Where Do I Sign?

I am a member of a trade group called National Association of Mortgage Brokers (NAMB).  It is an association, like every industry has, that helps to keep the playing field correct and competitive in this market, at least that is my explanation for them.  Recently, laws changed on how appraisals can be ordered for residential home loans.  Something called the Home Valuation Code of Conduct (HVCC) was introduced a bit ago- just a horrible idea and plan.  And it is costing homeowners Billions.  This link takes you to a page that has more detail and a petition provided by the NAMB, if once you realize the negative with this new legislation and want to help us make a change, then please sign!

Why an ARM?

The other day I read in Scott Burns’ column in the Dallas Morning News as a reader was asking about ARM’s.  I like to read what Mr. Burns has to say on all subjects but do listen more when he gives mortgage advice.  The reason: I have yet to read him give bad advice.
 
ARM style loans came out in the 1980’s here in the States when the interest rate market was through the roof.  You might be surprised if you ever move overseas and want to purchase a home. ARM’s are very popular in the United Kingdom and elsewhere.  An ARM has a fixed and an adjustable time line.  They are available for 1 year, 3 years, 5 years, 7 years and even 10 years.  Those numbers represent the length that the loan will be fixed.  After that time, the interest rate can either go up or down depending on the details of that ARM program.  Most ARM’s are amortized over a 30 year loan period.  Each ARM has what is called a margin and an index.  A margin is a number given by the lender that stays with the loan and helps calculate what the rate will be during the adjustable timeframe.  An index is what that the ARM follows.  It could be the LIBOR 1 month, 6 month or 1 year; the MTA; or one of the Treasury options.  Now for the complicated part: an ARM will have a floor and a ceiling with limits as to how much the rate can go up or down depending on the index to which the loan is tied.  Some say no more than 2 points up or down at the first adjustment and no more that 5 total, but all of those details vary and you want to know all of that information before you get to the closing table.
 
For example, you are in a 5 year ARM and the 5 year’s are up.  A few months before the anniversary date would be a good time to dig out the closing papers that the title company gave to you as they have all the details you need.  Minor details will be on your monthly mortgage statement but the real info lies in the papers.  You want to look and see what your margin, index and details are so you can decide if staying in that loan at time of adjustment is the correct move.  Say you are in a loan with a 2.25% margin (most are) and follow the LIBOR 1 year index.  Head to the internet to find out what that index is trading. At the time of this writing it was 1.381%.  Add that to the margin and your new rate will be 3.63%.  Now look at the details. If your beginning rate was 5% and your contract says that it may move no more than 1% up or down, you would have a 4% rate for that next 12 months.  Repeat those steps each year, making sure that the index is not trading in a way that would make your rate unbearable.
 
The person in the above example made a good move by picking the ARM program as their rate dropped, but what about if we were not in a falling rate environment?  What if, while in that loan, their FICO score dropped as did their home value, making a refinance impossible?  ARM’s are never the problem; it is the details and the knowledge that goes with them.  Just like anything else in life, buyer  beware and know what you are getting into. 
 
Have an ARM story you would like to share with me?  Send it over. I’d love to hear it.

Why read me? Why listen to me? Why use my company? Why read anything that I write?

I graduated from Manhattan High School, Manhattan, KS in 1986 with no clear vision of what I wanted to do with my life—just that I wanted to be around family; I wanted to be happy and I wanted to have a little bit of fun! The amazing track racing in the 1984 Olympics was very inspiring to me. I decided that I wanted to try racing bicycles and that my graduation present should be a racing bike. My parents and I went to the Pathfinder Bike Shop in Manhattan for a real high-end racing bike but the salesman did a great job of talking us into a Fuji DelRay…just a step down from the higher end racing bicycle. It had a little bit wider tires and was a little more of a touring bike. The reason it was so good for me was that it was heavier duty and could take more abuse since I didn’t know anything about what I was doing!
 
When a friend asked me to do the Coors Light Biathlon (Run-Bike-Run), I quickly agreed as I had been a runner all through high school and had run intramurals in college and by then I had some experience on long-range bicycling. Well, I actually got just destroyed on the bicycle part by some really big guys and I thought to myself…’I'm a 5′9″ guy; I’m really lean and I can see my ribs. Those guys haven’t been able to see their ribs for years. Why are they passing me?’  After that I began to focus more intensely on the bicycle.
 
What I learned about myself at that point was that if I had something I really wanted to accomplish and it was something that I figured out for myself – nothing that anyone had told me I should do – but something that I wanted to achieve………get out of my way because I am going to achieve it! I am a goal-oriented person and I believe that is the reason I am good at what I do. A loan is very simple: get to the closing line with papers; have the money there to fund and have the clients be happy!
 
