Why a Mortgage Planner

Becky Rhodes, MBA, CMPS®

Cellular: 310-916-6013Email: [email protected]

Why a mortgage planner?

I’m puzzled--a lady I’ve been in contact with for months waits until the last minute to tell me she needs to refinance. She’s afraid of her rate reset next month. Why had she waited 9 months, right up until the deadline before providing any real information?

I took another call from a young teacher who responded to my advertisement for the Teachers $15,000 down payment assistance loan. Why won’t I just tell him right there on the phone how much they would qualify for so they can go look for houses after school this afternoon?

It’s painful to have these conversations. What has created this mindset, that the largest item on the personal balance sheet is something to be disposed of in a 3-sentence telephone conversation? Is it because of incessant and mendacious internet advertising, offering “low” rates that turn out to be never actually available? Is it the loan industry that urges you to refinance and take out money for vacations? Is it the consumer, who invests more effort in hunting for vacation bargains, than for financial health? Perhaps, when one day we look back, and realize the “credit crisis” has passed, we will see that this marked the end of an era, the end of “drive-by” financing by unlicensed loan agents, and the beginning of when consumers demand professional advice and planning from their mortgage professional.

Your mortgage is more than a debt. Your mortgage is a powerful financial tool, the gateway to middle class wealth via tax deductions, cash flow management, and preferential tax treatment upon sale (the $250,000/$500,000 exemption). At the upper end, using the new first lien HELOC, your mortgage provides leverage, tax shelter of appreciation, and becomes your own flexible bank, driving down your mortgage cost, and paying you a better return than the 1% rate on your checking account.

For those needing to refinance during this market cycle of valuation deflation, your success will rest on entering into a substantive conversation with your mortgage professional earlier, rather than later. Refinancing is currently difficult because of loan guidelines, which tightened “overnight” at the end of last year, and valuations, which have wildly over-corrected from the double-digit appreciation 2005 and 2006. A substantive consultation with a mortgage planner can lay out the options in the current environment, once your facts have been completely uncovered. During one of my recent conversations, I discovered that the man was making 3 auto payments at 8% and 9%, and had a completely unused HELOC already in place. By just paying off the auto loans with the HELOC, he would save over $1,000 a month in cash flow, as well as transform the tax effects of his payment. This change would also relieve the debt load on his credit report, thus making him eligible for the “kiddie condo” loan he needed to buy his college-bound son a condo at preferential owner-occupied rates, rather than more-expensive Investor rates.

1



In the case of the lady needing to refinance in my opening paragraph, she’d just refinanced in February of 2007, AND had a prepayment penalty she wanted to roll over into the new loan she is searching for. By her own admission, she expected her home would appraise at $100,000 lower than the value that had supported the February 2007 refinance. That couple previously made the conscious decision to make the minimum payment on their negative amortization loan. Which means that they are “going negative” (adding to their debt) at about $17,000 per year, and have built their loan up from the original $350,000 to $400,000. They have a very short window to do a refinance before the loan moves past their ability to qualify for the refinance, or the valuation makes the loan impossible. They do have several choices remaining to them. They need to upgrade their monthly mortgage payment from the minimum payment to the “interest only” option” or their loan will recast within the year, and their monthly payments will “jump” $1,690 from the current minimum payment option to the fully-amortized required payment. Moving up from the minimum payment option to the interest-only option would forestall this rate reset, until a more “convenient” time (when valuations improve). They could find the cash flow to do this by cutting their 401(k) contributions and increasing their take-home pay, or renting out a room. We are in the middle of this discussion, which would have been more profitable to them closer to when we first met, last September.

