Homebuyers Pay Price For New Rules Taking Out A Loan May Require More Time, Money

By Kenneth R. Harney Washington Post Columnist

t’s barely been two weeks since the nationwide changeover in mortgage and settlement procedures took effect, but the early results are trickling in: Lenders and brokers say just about everything is taking longer and the costs to home buyers are moving up.

On Oct. 3, under a directive from the federal Consumer Financial Protection Bureau, lenders, title insurers and settlement agents were required to comply with a nearly 1,900-page new rule book designed to improve transparency and accuracy in real estate and mortgage transactions for home buyers and refinancers. The regulations impose potentially heavy penalties on lenders who get their cost estimates wrong or fail to deliver accurate disclosures to consumers on prescribed timelines at application and closing.

Though the new disclosures are widely regarded as improvements over the ones they replaced – the traditional good-faith estimates, truth in lending and HUD-1 settlement forms – there have been concerns for months that the reformed process would increase the typical time span between loan application and the final closing.

What has received less attention, however, are the impacts of longer timelines on how much consumers pay to do the deal. Now those increases are coming into clearer focus, as lenders take new applications and quote rates and fees.

Focusing In On Fees

Diann Tyler, president of Everest Home Mortgage LLC in Philadelphia, says she’s received and begun processing multiple applications since Oct. 3, and nearly every one carries higher loan-fee charges than would have been the case under the old rules. Why? Because most clients are opting for longer rate-lock periods and those longer locks cost more money. Typical rate locks guarantee borrowers that they will pay no higher rate than what is stated in the loan quote. They can run anywhere from 15 to 60 days or more, and involve capital market hedges by the lender to obtain the rate guarantee.

Tyler’s standard rate lock used to be 30 days, but now clients need at least 45 days. That can add an extra $500 onto her quotes for average-sized loan requests, she told me, depending on market conditions and the bank or investor she’s using to fund the mortgage.Sometimes the extra charge won’t be obvious to the borrower because the money is being subtracted from the “lender credit” they receive. “But the fact is they’re paying more” than they would have on the identical transaction before Oct. 3, Tyler said.

In Huntington Beach, California, Dennis Smith, co-owner and broker at Stratis Financial, says that in order to cope with the strict compliance requirements of the new disclosure rules, he has had to hire another staff person. He’s not yet certain how this additional expense will factor into individual borrowers’ fees – that will depend on application volume and “market factors moving forward” – but one can assume the added salary and benefits will be reflected in charges somewhere. Tim Kleyla, president of The Mortgage House in Holland, Michigan, says because of the tight time requirements of the new rules, higher rate-lock costs and the danger that shorter-term locks will expire before closings, “we are throwing (short locks) out the window and will be locking for 45 to 60 days.” Given the higher costs for these longer locks, higher underwriting fees from funding sources and his own higher compliance expenses, typical borrowers could see “another $500 and I am sure eventually more” on their total transaction costs, he said.

Michael Fratantoni, chief economist for the Mortgage Bankers Association, says the expenses added by the new settlement rules come on top of a long series of federal regulatory changes in the past several years that have pushed the cost of originating a typical mortgage from $4,500 to $7,000. “A lot of it is personnel, quality control, spending on new technology” and re-programming systems.

So what can a home buyer do to limit some of these costs? Probably not a lot, except shop vigorously and compare lender fees and lock policies. As time goes on and lenders and settlement agents gain experience in managing deadlines under the new rules, maybe 30-day closings will become more common again, making longer locks unnecessary. For now, though, you’re likely to see higher, not lower, charges.

But given the fact that the new regulations also require delivery of your final closing disclosure three days ahead of the settlement date, giving you plenty of time to spot problems and dispute charges, who knows? Maybe the rule changes could actually end up saving you money.

Insurance for your down payment coming soon

Kenneth R. Harney on Oct 9, 2015

When you put down thousands of dollars to purchase a home, you’re taking a potentially serious financial risk- You could lose some or all of that money if the value of the house declines or a job transfer, illness or other life event forces you to sell the property during a dip in market demand.

But would you be willing to pay an insurer a one-time premium to protect your down payment against loss? There’s never been such an option – so you can’t be sure. But beginning next January that’s likely to change with the projected nationwide rollout of something called “+Plus by ValueInsured.”

The basic idea is straightforward. For an upfront premium that under some circumstances could be part of the interest rate you pay on your mortgage, your down payment – all the way up to $200,000 – would be insured, with you as the beneficiary. If the value of your house declines and you sell at a loss, you’d be eligible to make a claim for up to the full amount of your original down payment.

