2017 Non-Prime Lending, A Primer; The Basics of Non-Prime Lending today

Written by Michael A. Foote, CMB on . Posted in bad boys, direct lender, high ltv, interest rates, mortgage banker, mortgage broker, mortgage finance, Mortgage Processing, mortgage regulations, NMLS Approved Processing, non-prime, refinance, Uncategorized

elephantNon-Prime Lending today is fundamentally the same product I grew up with in the late 80’s and early 90’s and that was primarily offered by Finance Companies and Savings and Loans prior to that. These loans formally called Subprime, B&C Lending, Hard Money, and now mostly referred to as Non-Prime or Non-Dodd-Frank lending, Non-QM, Or even Alt-QM. The high fees usually associated with these products has been greatly reduced due to regulations, but there are still profits in the higher than market rates and still on average higher fees and costs than traditional FNMA or FHLMC Financing. “Back in the day” the typical double-digit start rate would also include 10%+ in points and over $2000 in junk fees and a very pricey prepayment penalty. Non-prime lending today more typically is priced from 1.5% to 4.00% higher than conforming mortgage rates and priced between 1-5% points with about the same in junk charges.

These loans are typically 30 years fixed or adjustable with 3-10 year fixed periods. Lenders sometimes offer Interest Only or 40 year amortization options. To determine a non-prime loans pricing, we need to determine the RISK. Below is a diagram of a lenders grid. You can easily see how the combination of Credit Score, Loan To Value, Mortgage History and Significant Credit Events and Transaction Type can affect your interest rate.

You can document your income with traditional pay-stubs, W-2’s or 1040’s or you can use Bank Statements. You can even use bank assets in a way that determines monthly income based on those those assets. Stated Income is an option once again, as is Stated Investor Income, where as residential investment property is qualified based on the Debt Service Coverage Ratio in an appraisal.

This loan was always primarily associated with equity lending. However prior to the great recession (depression for me) the product’s LTV’s started to elevate. With the introduction of Wall Street securitization, credit depth and makes sense lending went out the window.  And so after Gramma on fixed income could buy a dream home with stated income on an 80/20 loan combo with a foreclosure the week prior.  A true low in the lending industry. This time the product has re-emerged in its earlier more conservative form.

These loans can be used to do all of the following types of transactions. Purchase a home, Refinance a Home, Cash-Out your equity in a primary residence or an investment property. You can fix and flip a property. You can use these as home improvement loans. You can use these as swing loans as their are many times no prepayment penalties. You can use these loans to buy unique properties like non-warranted condos, or high rise condos. You can use these loans to borrower a down payment for another property. You can use these loans to close BK 13’s or cure a foreclosure. That’s a lot of uses and I am sure I’ve missed a couple.

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It makes sense that the higher leverage or Loan To Value (LTV) you need, the higher the rate should be, and as you add risk, you can see that the available LTV does drop even as the rates rise. So a 700+ credit score with 0x30 and LTV of 50% is a much LESS risky loan than the 550+ 1×90, previous BK on a cash-out refinance.

The key to these loans is to have a direct conduit. Some companies layer on many fees and added expenses. These loan fees can be negotiated in some cases. Don’t be afraid to ask for exceptions to make a deal fit. This isn’t the conventional lock desk. And make sure to work with a competent seasoned licensed Loan Originator

It’s important to be honest with yourself when pricing these loans. You MUST have a complete application and understand all the pitfalls of your borrower and the property. It’s a big difference lending on a Single Family Residence rather than a Mobile Home. In fact, its a decline versus an approval in many cases.

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Let’s take a look at pricing adjustments. Once you’ve determined your base rate and LTV. You need to check your adjustments. These are typically additional risk layers a lender is making adjustments for to maintain their own profitability on a loan. It makes sense, that if you want Interest Only that loan is inherently more risky as the balance of the loan doesn’t drop for years. And again, it makes sense that a property that is NOT your primary residence is a more risky loan and at greater risk for default if you have a life event. These adjustments typically are added to rate and sometimes rate and cost.

Non prime lending is filling needs for borrowers who have good cash flow but come tax time tend to show lower results due to deductions and a variety of reasons. Or for people who have had significant credit events. These financing options are great for people trying to get to the next level in their investments by risking a little more in interest rate to have easy to obtain financing. People trying to get out of BK and have equity in today’s environment. People trying to get current on their mortgages after years of modified mortgages and foreclosure fees. These are great options for those that finally were able to get rid of their homes but were ready to buy years ago, only to be stalled with that active zombie foreclosure.

