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Over the weekend I finally caught the movie, No Country for Old Men. It’s critically acclaimed and several friends recommended that I go see it. At times the movie was boring and slow. At times it was quick witted and interesting. However, most of the time nothing about the movie made sense.

In the current mortgage landscape nothing makes sense.

I still get several refinance requests from the internet where people are shopping and getting quoted rates that haven’t existed in years. Moreover, to get a loan closed today is much more difficult than ever before. So for anyone to do a loan at the lowest possible rates doesn’t make any business sense.

Some requests are for home purchases by real estate investors. Every day lenders are limiting their risk by limiting what a mortgage broker can and cannot submit. Every day programs are disappearing. There are very few high risk loans available. It’s only a matter of time before buying a home with no money down will become extinct.

Most of the inquiries I get are questions. Simple questions such as “Is now a good time to refinance?” or “Will not paying my bills hurt my credit?” The people who ask these don’t give me any information about themselves just a name and an email. That’s like asking your optometrist (eye doc) “Do I have ocular degeneration?” without having him/her/it look at your eyes.

Just like the movie, No Country for Old Men, there is no end in sight to all the madness.

Here’s a mortgage primer on which loans are no longer the flavor of the month on Wall Street. They’re the Michael Vick’s of the mortgage world, they were once very popular on but now nobody wants to be associated with them. Okay, that’s a little bit too harsh since these loans didn’t kill dogs. Then again, these loans have put families in dire straits so lets keep the Michael Vick analogy.

Loans the Wall Street doesn’t like:

• THE LOANS WITH THE REALLY REALLY REALLY LOW RATE AND LOW MONTHLY PAYMENT

Also called: 1%, NEGATIVE AMORTIZATION, NEG AM, OPTION ARMS, PAY OPTION ARMS or

“A CAN OF WHOOP ASS WAITING TO HAPPEN”

• THE LOANS FOR BORROWERS WITH REALLY REALLY REALLY BAD CREDIT HISTORIES

Also called: SUBPRIME, NON PRIME, POOR CREDIT, 2/28s, 3/27s, or

“I GUESS THIS IS WHAT I GET FOR NOT PAYING MY BILLS”

• THE LOANS FOR BORROWERS WHO HAVE GOOD CREDIT BUT WHOSE OVERALL LOAN APPLICATION DOESN’T MEET FANNIE MAE OR FREDDIE MAC’S STANDARDS

Also called: ALT-A or

“SO I’VE GOT GOOD CREDIT AND A GOOD JOB BUT I’M PENALIZED FOR NOT SAVING ANY MONEY”

• THE LOANS FOR BORROWERS WHO CAN’T REALLY REALLY REALLY SHOW HOW MUCH MONEY THEY’VE MADE OR HOW MUCH THEY HAVE SAVED UP

Also called: STATED INCOME, STATEDSIVA, SISA, NO DOC, or

“DON’T THEY HAVE LOANS FOR PEOPLE WHO DON’T HAVE JOBS?”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PUT ANY MONEY DOWN

Are called: 80/20, 100% Financing, NO MONEY DOWN, 103%, 107% or

“I WANT A LOAN WHERE I GET TO KEEP MY MONEY IN CASE MY JOB GETS OUTSOURCED TO INDIA”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PAY AN AMORTIZED PAYMENT

Also called: INTEREST ONLY, IO, or

“IF I LIKE PAYING DOWN PRINCIPAL MY PAYMENT GETS RECAST TO A LOWER PAYMENT EVERY MONTH”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY WANT TO BUY A HOME THEY HAVE NO INTENTION OF LIVING IN

Also called: INVESTMENT PROPERTY LOANS, NON OWNER OCCUPANCY, NOO or

“I’M GOING TO BE THE NEXT DONALD TRUMP”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY MAKE A LOT OF DOUGH

Also called: JUMBO, NON CONFORMING, SUPER JUMBO, MILLION DOLLAR LOANS, ANYTHING OVER $417,000 or

“THAT’S PRETTY LOW FOR A RATE OF RETURN AND PRETTY HIGH FOR A MORTGAGE INTEREST RATE”

It remains to be seen if Wall Street still likes:

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY HAVE NO INTENTION OF LIVING IN THEIR HOMES FOR 15 to 30 YEARS

Also called: ADJUSTABLE RATE MORTGAGES, ARMS, 3/1, 5/1, 7/1, 10/1, TEASER RATE LOANS, HYBRID LOANS, BALLOONS or

“THE AVERAGE PERSON MOVES EVERY 5 to 7 YEARS, SO WHY SHOULD I GET A LOAN FOR 30 YEARS?”

Wall Street will always like:

• THE LOANS WITH REALLY REALLY REALLY NO RISK

Also called: FHA, VA, CONFORMING, FANNIE MAE, FREDDIE MAC or

“THE LOANS THAT MAKE UP THE MAJORITY OF THE AMERICAN MORTGAGE LANDSCAPE”

Back in September, the Feds came out with a press release entitled: Federal financial regulatory agencies issue final guidance on nontraditional mortgage product risks–September 29, 2006. The purpose of this press release was to address the problems our nation has been having with high risk mortgages.