The premiums are expected to average around $1,200 on a $20,000, 10 percent down payment on a $200,000 house. If you purchase the coverage as part of a lender credit toward closing expenses, rather than paying cash for the coverage at closing, the +Plus premium could be rolled into the interest rate on the entire loan, raising the rate slightly. It could also be a supplement to lender-paid mortgage insurance, with a higher rate on your mortgage.

Sounds intriguing, right? But as with all insurance products, you’ve got to look hard at the details, especially the terms governing when and how much you’ll receive if you make a claim for a loss. The sponsor of the plan is a company in Dallas, ValueInsured (www.valueinsured.com). For the +Plus program, ValueInsured is partnering with Texas-based specialty insurer Houston International Insurance Group, and Everest Re Group Ltd., a reinsurance company headquartered in Bermuda.

In an interview last week, Joe Melendez, founder and CEO of ValueInsured, told me that the goal of +Plus is “to take the risk element off the table and give (buyers) more confidence.”

So how much risk is really taken off the table? Start with the conditions that have to be met to qualify for a payment on a claim. Simply documenting that you suffered a loss after a sale won’t necessarily get you your down payment money back. You can’t file a claim during the first two years after your purchase or after seven years.

Next comes the really tricky part. The +Plus plan keys its payouts in part to a property value index published by the Federal Housing Finance Agency (www.fhfa.gov/DataTools/Tools/Pages/HPI-Calculator.aspx). If your state index hasn’t dropped during the period of your ownership but the sale price of your house has gone down, or if the FHFA index hasn’t declined as much as your home’s value since the date of purchase, you’re not likely to get all of your money back. Or maybe anything at all.

Here’s an example provided by ValueInsured- You put down $20,000 down on a $100,000 house. Five years later you sell at a loss of 20 percent, $20,000. If your state home price index as measured by the FHFA has declined by only 10 percent, the most you can obtain on a claim is $10,000. If your house declined in sales price by 30 percent but the FHFA index remained flat, you’d get zero on your loss. But if the index declined by 30 percent and your home price also declined by 20 percent, you could claim your full $20,000 back.

The payout formula is this- +Plus will pay the lesser of- (1) your original down payment, (2) the actual equity you lost, or (3) the purchase price or your house times the reduction in your state’s FHFA index.

Not so simple. For this sort of down payment insurance to provide you maximum coverage, your house essentially cannot be losing value faster than the statewide average, which of course, may not show any decline at all.

Good deal or not? It might make sense for you if unexpected economic reverses depress property values in your state. It might make sense as peace-of-mind coverage. But do the math and figure the likelihood that the premium you pay – which could raise your interest rate for long beyond the point where your coverage expires if it’s included in your mortgage rate – is worth the coverage you’ll receive.

Are lenders cherry picking higher FICO scores?

Kenneth R. Harney on Sep 11, 2015

WASHINGTON – Everybody knows how important credit scores are to obtaining a home mortgage. But are lenders lately playing a numbers game with consumers – claiming they’re willing to accept lower scores while actually approving applicants with higher scores on average than they did last year or even earlier this year?

That’s an important question for people who want to buy a home but don’t have stellar credit scores. They may have heard that that there has been more flexibility on scores in recent months, but what are the facts?

Consider-

- The Mortgage Bankers Association, which publishes a monthly index of “credit availability” based on lenders’ offering terms, reported last week that conditions for applicants have improved for “eight of the last nine months,” including for loans where borrowers have “lower credit scores.”

- But data from Ellie Mae Inc., a mortgage software company that produces a highly regarded monthly report on accepted and rejected loan applications, paint a different picture- Average FICO credit scores on non-government and government-backed mortgages for home purchases have been rising – not falling – all year.

FICO scores are the dominant credit risk measure used in the mortgage field. Scores run from 300, which indicates a high risk of default, to 850, which signifies the lowest risk.

In January, according to Ellie Mae’s latest report, the average FICO credit score for applicants who closed on non-government mortgages to purchase homes was 752. During the course of the year, it has risen steadily to 757 in July, the latest month surveyed. That’s a higher average than during any month in 2014, and well above prevailing scores during most of the past 15 years.

Federal Housing Administration (FHA) loans show a similar pattern- Mortgages closed during January had average FICO scores of 682. In July, they averaged 689, five points higher than the average for 2014. Veterans (VA) loan scores are also up – 709 in July on average compared with 704 in January and 701 last December.