So I started to concentrate on bicycle racing and, the next thing you know, I became the best cyclist in my area. By that time we had moved to Lawrence where I started a cycling team and moved up to a Category 1 racer. At that time a Category 1 license through the United States Cycling Association was $35 a year; a pro license was $500, so why go Pro?  We raced the same races that the pros raced. Lance Armstrong and I raced against each other once or twice. He chose to stay near the front of the race and my ability kept me a bit nearer the middle of the race!
 
One of the reasons I left full time bicycle racing is attributable to a conversation I had at my older brother’s 40th birthday party in Houston years ago. My brother is in the oil business, as were many of those at the party. One of the gentlemen asked what I did and when I said that I raced bicycles he asked if there was good money in that. I said “Nope.” And he said, “Then get out.” While that was not the only reason, it did remind me that perhaps it was time to become a little more serious about making some money so I went to work for the bicycling industry. I was with Specialized Bicycles for a number of years and learned a great deal about the inner workings of corporate America. I learned that the sales department and the credit department and everybody has to get along and that sometimes if you hear the word ‘No’ from a department and you believe in the mission that you have, you need to find another avenue to get to the ‘Yes’. I continue to learn that there is a ‘right flow’ and a ‘wrong flow’ to who you go around but when I am working on behalf of a client, I want to make sure they get to the ‘Yes’ answers so I will go around a department if I need to.
 
When I became a lender, I recognized that it was the same corporate structure. If I got turned down by an underwriter and I knew that I was right, then I would get the sales manager or the underwriting supervisor involved and usually it would turn out well for my client. Just as I did when I became a bicycle racer, I have done a great deal of research on the mortgage industry and knew that I could do it well with good training. I have learned the value of the industry requirement for continuing education every year. As a lender, I must fulfill a certain number of hours each year to maintain my license. You can choose the type of education you would like to attend and for the last 7 years I have chosen to attend as many credit seminars as possible to learn the ins and outs of credit. The seminars have increased my confidence in my ability to advise people who are ready to purchase a home. Along with that I have studied the bond market and the credit market watching for curves and watching for new loan programs. What I have not done is waste my time with too many crazy salesman-type loans. I have always stuck with the standard 30 yr fixed or 15 yr fixed. I like Dave Ramsey’s principles – always do a 15 yr fixed loan with 20% down! Not all of us can do that (certainly Julie and I have not done that yet) but it is a great goal.
 
So I believe the reason you will listen to me or read what I write and give my company a chance to be your lender is that we are constantly learning and studying the intricacies of lending and that our advice to you comes from a firm understanding of our business. We are present with you from the first appointment to the closing, assisting you with whatever is needed throughout the entire process so that your loan goes smoothly and without undue stress.

I Am a Boring Lender

When I first began working as a mortgage broker the more lenders you were signed up with the more rate sheets you received. A rate sheet is a PDF document from the lender you signed up with – Chase, Wells Fargo or Bank of America, etc. These rate sheets used to be 8 or 10 pages long. There were a variety of transactions and way too many options and programs. To be honest, I don’t think the loan officers or brokers even knew what some of the programs were. There was a day when account reps would come to your office about every two or three weeks or so to talk about new programs.
 
Again, I think that was – and it has been proven – the demise of some of our mortgage industry because with those programs, when their risk category got too aggressive some of those ARM (Adjustable Rate Mortgages) programs were just not as attractive for anybody – the mortgage market or the homeowners. Now when I get rate sheets, they are between two and four pages long. I think it is great! It has gone back to the days of “would you like a 30 yr. fixed or a 20 yr fixed or a 15 yr fixed?’ Rarely do I talk about ARMS unless I have a client who is buying a home for an investment property and might sell. Or perhaps my client is going to graduate school or they have a contracted job for only a 3 year term. Then that program might be a viable option.
 
To recap, the mortgage industry has become pretty boring! As Dave Ramsey says, he would much prefer that you come in with 20% down and do a 15 year fixed but some of us do not have that capability. We also are not certain that we will not be moving, so why get a 15 year fixed when you can spread those payments out and make it a little cheaper each month. If you look at the amortization of that loan over 15 and 30 years and see the difference in the finance charges over the life of the loan, the benefit of doing a 15 year fixed becomes pretty obvious.
 
I’d like to close with one of my favorite stories. When NASA first sent astronauts into space, they realized that a ball point pen would not work in zero gravity. A million dollar investment and two years of research resulted in a pen that could write in space on almost any surface and at temperatures ranging from well below freezing to over 300 degrees Celsius. When confronted with the same problem, the Russians used a pencil.
 