These products, referred to variously as “nontraditional,” “alternative,” or “exotic” mortgage loans (referred to below as nontraditional mortgage loans), include “interest-only” mortgages and “payment option” adjustable-rate mortgages. These products allow borrowers to exchange lower payments during an initial period for higher payments later.

These loans often carry the following layers of risk:

• Interest Only

: Interest only payments do not require principal reduction therefore your loan balance stays the same.

• Adjustment of Rate

: When adjustable rate mortgages begin their adjustment phase, your loan payments may increase.

• Negative Amortization

: When you only make the minimum payment your principal balance increases every month.

• Prepayment penalties

: If you decide to refinance or sell your home before the penalty expires, you may face severe monetary penalties.

For more on the Feds effort to explain high risk mortgages, check out these addendum’s which explain:

1. Risks of Non Traditional Mortgages
2. Key Facts About Interest Only and Payment Option Mortgages

Phil’s take: I take pride in understanding these “high risk” mortgages inside and out. However, it took time to really understand all the nuances. On the other hand, a borrower has a month, maybe less, to really understand what they’re getting themselves into. The above documents are a good start but it won’t deter mortgage companies from coming up with even more complex loan programs in the future.

I’ve been tracking this blog: www.iamfacingforeclosure.com for quite some time. Casey Serin, a young dude in his mid 20’s decides to become a real estate investor and does it without deep pockets or the necessary income or assets to qualify for the mortgages on the investment properties he buys.

I’m a 24-year-old aspiring real estate investor from Sacramento CA. After going to few seminars I bought 8 houses in 8 months across 4 states with no money down. I fixed and sold 2 and then ran out of cash. I am now facing foreclosure on 5 houses. I’m learning my lessons, finding solutions and blogging about it. Comments appreciated!

Casey’s blog has gained national exposure including an article in USA Today entitled 10 mistakes that made flipping a flop.

Here’s a summary of the 10 mistakes:

Mistake No. 1 - Using ‘liar loans’

Mistake No. 2 - Overpaying

Mistake No. 3 - Lacking cash

Mistake No. 4 - Quitting your day job

Mistake No. 5 - Hiring an unlicensed contractor

Mistake No. 6 - Buying sight-unseen

Mistake No. 7 - Buying out of state

Mistake No. 8 - Buying too many properties too fast

Mistake No. 9 - Underestimating remodeling costs

Mistake No. 10 - Having a poor exit strategy

Casey isn’t the only one who caught the real estate investment bug and failed miserably but he’s the only one to really document his story as an RSS FEED.

Senator Wayne Allard spoke at a Senate subcommittee hearing on the mortgage dilemma that faces the state of Colorado in a Denver Post article entitled Senators: Borrowers don’t understand mortgage risks.

First up the political jargon:

Consumers “must have adequate information. The information must also be clear and meaningful,” Allard said Wednesday. “Consumers should understand exactly what risks and benefits different products represent.”

Next up, what the banking regulators have to say:

Banking regulators including the Federal Reserve and the Office of the Comptroller of the Currency are working to upgrade lenders’ disclosure and loan-qualification procedures.

What Phil has to say:

The mortgage industry is full of a**holes who don’t even know how the Option Arm or Interest Only Loans work, yet sell them with reckless abandon. However, these high risk loans have allowed many Americans the opportunity to buy a home with little to no money down. Is that such a bad thing?

Borrowers receive disclosures at loan application. At closing the borrowers receive a Note, Riders, and a Truth In Lending document. These documents scream “PROCEED WITH CAUTION!” Hot tip to borrowers: START READING THESE DOCUMENTS!

Business week has an article entitled “How Toxic is Your Mortgage” which condemns the Option Arm loan program. The article explores the history of the option arm and the risk associated with a negative amortized loan.

For cash-strapped homeowners, it was a pitch they couldn’t refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn’t even need to produce documentation, much less a downpayment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket.

Consider the following questions when evaluating this loan product:

• Do you understand the start or introductory rate?
• Do you understand the margin?
• Do you understand the index?
• Do you understand the effective rate?
• Do you understand the four payment options?
• Do you understand the minimum payment?
• Do you understand negative amortization?
• Do you understand the recast payment?

If you can answer all these questions, then maybe, just maybe, this loan is right for you!

Denver Post is reporting that rates are dropping.

Their graphic is somewhat puzzling because the online article never references subprime lending.

Subprime loans are for borrowers who have:

• LESS THAN PERFECT CREDIT
• BANKRUPTCIES, FORECLOSURES, LIENS, COLLECTIONS
• HIGH DEBT LOADS
• MINIMAL TO NO ASSETS i.e. SAVINGS, 401K, STOCKS, FUNDS, etc.
• HARD TO DOCUMENT INCOME

Subprime loans have:

• HIGHER RATES
• STRICT PENALTIES TO PREVENT YOU FROM SELLING OR REFINANCING
• INTEREST ONLY AND 40, 45, OR 50 YEAR AMORTIZATIONS AVAILABLE
• LENIENT UNDERWRITING

Here are some reason why you would choose a mortgage broker:

A mortgage broker can shop the banks for you; saving you time and money. A broker has many banks to choose from so you get the best rate!