- The average FICO score for American adults was 695 in April, according to FICO. Though credit scores represent just one element in a mortgage application – debt-to-income ratios, down payments and documented income are at least as important – the average American consumer’s score comes nowhere near what’s been typical in the non-government (“conventional”) mortgage marketplace, which is significantly larger than the government (FHA-VA) marketplace. Conventional loans typically are originated for sale to giant investors Fannie Mae and Freddie Mac. Both corporations say their minimum acceptable credit scores are 620 FICOs; FHA accepts scores as low as 580. Lenders, however, are free to set their own, higher limits, and many do.

So what’s going on? Are lenders cherry-picking when it comes time to approve applications? Or are other factors at work here?

Most lenders I’ve spoken with insist that loan terms have eased in recent months, including modest declines in acceptable FICO scores. Bill Banfield, a vice president at Quicken Loans, the largest non-bank mortgage originator, says “there have been a lot of changes” to underwriting guidelines that should allow greater numbers of buyers to qualify for a loan. Though Banfield would not discuss average credit scores at Quicken, he noted that the company is approving qualified applicants for FHA loans who have FICO scores down to 580.

Dan Keller, a mortgage adviser with New American Funding in Kirkland, Washington, says small movements in average scores on closed loans are no big deal because “a credit score today isn’t getting in the way of getting a mortgage” – it’s rarely the back-breaker for an application. Underwriting systems judge potential borrowers on their total package, not just one factor, such as credit scores.

Mike Fratantoni, chief economist for the Mortgage Bankers Association, told me that part of the seeming conflict between the credit availability report and Ellie Mae’s statistics can be traced to the fact that they are measuring different things. The MBA survey examines what terms lenders are offering – their menus and requirements that are available to consumers. These have definitely loosened up during the past year, though maybe the word hasn’t gotten out sufficiently to consumers, he says. The Ellie Mae report, by contrast, focuses on the end result of actual applications. Some borrowers may have acceptable credit scores but negative issues elsewhere in their applications.

That’s one theory. But the bottom line for consumers is- who gets approved, who doesn’t? And the statistical evidence suggests that it is increasingly people with higher scores on average, not lower, who are making the final cut.

FHA opens window to more borrowers

Kenneth R. Harney on Aug 28, 2015

WASHINGTON – If you’ve got a low FICO credit score but believe you can handle monthly mortgage payments instead of rent, here’s some potentially good news- The government is now willing to give you a better shot at obtaining a low-down-payment home loan from the Federal Housing Administration.

Under a key policy change that took effect last week, lenders nationwide now have more leeway to approve mortgages to borrowers who qualify under FHA’s underwriting guidelines but may have below-par FICO scores. Some analysts say the revised approach could create a pathway for as many as 75,000 to 100,000 new loans a year to borrowers who are currently frozen out of consideration.

FICO credit scores run from 300, considered the highest risk of default, to 850, the lowest risk. Though FHA for years has accepted applicants who have FICO scores in the 500s, the practical reality has been that most lenders ignore borrowers whose scores are under 620 or even 640. Lenders have avoided low FICO borrowers in large part because FHA itself has employed a statistical evaluation system that scrutinizes – and sometimes severely penalizes – banks and mortgage companies that make what FHA considers too many “high-risk” loans compared with other lenders active within the same geographic area.

Under the revised policy, lenders will be judged under a fairer metric. This will allow companies located in communities with large concentrations of residents who have lower than average FICO scores – these tend to include young, first-time buyers, minority households and moderate-income working families – to make loans without fear of being penalized solely because of their business focus.

“This is going to really open the doors – I think it’s a huge step in the right direction,” says Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, California. “There are a lot of people out there who have good credit but low FICO scores simply because they lost their jobs during the recession” and got behind on paying bills. “They are working two jobs. They’ve been slowly rebuilding their credit and have been saving money for a down payment. They are good risks” – they’re not going to mess up on mortgage payments. Equally important, Ziroli told me, they are eager “to build wealth by owning a home” rather than paying rent to a landlord. Ziroli’s company originates roughly 7,000 FHA-insured loans a year, many to Latino and African-American first-time buyers.

David H. Stevens, president and CEO of the Mortgage Bankers Association and a former head of the FHA, says the revised policy should help “some” borrowers whose FICO scores in the low 600s and upper 500s currently bar them from obtaining any type of mortgage, FHA or otherwise. But those who fully qualify under FHA’s regular underwriting standards – reliable income, acceptable debt-to-income ratios, solid ability to repay – “will now be more likely to find some lenders who will do their mortgages.”

That’s significant, he said. Even so, many lenders will not rush in and immediately start doing more low-FICO loans. They’re going to wait and watch how FHA treats lenders who do increased volumes of these mortgages.

“So this emphasizes the importance of shopping,” Stevens said in an interview. If the first couple of lenders say no, borrowers should keep shopping until they locate a lender who – encouraged by the new flexibility from FHA – says yes.