Sometimes we can make things just a little too complicated when the easy side is where we need to stay! My thanks to my former boss at Specialized Bicycle for the gift of a Russian space pen and the story!  I had no idea you could buy the Russian Space Pencil.

When to ‘Float’ Your Interest Rate

As a mortgage broker my responsibility to you begins at our first contact, continues through the process and does not end until the house you have chosen is officially yours. I stay involved throughout the entire proceeding, watching the market and advising you to the very best of my ability.
 
When you begin working with a lender and go through the pre-qualification for either a refinance or a purchase, you have the ability – once your loan is approved – to lock that interest rate. The question is always when to lock the rate. No one can answer that with total assurance. It is always possible that, after you have locked your rate, rates may decline which means you locked too early. But maybe just the opposite happens: you choose not to lock your rate and in the next day or so the rates go up and it is a quarter percent more. You cannot go back to the better rate.
 
In order for my clients to make the best decision, I ask them to allow me to be in the driver’s seat on when to lock the rate. I watch the bond market for a curve and when I begin to see a curve develop – either one way or the other – I am able to ascertain whether or not to lock or wait for a better market. Sometimes when the market is very volatile I may choose to lock the rate on a 30 or 45 day lock as soon as a closing date has been set. Loans may also be locked for 60 days and some lenders will even allow us to lock 90 days out. When you are purchasing a property, lenders will not allow you to lock unless you are locking on to an address. In other words, they do not want you to lock a great low interest rate for 90 days and then go out shopping for homes. Their fear is that at the end of 90 days you have either not found the property you want to buy or have decided not to buy at all and cancelled the lock. This means they have taken the amount of your loan off their available line and have not been able to do another transaction with that money. If they are going to lock a loan, they would like the assurance that you intend to close on that loan.
 
My company does not charge to lock an interest rate but I know that several of my competitors do so.  If they locked you into a loan rate, the rates improved and their company did not have the capability to do a float down, they need the money from you to hold you to that loan so you will stay with them. The reasons I do not charge are 1) I want to work with people who want to work with me and 2) I know that the lenders I work with have float down availability. A float down works this way: If we lock an interest rate – let’s say we lock at 5.5% and the market betters to 5.375%. The lender is not going to initiate a float down for you because they are looking at their rate of return and their profit margin. What the lender likes to see is that their profit margin stays the same or improves in a float down environment.
 
The other day I was able to obtain a float down for a client whose rate went from 5.5% to 5%. Unfortunately, this is not something I can do with email so it involved almost an hour on the phone with the lender. The good news is that it did not cost my client a penny but will ultimately save him over $15,000 over the life of his loan. Another friend had a slightly larger loan and I was able to save him over $20,000 over the life of his loan.
 
So there are two things to ask your lender when you are locking your loan.
1.      Are they going to charge you for locking the loan and
2.      Do they have the ability to float it down if the market improves
 
A surprising thing about this business is that it has turned me into a geek – a word I never thought would be applied to me! I spend long hours at my computer reading analyst reports, treasury reports, bond trading information, speculators talk, future earning reports, housing starts, unemployment numbers, LIBOR. But all the time spent enables me to watch for those curves and predict where to place my clients as their closing dates approach. The other day we had a great interest rate for a client – 5.25% – an awesome rate. But the market turned and I was able to float him down to 5%. He did not have to do a thing. And, sure enough, after I did that float down for him and a few other clients I had locked in the pipeline the interest rates began rising. Remember, interest rates move by how the bond and stock markets are doing so I watched the bonds selling off very aggressively one day and I called to initiate the float downs for my clients. The next day interest rates were up by 1/8 to even ¼% on certain programs.
 
So remember those two questions to ask your lender when you are considering a lock:
1.  Are they going to charge you for locking the loan and
2. Do they have the ability to float it down if the market improves
 
You might also ask a third question: Is their lender willing to take the time on the phone to initiate a float down when the market improves?
 
That’s it for now. Thanks for reading!

Trip to Houston

I traveled to Houston recently to interview new lenders. I find it is always good to meet new lenders face to face to evaluate their level of competence and ethics before I sign up with them.  It was a successful trip and certainly worth my time. There are some great lenders out there.  Driving in Houston is a challenging experience. Houstonians drive with the feeling that they will never see you again and they care not for you or your safety! They swerve in and out of lanes with abandon and it makes no difference to them where YOU might be! It has made me much more appreciative of Frisco drivers.
 
The one thing that saved me on my trip was the gift Julie and the boys bought me for my birthday: a Garmin GPS unit. I am logistically challenged (good that I never wanted to become a navigator). It was never a problem when Julie and I lived in Denver since I always knew where I was in relation to the mountains.  The GPS is one of those inventions that, once you have one, you have no idea how you lived without it. I arrived at all of my meetings on time and even located the Red Robin restaurant….a place Julie and I have always enjoyed. Without the GPS I would have missed a great lunch.

