Back to the Good Old Days…

Its January 2009, and the days of the 1% down, no dock, interest only, teaser rate mortgage is over. And for the millions of taxpayers, their children and grandchildren that will have to pay for the past absurdity, I say good riddance!
 
As I have written in the past, homeownership is not a right…it;s a privilege and one that should be earned. Giving away loans to people who will simply never be able to afford them is no different then Bernie Madoff’s ponzi scheme. In fact, the display we have seen in home lending over the past 5 years will end-up making Madoff’s scheme pale in comparison. Instead of $50 billion, risky home loans will end-up costing Americans more like $500 billion.
 
At least I can take some solace in the fact that we are returning back to the old days of responsible home lending. I come to this observation because I recently inquired with my mortgage loan officer about a possible refinance of my personal home. I heard things like…independent appraisal, income verification and fixed rate. And the real kicker…80% Loan-to-Value (”LTV”). Its about time.
 
So in case you forgot what these terms mean, here is a refresher course on the “old school” mortgage process:
 
1) Appraisal…not to be confused with what your real estate agent next door tells you. Expect your bank to hire a real independent outside appraisal company to estimate the true market value of your home. One piece of advice, don’t be afraid to meet the appraiser when they come to visit. The value they put on your home will be the deciding factor for millions of Americans who will try and keep their LTV below 80%, so as not to incur expensive private mortgage insurance. In many cases, banks are asking that loans be paid down to meet the 80% refinance level, which means that a borrower will have to come “out-of-pocket” at closing to refinance their home. We are not used to that.
 
2) Full document loans and income verification…for those of you that don’t know what this is, you most likely got your first and only mortgage within the past 5 years. Those of us that remember, we know all to well the paperwork is voluminous. Your loan officer will need complete documentation. This will mean a) two years of tax returns; b) contact information and verification of employment; c) personal financial statements, including bank accounts, brokerage accounts, assets and all other liabilities; d) credit checks; and finally, e) source of funds verification (if you need to put down cash at closing…its yours and not borrowed). A good loan officer will be a stickler. 

3) Fixed Rate or Conventional Loans….the exotic loans are gone. You can still get an interest only product, but that is about as “unconventional” as I see banks are willing to get. (With that said, certain high end borrowers are able to tap libor floating rate loans, but these borrowers are the “crème-de-la-crème” and that product will not be available to a majority of borrowers). With rates going lower and homeowners realizing that they will have to stay-put longer, I think many borrowers are looking at the 30 year fixed rate option, rather than the 5 or 7 year interest only or adjustable product.
 
Remember, the rule of thumb in determining whether or not it makes any sense to refinance your mortgage is to take the total cost of the refinance (points, appraisal fee’s, legal, etc.) and divide by the cost savings on your monthly payment. Then ask yourself, am I going to live here that long? For instance, if it costs you $3,500 in refinance costs and you save $200 a month, your break even 18 months. If you plan on staying put for years, then it probably makes sense.
 
Finally, shop around and do your homework. The internet will give you dozens of choices. But make sure you be careful about those mortgage companies that ask for anything up front, except perhaps for the appraisal. Make sure that the loan officer gives you some comfort as to what product they can offer you. In other words, be careful of the bait-and-switch. Just recently, Los Angeles’ Mayor issued a consumer beware announcement about companies that are offering to help “refinance” consumers out of a bad mortgage. They promise a lot and ask for thousands of dollars up front only to dissapear and leave consumers stranded.  That being said, most loan officers are trustworthy and only get paid when the loan closes. With the new standards in place, they have to work a lot harder to close a loan and don’t want to start down that path only to have you turned down by the loan committee.

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