option, are now accounting for increasingly large chunks of their business. For example, Rockville Bank in South Windsor, Conn., reports that 10-year loans represented a surprising one-fifth of its total residential mortgage originations in dollar terms last year.

Plus in a new survey released last week, Freddie Mac, the giant federal mortgage investor, found that 28 percent of all refinancings in the first quarter of 2013 involved shortening of terms. Among refinancers with 30-year mortgages, nearly one-third switched to shorter-term replacement loans.

Though 15-year mortgages have been popular for years among homeowners who want to pay off their balances quickly, lenders say the 10-year loan – targeted directly at the demographic tsunami of baby boomers who are still employed but planning to retire in the coming decade – is on the upswing.

“There’s a lot of interest in this [10-year] product,” said Victoria Stumpf, a loan officer with Third Federal Savings and Loan in Cleveland.

Why the growing attraction to going short? Start with interest rates. With an almost-certain increase in rates on the horizon as the Federal Reserve begins to “taper” its purchases of mortgage bonds and Treasury securities, fixed rates on 10-year loans remain enticingly low. According to MyBankTracker.com, which surveys 7,000 lenders nationwide on rates and terms, the average 10-year fixed-rate mortgage goes for 3 percent with a fifth of a point. (A point equals 1 percent of the loan amount.)

But many community banks and smaller lenders quote much lower than that. Rockville Bank’s current rate for a 10-year – whether for refinancing or a home purchase – is 2.375 percent with no points. Third Federal’s quote for a $200,000 10-year mortgage is 2.79 percent with a closing fee of $450. For community lending institutions such as these around the country, 10-year loans tend to be portfolio investments. Rather than selling the mortgages to Freddie Mac, Fannie Mae or other investors, lenders retain them in-house. Partially as a result, rates can be lower. And since lenders who specialize in 10-year mortgages want to keep risks as low as possible on their in-house investments, they typically require borrowers to have solid credit histories and significant equity or down payments.

Picture this: You’re in your prime pre-retiree years – anywhere from the mid-50s to early 60s. You’ve got a good income, significant equity in your home, good credit scores and you want to refinance to a lower rate. Your home is worth $250,000 and you need a $150,000 loan that will leave you mortgage debt-free – or close to it – once you’re into retirement. You don’t want to risk potential interest rate spikes along the way, so adjustable-rate loans are out of the question.

How does a 10-year loan stack up? Consider this comparative scenario using current rates and terms for 30-year, 15-year and 10-year loans provided by Jeff Lipes, vice president for mortgages at Rockville Bank:

. Interest rates: The 10-year’s 2.375 percent rate is the lowest by far. The rate on the 30-year fixed is 3.99 percent; on a 15-year, it is 3.25 percent.

. Monthly payments. Here’s where the shorter term and faster payoff of principal available through the 10-year mortgage can be a budget issue for some borrowers. The monthly total for principal and interest on the 30-year loan is just $715. On the 15-year it’s $1,054. But on the 10-year it’s nearly double what you’d pay on the 30-year – $1,406. Though over the term of the loan you pay substantially less in total interest charges, on a monthly basis the 10-year requires the most out of pocket of the three.

Frank Nothaft, chief economist for Freddie Mac, says that as part of a retirement planning process designed to leave you with lower debts at a predetermined point, a 10-year mortgage “could be an ideal product,” provided you’ve got the resources to handle the higher monthly payments. Ditto for a 15-year loan.

Bottom line: If you’re looking ahead, want to lock in what may be once in a lifetime low rates and like the idea of getting rid of all home-loan debt for your retirement years, check out the mortgage shortening trend. A 10-year just might be a fit.

FHA interest rule under fire

Jun 7, 2013 Kenneth R. Harney

WASHINGTON — Pressured by consumer protection regulators, the Federal Housing Administration is expected to end one of its most controversial practices: Charging borrowers interest on their home mortgages for weeks after they’ve paid off the entire principal balance.

Though FHA officials declined to discuss the matter, the agency will have to eliminate its long-standing policy of collecting a full month’s worth of interest — hundreds of dollars extra in many cases — even when borrowers terminate their loans earlier. For instance, if you pay off your FHA loan on July 3 in order to buy a new house with a conventional mortgage, FHA currently will demand interest charges on your mortgage through July 31, collecting it out of the settlement proceeds.

But under the Consumer Financial Protection Bureau’s “qualified mortgage” rules, charging interest after a principal balance payoff “is the functional equivalent of a prepayment penalty,” according to the bureau. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the bureau, prohibits prepayment penalties on “qualified mortgages,” that is, residential loans that incorporate key consumer safeguards and are underwritten to limit risks for lenders and borrowers alike. Qualified mortgages are expected to become the gold standard for home loans in the coming years, and will offer the lowest rates and best terms available in the marketplace. The Dodd-Frank law designates the bureau as the federal government’s drafter of rules spelling out what constitutes a qualified mortgage.

Among major players in the mortgage field, FHA is the only one that requires full-month interest payoffs. Fannie Mae, Freddie Mac and the Department of Veterans Affairs all stop collecting interest on the day of payoff.

For more than a decade, FHA’s practice has drawn congressional and real estate trade-group criticism, most recently from Sen. Ben Cardin, D-Md., who sponsored legislation during the last Congress that would have banned it. The National Association of Realtors also has been a vocal critic, and has launched multiple efforts in recent years to persuade the agency to abandon its policy, all to no avail. The realty group estimated that during one year alone — 2003 — FHA collected more than half a billion dollars ($587 million) in “excess interest fees.” With today’s lower interest rates, the sums involved most likely would be lower, although FHA’s loan portfolio and market share have increased.

Cardin, who typically is a strong supporter of the housing agency, complained in a statement introducing his legislation that “this is an issue of fairness. Homeowners should not have to pay interest on loans that they have fully repaid.”

FHA’s policy, which is tied to a guarantee of a full month’s interest payments to investors in so-called Ginnie Mae mortgage-backed bonds, has had the side effect of encouraging many borrowers to seek to pay off their loans as close as possible to the final days in the month in order to avoid the hefty interest penalties. However, when mortgage lenders, title companies and settlement firms are busy — as they’ve been lately — it’s often not possible to schedule an end-of-the-month settlement, causing some refinancers and sellers to pay more at the closing than they expected. Those extra payouts, in turn, can be shocks to unwary sellers and refinancers who have modest incomes and resources, as many FHA borrowers do.

In its final qualified mortgage regulation, which goes into effect next January, the consumer bureau said that it had “consulted extensively” with FHA about its interest charging practices, and has agreed to allow the housing agency additional time — as much as a year extra — to implement the necessary changes. FHA is now drafting a formal regulatory proposal aimed at bringing the agency into full compliance. At the end of that process, FHA presumably will collect interest only through the date of actual payoff of a mortgage, rather than the full month.

That should be welcome news to critics who say FHA’s recent series of increases in monthly mortgage insurance premiums and its June 3 revocation of new borrowers’ rights to cancel premiums at any time during their loan terms are driving moderate income borrowers away from the agency and making home-buying less affordable.

The takeaway here: Until FHA changes its policy, try to schedule any early payoff or closing on a refinancing as late in the month as possible to avoid punitive interest charges.