In addition to (depressed) valuations, the other obstacle that impedes refinances is “tightening guidelines.” This is a topic that I will expand upon more fully in a future column, but one of the most frequent impediments is the contraction, or disappearance of “Stated Income” loan programs. Briefly, in a “Stated Income” vs “Full Documention” loan, only employment, not income, is verified. These loans, when originally created, are very useful and flexible tools for the market they were created to serve, but during the frenzy of the last stages of the subprime mania, became abused. The Stated Income loan that “qualified” the borrower to buy the home, has now become a trap. The most frequent trip-up is the case of the W-2, salaried employee who qualified 18 months ago for a “Stated” loan, but now can’t qualify for the same loan amount under “Full Documentation” terms. “Stated Income” loan programs are now available only under drastically restricted terms than previously. This is another example of why such a borrower should be entering into a comprehensive conversation with a mortgage planner sooner, rather than later, so that all alternatives can be uncovered, including whether there are other sources of cash to bring to the table to enable the refinance. The “Stated” vs “Full Documentation” issue must be addressed separately from the valuation issue, as improving valuations will not correct for this qualification problem.

Currently we are in a Buyers market (there is an excess of supply compared to the demand). What is a crisis for the seller is an astounding bargain for the buyer. There are several advantageous no- and low-down payment programs available to first time homebuyers who are willing to divert some time away from the catastrophe headlines and invest in a home search based on a real loan qualification with a 0% down payment loan from the state agency CalHFA. One teacher that I am working with has some “off-balance sheet” resources. That is, she was able to get her student loans refinanced by someone else, which relieved her debt-to-income ratio, and therefore qualified her for a higher target purchase price.

2



Frequently, people will ask, “what’s your best rate?” or “what’s the rate today?” It’s difficult to respond to this question with a monosyllabic answer such as “5%.” The reason why is because there is no single “best rate,” and also, what does the rate matter if you don’t qualify for that rate? I receive more than 20 pages a day of loan rates. The “best rate” is driven by credit score, LTV (loan to value) and type of loan program (fixed vs adjustable, conventional vs government, for example). Other factors that affect the rate are whether the property being financed is a low-rise or high-rise condo, if there is cash being taken out, usage (owner-occupied vs rental) etc. It is unproductive to answer “what’s your best rate” with a simplistic answer such as “5%”, because any subsequent deviation from this announced rate is perceived as a bait-and-switch tactic.

One of the obstacles that crops up is people seeking a quote, but not wishing to provide their credit report, or other documentation. The credit report provides more information to the mortgage consultant than just the 3-digit score. When I used to accommodate these types of requests (“I have a 720 score, what could I get?”) frequently the quote I provided in all good faith turned out to be unfeasible, after all the facts finally came in. Some people think that just because they have a good credit score, they will qualify for a loan, or the amount of loan they want. There are other factors that the credit report details. I’ve seen credit reports with “good” scores, but “thin” credit, meaning the borrower will not qualify if other factors of the loan file are weak or below average. If you are reluctant to provide your financial professional with the facts so that you can receive competent advice, why are you dealing with that person? Conversely, I recently had a transaction where the borrower provided his complete tax returns only at the last moment, after the offer was already accepted and escrow opened. When I finally saw his entire documentation, I realized that I could have qualified him for a higher loan amount, had he been willing to provide complete documentation earlier in the process.

If you’re considering a refinance, my suggestion is to start a discussion now, months, not weeks, before your target refinance date/reset date. This gives your mortgage professional time to review your credit report, and assist you in making any possible corrections or adjustments, and to plan your strategy. The combination of your credit score and your LTV (loan-to-value), as well as your debt load will have a large impact on the price of your loan, or whether you even qualify for the amount you need. There are (legal) techniques your mortgage planner may be able to do to reposition you to qualify, or qualify at a better rate or for a better program, if you get started soon enough. Additionally, rates are highly volatile during this period, moving more in a day, than during a month in former periods. Some people do not realize that rates, and therefore quotes, move every day, and currently, there are even intra-day reprices. Once you and your mortgage professional have agreed on a loan strategy that will serve your holding period goals and cash flow needs, you can leave the rate shopping to your mortgage consultant, who can put you on rate watch and lock your loan during one of these rate moves. This works best if you’ve built some time into your process, so the strategy decisions that you should control can be made separately from rate moves driven by that market that you don’t control.

Please call BeckyRhodes, MBA, CMPS® at 310-916-6013 to discuss your circumstances, or email your questions to [email protected]

3

mailto:[email protected]

Economy & Finance

Why a Mortgage Planner