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Ernie Lester's Blog

By Ernie Lester | Real Estate Pro in Peachtree City, GA
  • What will a CFPB-Compliant “Alternative Loans” Disclosure look like?

    Posted Under: Home Buying in Atlanta, Financing in Atlanta, Agent2Agent in Atlanta  |  October 29, 2012 8:58 AM  |  27 views  |  No comments

    By:    Ernest W. Lester,

    Author / Developer of Transaction Intelligence®

    As mortgage lenders wait for the Consumer Finance Protection Bureau to consider feedback on its final proposed rules, not all is known about what home mortgage lenders will be required to disclose to consumers as ‘the comparison’ of loan proposals to a “no fee mortgage.”

    If a lender wants to propose any rate in its rate schedule that charges lender fees, the CFPB will require disclosure of a “no fee mortgage” at the same time, with exceptions.

    The CFPB has described the no fee mortgage as a loan without lender fees. The originating lender is paid from a loan premium. For example, if required fee income to the originating lender is 2% inclusively, a wholesale rate coupon priced at 102 (priced at par to the customer with no other lender charges) would be the deal. Its definition does not preclude a wholesale price of 106 provided only that all lender fees are paid from the premium… apparently. The regulation is not telling lenders what their all inclusive fee must be… so far.

    When Scenarios Compete

    The CFPB’s stated purpose in requiring competing loan scenarios is "to provide consumers with clearer options and enable them to choose the loan that they believe is right for them."

    There is further guidance on paying points… The increased cost must actually reduce the note rate (must be bona fide).

    The requirement that one of the scenarios be a low cost alternative (the “no fee mortgage”) is good. When compared to a higher cost (lower rate) alternative, the borrower can see both the payment savings and the upfront cost difference. The borrower can see the difference, as well, when a no fee mortgage is compared to a lender-paid closing cost scenario; but, apparently, the CFPB is concerned only with lender fees visible to the borrower (Look for this to change.)

    The point in time when the disclosure must be rendered has not yet been defined. The CFPB is requesting industry feedback as to whether to require at the time the GFE is required, or sooner. The GFE is currently required post-real estate contract.

    Seller-paid Costs Create Challenges

    I have a practical issue with the usefulness of the comparison, rendered post-real estate contract, when the real estate contract has some or all of the transaction costs being paid by the seller. If the higher cost of the lower rate alternative is covered by a seller payment, it is not so likely the borrower will choose the lower cost alternative… as that would mean either not spending some of the seller contribution (to the seller’s benefit) or renegotiating the contract for the lower seller contribution. This may be counter-intuitive to some borrowers who regard the seller contribution as ‘free money’. The possible borrower reaction will not be popular with the real estate broker(s), who must then renegotiate the deal. Transaction alternatives should be evaluated well before the contract is written so that the contract can be negotiated on the terms required. With current technology that can provide such evaluations simply, there is no excuse not to do this early and often.

    "We are fallible human beings who more often than not ignore even the most elegant of explanations with impunity."  - carl801 Madison, Alabama

    Valid Comparisons

    Seller-paid costs may also pose a challenge to constructing a valid, apples-to-apples, purchase scenario for the no fee mortgage. The buyer will be due an amended contract (with lower purchase price and lower seller payment) if he chooses the no fee mortgage. The purchase scenario must be found that is equivalent (i.e.; delivers the same proceeds to the seller). In the case of maximum loan-to-value scenarios, this will be a trial and error exercise for the MLO without automation specific to the task.

    Examples:

    A comparison of the proposed Loan Scenario 1 to a “no fee mortgage” is required. Loan Scenario 1 reflects the negotiated purchase agreement.

    Apples to Oranges = not equivalent

    NOT A VALID COMPARISON – Scenario 2 nets seller more than the contract requires because the allowed seller payment cannot exceed costs.

     

     

    A VALID COMPARISON – These scenarios are equivalent because they net the seller the same amount. (6% brokerage fee assumed)

    Practicality Exception

    Borrowers with maximum back ratios may not qualify at the higher no fee mortgage rate/payment. A CFPB rule waives disclosure of the no fee mortgage in cases where the consumer is unlikely to qualify. This is not good regulation. These are the at-risk borrowers… who may qualify for a lower cost alternative (just not a “no fee mortgage”)… and they don’t get to choose?? If there are ANY practical lower cost alternatives, then a comparison is possible and should be provided.

    Why Not Compare the Lower Cost Loans?

    In requiring these disclosures, the CFPB is obviously trying to reveal, by way of comparison, the value of the rate buy down. But why not also compare the no fee mortgage to a higher rate, lender-paid closing costs scenario? The dynamics are the same… the difference in rates results in different overall transaction costs and different monthly payments.

    Example:

    Given the CFPB’s goal, this appears to be an inconsistency. Especially, it is the withholding of lender credits at the higher rates that has been an issue. Without the comparison requirement in every case, the issue is not being addressed.

    Best Choices | All Choices

    Most disconcerting to me: neither of the two alternatives presented may be a borrower’s best choice! Here, I am concerned with 1) considering only a single, defined alternative, that may not be the best, and 2) the absence of financial analysis to guide the borrower to a ‘financially best’ choice from among all practical alternatives.

    [This ends the discussion of the regulations and begins discussion of my better solution.]

    Technology can bring this, thoroughly! So, I say if we are going “to enable them to choose the loan that they believe is right for them,” - we should do it in a manner that is so clear and transparent it leaves no uncertainty. After all, this is the biggest of deals! And uncertainty is a deal killer!

