Richard's Real Estate Thoughts

It has been my pleasure to post frequently the high ratings Chattanooga receives as a top city on the international scene.

This morning I must now post our high ranking as the least physically fit city in the US, according to the Center for Disease Control and Prevention.

Come one folks - we are better than this.

We have the Riverwalk, bike trails, numerous gym facilities, even some public facilities. 7 area YMCA's. Each community has a walking track with its youth athletic association.

We are better than this.

Let's go for a walk! Today!

Yield spread premiums are the current target of federal regulators, as well as many in Congress. Using loaded language such as "steering fees" and "kick-backs" and misdirected by well intentioned (I hope) but misinformed consumer advocacy groups, regulators and legislators are working to make changes to the mortgage industry that will harm consumers and small businesses alike.

The goal of consumer advocates and federal regulators is to make loan officer compensation unrelated to the terms of the loan. The false and overstated perception is that loan originators have incentives to push unwitting consumers into a loan that only benefits the loan originator, and puts the consumer into a bad financial decision.

This overstates,incorrectly simplifies and inaccurately summarizes the problem. The result is that the proposed solution (elimination of lender paid premiums to mortgage brokers) is overly complicated and will cause harm to the consumer and to the housing market.

At first it seems right not to pay the originator based on the terms of the loan. Except that the terms of the loan are the only income that the lending company receives. What else can the company use for income with which to pay the originator?

At first it seems right not to pay the originator based on the terms of the loan. The justification is found from anectodotal accounts of loan officers steering unwitting consumers from low rate loans to high rate subprime loans, and not giving the consumer the best loan for which they qualify. The examples generally offered are exagerations of rate increases of a full 2% or more.

Those examples possibly refer to moving a consumer from an FHA loan into a subprime loan. Such a switch actually makes little financial sense to the mortgage broker if the consumer were truly qualified for the FHA loan.  In general more lender paid premium is available with conventional and government loans programs that were available with subprime loans. Of course subprime loans are no longer offered anyway.

The market shut down subprime lending. The market, not regulators.

At first it seems right not to pay the originator based on the terms of the loan. The justification is found from horror stories about loan officers adding prepayment penalties and other loan features that increased originator pay and hurt the consumer.

These stories most likely refer to Pay Option ARM's, another program that the market has shut down. (Mind you the market shut it down, not regulators.) Loan originators were able to change rate adjustment margins and to increase the length of the pre payment  penalty in order to increase their premium. I believe there was a problem with these loan programs. The initial payments were often set artificially as low as 1% of the balance. Many sophisticated consumers and many of the originators and lender representatives did not themselves understand these loans or the impact of the different terms.

It was a dangerous loan program, and because of its danger it is gone from the market.

Because of the unique nature of this loan program it very well should be the focus of targeted regulation, but the problems associated with this unique and no longer available loan program should not be used to shut down consumer access to standard financing options with conventional and government programs.

Standard conventional and government loan programs do not offer those loan features.

At first is seems right not to pay the originator based on the terms of the loan. Because it would seem to raise the cost of the loan for the consumer in the form of higher interest rates. Except that not paying the loan originator the interest premium does not eliminate the interest premium. It only lets the lender retain that interest premium. The consumer still pays the same rate. It only changes who receives the income from that rate.

I intended to write more detailed explanations of how lender paid premiums work for the consumer and for the mortgage broker, and to explain the difference between a lender and a broker. This post is fairly long as it is, just setting up the issue.  The issue of lender paid premiums itself is fairly technical, which is why some people can get away with using loaded catch phrases like "kick backs" and "steering charges."

The issue is important, and while fairly technical, it is not really that hard to understand.

I will write another post to cover more aspects of this issue, vitally important to you the consumer.

We had a client referred today from a real estate agent who had been driving a buyer around for 3 weeks. The buyer was prequalified by a local bank loan officer.

The client said the loan officer had called and said they needed to have a sales contract today and to lock today because the program that allowed the client's credit score was going away today.

The agent asked if we could help, because they could not find a property today. They have been looking steadily for 3 weeks, but had not found a property yet.

We talked with the client to understand what the situation was. Their credit score had been 612. They were looking for a Rural Development loan, 100% purchase. They had followed their loan officer's advice to improve their credit, while they looked for property.

Our loan officer asked questions about their employment, their income, their debts. Satisfied that maybe we could help, she pulled credit.

The 612 score was gone, dropped.

The client has failed to tell us about a $500 car payment that actually put their debt ratio well over 65%. The client's husband is just out of bankruptcy and will not qualify for the loan.