Why is the government opening FHA’s doors wider for buyers who previously would have been rejected? In large part it’s because just about everybody – from Fed Chair Janet Yellen to prominent economists and financial experts – agrees that credit standards have gotten too strict in the years since the bust, especially given the payment performances of borrowers recently.

Brian Chappelle, principal at housing consulting firm Potomac Partners and a nationally known expert on FHA, says mortgages with low FICO scores originated during the past two years “are performing better than the total mix of FHA business (including much higher score levels) from 1999 through 2011.” Serious delinquencies of 90 days or more where applicants had FICOs below 640 were at just 1.82 percent as of June 30.

The takeaway here- Just because your credit reports and scores continue to bear the wounds of the recession and financial crisis, don’t assume you can’t buy a house. Shop aggressively among FHA lenders in the coming weeks and months, and you’re likely to find a better reception than you feared.

New rules could further complicate closings

Kenneth R. Harney on Aug 21, 2015

WASHINGTON – Could home sale closings get delayed in the coming months, even more than they are now? Bankers, real estate agents and title insurers think they might. They are worried that the new federally mandated mortgage and real estate disclosure procedures scheduled to take effect nationwide Oct. 3 will lengthen the typical time span from sales contract signing to settlement.

The new rules, which mandate longer document review times for buyers and impose an entirely new set of disclosures in place of the traditional Truth in Lending, Good Faith Estimates and HUD-1 settlement forms, are likely to take a while for mortgage and closing service providers to get accustomed to using.

Some industry experts warn that today’s 30-day to 40-day turnaround times could extend to 45 days or longer, depending on the number of complications that arise during the process.

But then again, complications in real estate transactions are nothing new. Talk to any experienced realty agent and ask about issues that lead to delays – or total derailments – and you’re likely to get an earful. The sobering fact is that even without the new closing rules coming in October, nearly two of every five of all home sale transactions don’t proceed to closing on time or as planned.

Most buyers and sellers are unaware of the statistical probabilities, but a surprisingly large percentage of sales involve problems that push closing times beyond what was originally agreed to by the sellers and buyers. Roughly one out of 14 deals actually implodes after the sales contract signing – they don’t make it to or through the closing at all.

Consider this- According to an internal survey of members conducted by the National Association of Realtors, during the months of April, May and June this year, only 63 percent of purchase contracts settled on time. Twenty-nine percent experienced delays and 7 percent fell apart.

What gets in the way? According to the survey, problems with financing in deals that were delayed but eventually settled accounted for 39 percent of the trouble, followed by appraisal disagreements (16 percent), title and deed problems (11 percent) and home inspections (9 percent), contingencies in the contract (8 percent) and a long list of others, including sellers and buyers getting cold feet and backing out, homeowner associations creating obstacles and buyers losing their jobs.

What specifically interferes with mortgage financing, the No. 1 cause of delays and cancellations? Things like buyers not being able to back up the income numbers they claimed at application, not being able to come up with the down payment cash. Or doing something ill-advised that affects their credit negatively.

For example, in a post earlier this month on ActiveRain, a popular blog for real estate professionals, Fred Griffin, owner of a brokerage in Tallahassee, Florida, said he had a buyer who decided to purchase an SUV one day before the scheduled closing. That’s a major no-no- Any credit transaction during the period from loan application to final settlement – buying a diamond ring or even a refrigerator – can throw off your credit scores or increase your debt-to-income ratio beyond what’s acceptable.

Lenders routinely run follow-up credit checks ahead of closings, and any new activity shows up on national credit bureau files almost instantaneously. In Griffin’s client’s case, the SUV purchase killed the sale, even though the buyer pleaded with the auto dealer to take the vehicle back and unwind the car loan.

Beth Brittenbach, an agent with Century 21 Schutjer Realty in Vallejo, California, had a buyer do the same thing recently, then had the sad experience of having to tell the home seller the deal was dead, just as she was having furniture loaded into the moving van.

Sometimes deal-threatening complications can get a little testy. Even weird. In an ActiveRain posting, Jennifer Monroe, an agent with Savvy + Co. Real Estate in Charlotte, North Carolina, cited several types of issues that can endanger deals at the last minute. Among them- Fights between husband and wife buyers- “As in near break-up fighting. It’s more than just ‘I like this but she likes that’ or a philosophical disagreement over the smartest financial move. No, there can be some truly dangerous ground here. Example- turns out he was married before but never told you. True, it lasted all of 27 days and they promptly split, but now the lender needs a certified copy of those divorce papers he burned all those years ago.”

Yikes.