Mortgage brokers work with wholesale rates rather than retail rates. They can often provide rates lower than what you may get quoted by a bank which uses retail rates.

Mortgage brokers originated over 70% of all mortgage loans originated over the past couple of years. For this reason alone, this should let you know how key the role of a good mortgage broker is.

A mortgage broker has the ability to have your loan approved and submitted at many different lenders. If a particular lender should cause a delay or refuse the loan the mortgage broker can have another lender begin to underwrite the loan. This will insure there are no timely or costly delays in your loan process!

A mortgage broker makes banks compete with one another for your business.

Mortgage brokers allow you to see multiple offers at once. You are given choices on which program best fits your needs. Direct lenders often have higher costs and are forced to charge you a minimum in points and fees. Brokers give you the flexibility to negotiate those fees.

A mortgage broker generally have established business relationships with multiple banks, and therefore has many more loan programs available, whereas a bank loan officer can only sell mortgage products offered by the bank. While a mortgage broker has the ability to shop different lending institutions to find loan programs tailored made for homebuyers in almost any financial situation, a bank based loan officer can only offer the bank’s product, even if that loan product may not be the best for the home buyer. For example, a neighborhood bank may have a “Stated Income” program for loan applicants with credit scores of 700 and above and a “No-Doc” program for credit scores of below 700 at a higher interest rate. Since a borrower with a credit score of 685 does not qualify for the “Stated-Income” program, the bank loan officer would put him in a “No-Doc” loan with a higher interest rate. On the other hand, an experienced mortgage broker can often find another lender offering a lower interest rate “Stated Income” program for the same borrower.

A mortgage broker can quickly determine the best loan program for you, then search through several lenders who specialize in that program to find the best rate and terms for you. A bank, on the other hand, has fewer programs to choose from and must sometimes try to fit your unique situation into one of their programs, whether it is a perfect fit or not.

In addition a good mortgage broker will look at more than just obtaining a loan for you. They will look at your whole financial picture to make sure the loan program fits your short term and long term goals.

Here are some reasons why you would use a mortgage broker:

There are many reasons that you should use a mortgage broker and many advantages to using a mortgage broker. One reason to use a mortgage broker is because a mortgage broker has access to all kinds of different home loan programs.

A mortgage broker’s job is to assess your situation and then shop your loan via 100 different lenders in order to find you the most beneficial loan for your situation. We have access to over 1200 different loan programs and are able to obtain wholesale rates which can save you $100,000 plus over the life of your loan.

Here’s something to keep in mind. As a mortgage broker, I’m completely independent. I’m not employed by or work for any bank or lending institution. I work for my clients. The bank is going to look out for its best interests, isn’t it nice to have someone working for you, the borrower, and looking out for your best interests?

Many mortgage brokers have expertise in certain types of loans, such a construction-to-permanent loans, poor credit loans, or reverse mortgages. If your situation has special obstacles a mortgage broker may be the best answer.

A mortgage broker is an individual or firm that acts as an independent agent for both the borrower and the lender of a mortgage loan. Mortgage brokers are the middle man between you and the lending institution, which can be a bank, trust company, credit union, mortgage corporation, finance company or even an individual private investor. A mortgage broker will analyze your financial situation to determine which lender is the best fit for your loan needs.

Mortgage brokers have the advantage of being able to access dozens of rates quickly for similar loan programs from different lenders. Although banks have similar programs, their rates can vary widely. Mortgage brokers, through experience and through searching rates, can find which lenders are offering the lowest rates at any given moment.

Mortgage brokers have more options than banks. For example. if you have poor credit and need a sub-prime loan, your bank may have access to one option. A mortgage broker would have access to dozens. Other situations where mortgage brokers would be able to provide you with more options than a bank include manufactured homes, rural properties, commercial properties, first time home buyers, and special credit situations, such as bankruptcies and foreclosures.

Working with a mortgage broker has many benefits. Just to name a few: we discuss and explain the programs that are available to you in your particular situation. We inform you in writing that you loan interest rate is locked and wont change. We explain all the documents in plain English so you understand what you are signing. We explain all the costs involved in closing the loan. We give you a time-line of the loan process. We provide you with a good faith estimate. We also coordinate the final closing of your loan.

Mortgage brokers have access to wholesale rates, where as your local bank only has access to the rates that they offer. This can save you money on your monthly payment, especially if you have a unique situation that your bank will not be able to handle.

Mortgage brokers are also familiar with the area in which they operate. Using someone local has big advantages. With so much mortgage information online, it’s hard to know who to choose. If something goes wrong along the way with your loan, it is easier to deal with if you have a loan officer you can meet with face to face rather than a website or 800 number.

A mortgage broker is also able to move your file to another lender should a better deal appear. Or if there is a problem with your file in underwriting your mortgage broker can switch lenders within minutes and ensure you meet your close date. Local banks cannot do this.

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