The fact though is that the client was never qualified. The program that ended today, that supposedly allowed Rural Development loans below 620 credit scores, did not matter. The client's debt ratio was too high, yet the previous loan officer had issued a prequalification letter. Based on that prequalification, the agent and the hopeful buyer had spent 3 weeks looking for homes.

BTW, the advice given to the client to improve their credit - pay off an old tax lien. The client borrowed from a finance company to pay the lien. The lien has not updated, but when it does it will probably reage the reference and further lower the score.

As it is, the new finance company debt has already lowered the score.

And no underwriter has reviewed the file.

This loan officer has wasted the agent's time and gas and has left the client in worse financial shape with bad advice.

What is a real estate agent to do?

What is a buyer to do?

This was a loan officer from an established bank.

Pick your loan officer well. Require that your loan status be fully explained and you know what has been done, what still needs to be done, and why are we waiting?

Here is a checklist with some information that I hope will help:Homebuyer Help

The NAMB has announced that it will testify before Congress Thursday, October 8, at the House Subcommittee on Housing and Community Opportunity.

Expected time is 2pm. Some of the major points in the prepared statement are:

• Consumers benefit from working with brokers, many of whom who have working relationships with one or more banks
• Mortgage brokers facilitate competition in the marketplace and help drive down origination costs
• NAMB consistently advocated for a licensing and registration regime for all mortgage originator which has helped establish higher level of professionalism in the broker industry
• NAMB supports the goal of appraiser independence, but HVCC is failing to provide any greater protection for appraisers. The statement reviews many of the problems from HVCC.
• NAMB strongly opposes FHA's decision to follow in the footsteps of the HVCC
• Concerns are discussed about the new FHA refinance guidelines and issues with appraisal portability

The statement points to findings from "A 2005 independent study conducted by economists at three major universities concluded that broker-originated mortgages are less costly to the borrower than lender-originated mortgages."

The NAMB prepared statement does not mention lender paid premiums. This is an developing issue in which regulators are threatening restrictions that I think will limit consumer choice and make mortgages more expensive. This issue is still in the comment phase with the Federal Reserve. I understand that the NAMB comment is expected in November. 

Here is a copy of the the prepared testimony.

Here is a link to hear the testimony.

The NAMB is working hard in the face of massive new regulation and legislation. Their efforts to boost our industry and to protect the consumers access to affordable home financing is worthy of our support.  

The idea of purchasing a home, your first or your last, will bring many questions to mind. As is so often said, one of the major purchases a family will make.
Many questions are about finding and selecting a home.Your Realtor® is the best source for help in this.
Financing is another facet of your home purchase. We hope you will find some answers to many of your questions about financing.

Shopping for a mortgage

There are different types of home mortgages – conventional, FHA, VA, and Rural Development are the most common.

These vary in their requirements. Loan size, credit, amount and source of downpayment, the amount of seller contributions to closing costs, and income limits are some of the differences between these different loan programs. Your loan officer should be able to compare these different options and to discuss which choice best suits your home financing objectives.

Qualifying for a loan
Loan qualification has become more difficult over the last several months. Income, debts, credit history, money for down payment, employment and residence stability are just some of the areas that can impact your loan approval. Your loan officer should give your application a thorough review before giving you a prequalification letter. You want to be sure that there will not be any last minute approval changes.

Documents
You will need to provide income and asset documentation, as well as your photo identification and Social Security Card. Generally you will need to document all income sources for two years and year to date. Assets needed can be documented with the most recent full statement for all assets. Bring all pages of all documents. You may also need to bring other items such as bankruptcy papers, divorce papers, and credit explanations.

Credit
Credit issues should be addressed before you begin negotiating a purchase of your home. Many credit problems can be corrected, if you allow sufficient time. In today’s market the minimum target score for most loan types is 620 for all borrowers.

Disclosures, Closing Costs, and APR
Your loan officer should provide certain disclosures within 3 days of the loan application. In reality the loan officer should provide this information immediately. It does not take long to prepare accurate estimates. The most important disclosures are the Good Faith Estimate (a detailed listing of loan charges, tax and insurance estimates, and title and closing charges) and the Truth In Lending (a presentation of the closing costs as included in the APR interest rate). The APR shows closing costs in a interest rate that is a little higher that the loan note rate. This helps you compare with one number the various total cost of different loan options.

The Loan Process
Your loan officer should take time to understand fully your closing time frame goals and relate this time frame to the loan process. The process is not complicated but because it is often new, it can be a little intimidating for some. The steps include 1)application 2) documentation and verification 3) lender submission and review 4) appraisal 5) title check 6) conditional approval 7) final approval 8) check of final fees and insurance 9) approval of closing requirements 10) close. After the initial application, your loan officer should keep you regularly informed of the progress.