    There are a couple side benefits I can think of, as well. One is that you are less likely to later be accused providing bad or less than totally transparent guidance. (Loose regs lead to loose litigation.) Another is that you are exceeding regulatory requirements to better care for your customer. These side benefits can ultimately help the industry get the government off its back.

    First

    Present ALL practical alternatives. There are often 9 or more rate/cost alternatives for a loan program. All may not be practical; but, usually, several more than one will be practical.

    Second

    Include analysis that concludes which alternative is “financially best” given the borrower’s profile and plans (i.e.; tax bracket and expected term of ownership).

    Third

    Compare the scenario that is “best if my plans are realized” with the scenario that is “best if I sell short of my plans.” Set the 'sell short term' of ownership at 4 years. (For those with not so much skin in the game, at least 4 years of loan amortization is needed to show enough equity for resale... so it doesn't look so scary.)

    Have I just thrown you a curve? Perhaps. But isn’t this exacting what we are trying to warn the borrower about?

    If you finance more or pay more cash to buy down the rate, you are taking the risk of losing if you sell short of your plans.

    Example: In the ‘A VALID COMPARISON’ above, the borrower saves $8.00 per month by paying $2,228.00 to buy down the rate. Only $384.00 is recaptured in 4 years. Had the borrower not saved the $8.00 per month (i.e.; chose Scenario 2), his payoff in 4 years would be $1,595 less.

    Technology Can Handle This!

    Above, I mentioned “current technology that can provide such evaluations simply.” Mort Genius Brands has styled a Lender Proposal and supporting details as follows.

    The Lender Proposal as Comparative Disclosure

    This ‘How to Read the Lender Proposals’ appears on our www.AskMort.com, website, under construction. This 'Ask Mort, Home Buyer Resource' site will be designed to attract, inform and connect serious home buying prospects with local, individual MLOs.

    Below, the 'Best for 12 Years' alternative is, coincidentally, the original contract price and terms in the above examples. But also notice that the 'Best for 4 Years' alternative is a significantly lower cost alternative than the above no fee mortgage. A 4 year term will typically point to a cost alternative lower than the no fee mortgage, if available. The 'Best for 4 Years' alternative should, therefore, always meet the technical definition of a no fee mortgage (e.g.; no lender fees).

    The Details Including All Practical Alternatives

    This is from our Transaction Intelligence® (Beta) tool, the Best Scenario Analysis page. It is the same data as the 'Proposal Details', referred to above. You can test drive this beta version at www.mortgeniusbrands.com.

     

  • The Mort Card – Don’t Leave Rentville Without It

    Posted Under: Home Buying, Financing, Credit Score  |  May 7, 2012 7:28 PM  |  52 views  |  No comments

    A credit card to buy a house?

    …and the closing agent said, “Now just sign all these papers, I have your lender’s check I’ll swipe your card, and we’re done.”

    Earlier…

    …the real estate agent said to the buyer, “Now, first things first. You will need a loan pre-approval letter The Mort Card before we can make any offers.”

    Am I spoofing you? Sort of.  The story sort of describes the way the home buying experience goes. Otherwise, the credit card concept fails, currently, because… “it’s too complicated.”  A loan pre-approval letter is the same idea. It confirms you are qualified for how much loan. If nothing significant changes with you by loan closing, you will get the house.

    Real estate agents do buyers a great service, especially first time buyers, by cutting to the chase right upfront. “Show me the money pre-approval letter.” No experienced agent is going to cotton to “look-e-loos” without proven means… You know, with the price of gas and the cost of time these days.

    Otherwise, society in general frowns on the delusional ;-) If you are seriously interested in homeownership, be real about it. Confirm that you are qualified! This will also give you the extra confidence you may need to go forward with the whole idea.

    A loan pre-approval letter is a must these days if you are going to offer on a home and your offer is subject to financing. The best real estate agents will help you with this and try to protect you by referring you to one or several local, proven trustworthy, mortgage loan professionals.

  • Out with the Opportunist; In with the Budget Focused

    Posted Under: Home Buying in Atlanta, Financing in Atlanta, Agent2Agent in Atlanta  |  April 9, 2012 6:34 PM  |  82 views  |  No comments

    Out with the Opportunist; In with the Budget Focused

    My eyes were turned recently to a staff blogger’s topic on a big real estate site: “How Much House Can You Handle?...”

    Some good thought, but more interesting to me was the reply comments. One reader was complaining that the mortgage loan officer had qualified her for a payment greater than she would attempt. Another reply mentioned how limiting it is to be house poor.

    In an April 8, 2008 blog, I said this was coming: “It is likely that the next buyers you work with will have carefully considered what they can comfortably afford.” I wrote.

    In a message to stockholders in 2011, Warren Buffet wrote: “Our country's social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.” (sad, really, but poignant)

    I believe this is a “sign of the times” for the residential real estate market. Today’s buyers are less motivated by financial gain. They remain interested in quality of life. Affordability is very high. There is less need and less motivation to stretch the budget.

    But this remains only a hypothesis. WHAT CAN YOU TELL THAT CONFIRMS OR CONTRADICTS THIS?

    I can offer this additional evidence: I also replied to the above mentioned blog to point out that this is precisely what my new web app is all about. That was enough to blow up the hits on my app and we are seeing a long stay per visit… an indication that buyers are interested in making “financially correct” choices. www.mortgenius.com

 
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