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Debt to Income Ratios are higher, right around 50%, Income Doc requirements are fluid and there are many different ways to document your income. Again the less income documentation you can provide the higher the rate and cost. Stated Income being the most expensive, but available.

Loan Amounts vary greatly. You can get small loans under $100,000 to well over $5 million with some lenders.

This financing is heavily dependent on the property as collateral. This is after all equity lending in reality. The underlying protection in all these loans is that if you or your client defaults, the lender will take the property. And it won’t be some zombie foreclosure. These lenders will act.

These loans are available in most states. Many state and federal limitations apply. These loans are risky and after the collapse in 2008, the market for this product has only recently begun to spike. Lenders are still gun shy from the risky lending days of the past. Although memories are very short.

And these loans are still risky. They should not be taken out without a good plan for repayment. These rates are higher and terms are more onerous than conventional conforming financing. You should ALWAYS make sure you don’t qualify for conforming financing before you consider these non-prime products.

This article was not an advertisement or an offer to lend.

Michael A. Foote, CMB – Certified Mortgage Banker | 30 years experience | Licensed Real Estate Broker #01149645 NMLS 1059372 235435

 

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A Bird in the Hand is Worth “No Points” in the Bush

Written by Michael A. Foote, CMB on . Posted in bad boys, direct lender, good faith estimate, high ltv, interest rates, Lending, Loan Processing, mortgage banker, mortgage broker, mortgage finance, mortgage regulations, refinance

I share real world stories with my clients always. They always help me and my clients make good informed decisions. I ran into a bad story that is good to share with all of you in regards to mortgage financing.

Too often we get stuck on getting the best deal, the easiest deal, or both. It’s a Californian’s drive to ‘grind’ people for better deals or better treatment. Sometimes it works, sometimes it doesn’t. Today’s example is of when it doesn’t.

-Paralysis by Analysis

A friend, who I’ve known for years, asks about a jumbo refinance in 2013… Yes, I said 2013. We spoke and talked about his current adjustable loan, which only interest was being paid on each month, and a recasting of this adjustable would take place in the next couple years. The new payment would be higher but the payment would be fixed and amortizing. He wasn’t willing to take the increased payment and his credit score needed to be a few points higher to obtain the slightly better pricing. The value needed to be a little higher maybe as well so we could include the HELOC that was maxed out and needing to be converted to fixed rate debt.

He moved on.

Over the next few years… rates changed very little, values shot up and in 2016, we talk about the mortgages again. Values are probably high enough to combine that pesky HELOC (which is basically a $100,000 credit card balance sitting out there…Albeit at a nice low compounding adjustable rate. The debt load was now lower so the DTI shouldn’t be an issue either. Comps are there.

We chatted, I quoted, He moved on.

Here is what the average rate and points for a conforming loan during this timeline:

2013 – 3.980% @ .70 points

2014 – 4.100% @ .60 points

2015 – 3.850% @ .50 points

2016 – 3.650% @ .50% points

2017 – 4.125%  @ .50% points

What I didn’t fully until this point was that my friend, and I still consider him a friend, was speaking with other lenders behind the scenes and had applied at a few. One lender, a super techy-awesome mortgage bro-company advertised on the TV and Radio that has a Hip Cool Name, took his application and as a crappy mortgage company does, proceeded to drag the application and underwriting process out for weeks… No matter the companies techy nature, bad service is bad service, and worse further is working with people who don’t understand the real world of underwriting and rely on the computer to make all their decisions and push their workload…and the client gets turned down. All the while talking with me about, “what I thought about what the lender was telling them”. Yes, still my friend…Yes, those are painful conversations for us Mortgage Professionals. You mean you trust me enough to tell you if the other guy is hosing you… But not trust me enough to do the deal with? <Me swallowing my pride> OK, Thanks. My kids

As a reminder, I had already done all the homework, pointed out the concerns I had to the client, who went elsewhere, because someone said, ‘It’. The two most dangerous words commonly spoken by the mortgage sales people that give ALL OF US a bad name,

“No Problem”.

There are no two more dangerous words you can hear from a Mortgage Originator…If you are a consumer, Realtor and hear these words…don’t walk, run to another Originator. Because, those two words mean its gonna be a problem! You can count on it.

So after that techy-awesome So-Phisticated FIn-Tech Lender declined my friend we spoke about where he was now. We looked at his credit report, at this point, the constant credit pulls and changes he was told to make with his debts and cards, had pushed his scores from 719 to 680-ish… Almost a death blow for a Jumbo loan.

But I still had options and presented a plan of attack.

We worked on the credit, got the scores back up. And when we were ready to get started he applied at yet another lender.  I graciously as possible accepted the call and notification that, yet again, he was going to work with someone else.