A Great Day for Sure

Yesterday was my birthday- a young 41 I am (but with twin girls on the way, young is not what I feel).  Instead of sleeping in I was up at 6am and on the road bicycle by 6:45 for a group ride with a few of my Frisco Cycling Club teammates.  My folks made the trip down from Lawrence, KS and that made it all the better as they could tend to our “angel” boys and let Julie sleep in!  That is a win/win– well, unless you are Gana and Papa who spent the morning taking requests and orders from the boys.  Home from the ride, a bite to eat, a 3 hour nap followed by a quiet dinner with the triplets and their families.  (Since a few of us at St. Philip’s have the same hair cut, Father Clay calls Eric, Todd and I the triplets.)  It is so great when mom and dad drive down and bring a few Growlers of Free State Brewing Company beer with them. This time was Ad Astra, Copperhead Pale Ale and Oatmeal Stout.  (Chuck, I need to connect you with Dave, the owner of Lochrann’s, and find a way to get kegs of your beer shipped down here so he can have it on tap!).  Some of the best birthday news was that the Fallon baby had arrived early! Please welcome Patrick Mclain Fallon to the world. What a blessing he will be to us all.

No Weekly Next Week

Due to the Memorial Day Holiday, there will be no Weekly next week.  I would like to offer my thanks to the men and women who lost their lives fighting to maintain the freedom of this country.  My honor and respect to them all!

Adequate Reserves: It doesn’t just apply to Banks

If you’ve been reading newspaper or online articles, you’ve seen the “bank stress tests” and how the government is requiring our lending institutions to have more cash reserves. We are now starting to see the same thing in the mortgage industry relative to second liens. For many of us, coming to the table with 20% down can be a bit of a struggle. So, often my clients will opt to borrow the 80% from one lender (first lien) and then borrow the remaining balance (second lien) required to get to the full purchase price.
 
If you are coming to the table with 20% down, this does not apply to you. For those of us only coming with less, say 5% of the purchase price, this is something that will impact your purchasing power in the future. Second liens at 15% are now looking for six months of available cash (e.g., checking, savings accounts) and will no longer count things like 401ks towards your total liquidity. This means that you will need to have more “liquid” cash available to qualify for this kind of loan product. The message for you? Cash is king at this point, and banks want to see that you have the financial staying power to weather your own personal economic downturn-specifically that  you have enough to pay both your first and second mortgages for six months. 

Speaking about mortgages, I like to read letters that are written in to the Dallas Morning News that Scott Burns answers for them.  He is a financial planner and is a great read and the question this day was about biweekly mortgage payments.  You need to read the article here but I like seeing in print what I have been saying for years validated by some of the industries experts.

The Refi Mail

I like to warn folks after a purchase or a refinance to get ready for the mail.  If they don’t already have a good shredder, it’s time to invest in one as these guys can obtain lots of information about you and your loan.  It is not always the lender “selling” your name; many times it is from lists at the county courthouse or other places. 
 
Here are the three most common letters you will receive and my advice for each:

1. The Homestead letter.  Here in TX you are allowed to claim your home as your homestead which means a reduction of your property taxes.  It is free to do and, when you refinance and already have a homestead in place, you don’t have to do anything.  But many times you will receive a letter advising you that, for $35, the company mailing you the letter can set that up for you.  Again, it is free and you just need to log into the appraisal district for the county you live in and download the form to mail in.
2. Bi Weekly payment programs: These are confusing when they come straight from the lender.  Not that it could not happen, but why would a lender help you reduce the amount of interest you pay to them if there was not a set-up fee and per transaction fee for establishing the program?  Don’t misunderstand me; it is wise to pay extra on your mortgage and reduce the amount of interest owed, but to pay a fee to do that is wrong.  In my opinion the By Weekly is close to adding one extra payment per year to your mortgage.  It comes down to this- – whatever you think the best way to pay down your debt is the way you should do it. Just research all the options.
3. Mortgage Protection Insurance Program.  We are going to see more and more of these letters. Just look at the auto industry. There are two types of programs: the 1st pays off your home loan at time of death per the contract details and the 2nd covers your mortgage for a few months in times of trouble or job loss.  Both are wonderful programs but in my opinion the 1st can be taken care of with a good life insurance policy and the 2nd by establishing a savings account with an amount equal to at least 6 months of your mortgage payment that you leave untouched until it is needed.  The cost of these two programs just don’t hold up when you run the numbers. You should speak with a qualified life insurance agent and financial planner about all those options before you go with either plan.

Again- this is just my opinion about a few of the mailings I have received since our refinance. What letters have you seen?