I was reading a book on astronomy recently and found it difficult to visualize all the various relative motions of the Earth, Sun, Moon, other planets and stars. When I went outside to try to work the motions out, skywatching became much more than interesting. It has become a new hobby.

Seeing the moons of Jupiter is probably what hooked me. When I first saw the planet, I had only guessed it was a planet because of its brightness and its appearance in the telescope. I had heard that the moons were visible, but did not see them the first night. So I did not think it was Jupiter.

Checking the next night though I saw the 4 visible moons. Wow! Neat!
 

There they are. Watching them rotate from night to night is just too much.

This is a photograph, off the Internet, of Jupiter and its 4 Galilean moons, not my own picture. But it is exacly what can be seen. The moons change positions each night.

 

 

I have found Mars, in Gemini. Identified numerous individual stars. Seen Venus. Mercury and Saturn are in the east sky in the morning. I have seen one of them, not sure yet which. I think Saturn, but will watch for confirmation as it moves daily.

Each night and morning there are new things to see and to observe.

We have had several days of rain and heavy clouds which have limited my viewing, (See Julia Odom's post My buyer's house is flooded) but the clouds seem to be leaving this morning.

So a great night to watch the sky. Can't wait.

It is time to visit the Clarence T Jones Observatory, right here in Chattanooga. A place I have never been.

Today the National Retail Federation projected a down holiday sales season in consumer purchases, following the down fall back to school season.

Economists seem always to look to consumer spending to drive economic recovery, but this year, at this time, spending is apparently not the engine that can.

The general thought is that consumers are looking for savings and job security - not the latest thing.

Will we be in a new economy - one based on saving rather than spending. What kind of economy will we build as we move into the recovery.

NPR ran this story a few days ago about the likelihood that China will lead the world economic recovery. It is an excellent article, describing the need for a major correction to national savings vs spending imbalances.

• US must import $3 billion each day in foreign capital
• US buying binge supported by housing and lending bubbles is over
• weak employment bringing end to "open-ended American consumption"
• 2007 comsumer expenditures peaked at 72% of GDP - unmatched percentage in modern history

The new realities are changing habits and bringing about a "fiscal conservatism".

• less credit card purchases
• conservative investment
• higher savings percentage
• limit expenditures to necessities

Is this a new American consumer? a new American economy? We are moving out of the recession - but it does not look like we can depend on overspending to drive it.

It seems to me that this will prove to be a good thing.

My favorite radio station is the local NPR affilitate, WUTC. The news, the music, the features just make my day, every day. They play the absolutely best music and with great variety. The news I count on is from WUTC, both local and national.

This month is their semi annual fund raiser and it is being conducted in conjuction with their

25th year celebration.

Public radio has long been a consistent and reliable source for balanced and indepth news coverage. Every program is flat up to date. I always learn something new about the bigger stories, but also about the important stories that are not front page.

With so much concern now about the profitability of for-profit news outlets, especially newspapers, the public stations may offer the best business model.

Funding for news is a real concern, especially in light of the free, easy access to news on the Internet. How will it be paid for in the future? Listener supported stations may give the best solution for coverage and information that is indepth and broad.

Add in the music, local news, features. Public radio provides a big bang for the buck. You can make a contribution or a pledge here.

WUTC - one of the great benefits of living in Chattanooga.

News that the service sector showed growth for the first time in a year is a very postive sign that the economy is beginning a turn around. Employment is still the big question, as we all look for sustained job gains. Last Friday's employment numbers nationwide indicate that jobs will continue to be a drag on the economic recover.

Employment is always a trailing indicator of economic trends, and as such, improvement in jobs tends to lag behind improvements in other areas. The numbers of unemployed though are the highest since 1983. The size of the employment problem is having a great impact of the recovery. And most definitely on the individual families who are struggling with lost work.

Improvement in jobs is not simply trailing the recovery. It is weakening it. The job losses seem also to be permanent in many cases with factory closings and whole industries retracting. Unemployment in Tennessee is higher than the national numbers, with 10.8% statewide and 9.6% in Chattanooga.

The service sector growth though is great news and cause for optimism.

An even better sign though was reported by John Tess tonight. The restaurant trash index is apparently increasing, indicating more people are eating out. Hotel reservation cancellations are down, indicating more people are taking that trip.

It was a funny hearing the restaurant trash report on the radio tonight, but it is a good sign. Not sure who monitors restaurant trash, or even how one might monitor it.

There are signs that recovery is beginning. We are all ready.