I don’t hard sell my closest friends or anyone for that matter. But I do regret not being more forceful and reminding him I’ve been doing this for almost 30 years, I’ve been right from Day 1, and oh yeah I’m your friend and trusted adviser? Maybe not? Still a friend though.

Sure enough the lender got the loan into underwriting… Which by the law is like suing someone, anyone can do it.. But getting an approval remains a difficult but precise process. Bad/Poorly Educated Salesmen = Low percentage of approvals.

My friends loan wallows in underwriting. Lot’s of “we are taking a look” or “I’m waiting to hear from the underwriter about the exception” or ” I’m gonna need another something”. All generally not good signs.

My friend was turned down again.

At this point we are in 2017 and the borrower home has peaked in value and it is probably the best time in the last four years for him to consolidate the first and second mortgages and get everything on a fixed rate, after all this is the house he wants to stay in with the wife and kids.

I quoted him again… at this point… I acknowledge that he will probably be applying somewhere else. I told him, I would have more input with underwriting, since I understand the file better than most, and I would do my best on pricing. After all after four years, it matter more to get it done than not, right?

He finds a quote that is cheaper than mine, again. Always amazing to me when there is always a LOWER quote. People… it doesn’t make it real. If you take anything away from this article, please realize you can be lied to by a mortgage sales person still. Shocking? It really shouldn’t be. People lie in all industries to win business.

I call him to check in one last time on the mortgage last week…

…And he still applied at yet another bank…

And he lost his job as well… Big paying tech job. I worry for him and his family. I am sure he will land somewhere and all will be fine.

He did say he would apply with me IF I COULD MATCH THE RATE & PRICE. I told him knowing he had lost his job is a non-starter for me as I would have to disclose it, which is pretty much a guaranteed decline at this point.

Still a friend though. I hope he lands a job, and I wish I could have made him trust me more.

Michael A. Foote -Certified Mortgage Banker & Trusted Mortgage Professional for 30 years.

949-584-4600

mfoote@calpropre.com

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Loan Limit Increase for 2017!

Written by Michael A. Foote, CMB on . Posted in FHA lending, fha mortgage, FHA purchase loan, hud, mortgage banker, mortgage broker, mortgage finance, Mortgage Processing, mortgage regulations

mbaaIn high-cost areas, the FHA national loan limit “ceiling” will increase to $636,150 from $625,500. FHA will also increase its “floor” to $275,665 from $271,050. Additionally, the maximum claim amount for FHA-insured Home Equity Conversion Mortgages (HECMs), or reverse mortgages, will increase to $636,150. This amount is 150 percent of the national conforming limit of $424,100.

FINREG

Written by Michael A. Foote, CMB on . Posted in finreg, mortgage regulations

So I have eagerly, OK not eagerly, awaited the passing of the FINREG 2010 what is touted to be the biggest increase in government oversight in the financial industry since the great depression. Of course, I am keenly interested in how the bill will impact me, my family, my career, and therefore my future.

So I get on the Internet last night and guess what. No one has published a detailed accounting of what this bill will actually create. I’ve seem some bullet points, but even those bullet points fail to fully layout or even explain how the bill will change the mortgage market. Some talk has been “Yield Spread is illegal now”, is it? I don’t see that – wholesale companies are everywhere and last rate sheet I checked had rebate all over it and lots of it.

2300 or twenty-three hundred. It seems like ever more when you write it out. But that is how many pages it takes to protect the consumer from the evils of the banking empire. Funny enough, no one who voted for it has even read it. And even if you did ( and I am not going to) the text would likely cripple your brain into a mush unrecognizable to all but physicians.

Written by attorney’s and legally like minded MBA’s, the bill is really only a road map and rough draft on how to prevent the train wreck that is the financial crisis.

Even this morning, after the bill has been signed and ready to deliver to the President for signature,Goldman Sachs settled with the SEC and largest earthquake recorded in DC struck. You tell me what that means, but in my world that’s an omen.

So what does this mean for consumers since we clearly cannot determine how this bill will really impact lending. They say no more Stated Income loans? Well unless you have 5% capital at risk for those loans (that’s not that much) It also exempts FHA and many want fannie mae and freddie mac added to that exemption. So the big banks won’t lend then…Well they really aren’t right now all that much anyway. So expect it to get harder- not easier to get a new loan.

Fees? Did you say fees. yes these are the things we will all need to get used to seeing more of. Banks will undoubtedly send the costs of ANY new legislation on to the consumer in one way or another. Just wait to see how expensive it will become to have checking account.

Bottom line, no one really knows the true impact of this bill. But one thing is for sure – it’s gonna be expensive for all of us.