New mortgage deals aim to spur activity

The mortgage industry has been busy reinventing itself.

Caught in a yearlong decline in business, lenders have taken a number of steps to shore up eroding loan activity. And there are some new -- and retooled -- mortgage products in the offing.

Not surprisingly, at-risk buyers are no longer the apple of their eye. Instead, lenders are courting the business of those with solid credit and steady jobs. For those borrowers, interest rates remain near historically low levels.

Even banks that were not stuck with bad loans have reassessed their product lines. Here is a sampling of what they are offering now:

Union Bank of California has come out with a 40-year loan in which the first 15 years have a fixed interest rate and borrowers can make interest-only payments if they wish to. At the end of 15 years, the loan makes a one-time adjustment to the market rate and is fixed for an additional 25 years.

"We call it a two-step mortgage," said Craig Cole, the bank's San Diego-based senior vice president and division manager for residential lending. The 40-year loan, offered to borrowers of jumbo (in excess of $417,000) mortgages, replaces one that carried a fixed interest rate for 15 years and then had a balloon, or lump sum, payment.

The loan, offered to borrowers of up to $2 million, most recently carried an initial interest rate of about 6.375% with no points and about 6% with 1 point down.

Although the market has traditionally been awash in five- and seven-year adjustable-rate loans and 30-year fixed-rate loans, the 40-year loan has been less common, though not unheard of.

Wells Fargo has a series of 40-year loan products in its portfolio, said Tom Swanson, the bank's regional manager for mortgage lending in the Los Angeles metropolitan region, though they predate the current crisis.

"What's old is new again," said Bob Barron, a mortgage planner in the Solana Beach office of Mortgage Loan Specialists Inc. "My first home in 1987 had a 40-year loan from Glendale Federal. It comes in and out of favor."

The difference, he said, is that two decades ago most mortgages were set as principal-and-interest loans; today, lenders have sought to create affordable options for borrowers by allowing them to pay only the interest for a period of years.

"They've come back a little more as interest-only loans, which I'm a big fan of," he said, despite that "they get a lot of criticism in the media."

The criticism stems from the fact that the switch from interest-only payments to principal and interest can result in a steep increase in monthly payments, often even higher because the interest rate has reset.

That just happened to a client of Barron's.

The borrower, he said, took out a $430,000 loan three years ago at an interest rate of 4.1255%. Her monthly interest-only bill came to $1,478.13, until Nov. 1, when it converted to a principal-and-interest loan and the interest rate rose to 6.125%. That change caused her monthly mortgage payment to nearly double, to $2,716.82.

Despite the client's sticker shock, Barron remains a fan of the interest-only formula banks are using to write loans, saying the problem isn't with the loan. "Not having a credit-worthy borrower is the problem."

Some lenders are still touting what are considered riskier, negative-amortization loans.

Steve Maizes, chief executive of the California office of Olympia West Mortgage, said some banks have compensated for the fall-off in business -- prompted, in part, by tighter lending guidelines -- by adopting loans with 1% "teaser rates." With these loans, lenders allow borrowers to keep their payments low by paying a 1% rate for a period of time. The reality is that the loan still amortizes at, for instance, 7%, so the amount owed increases while the lower rate is paid.

"They say, 'Hey, how would you like to pay 1% on a loan?' " he said. "The trick is that it's 1% and the real payment is 7% and the borrower is incurring negative amortization -- the principal owed gets bigger and the interest rate [can] vary from month to month."

Like the 40-year mortgage, teaser rate loans aren't new to the market. What is new is that some banks that hadn't offered them before now do, and some that did have tweaked their offerings, he said.

Robert Weiss, president of Rockland Financial, a mortgage brokerage in Simi Valley, called these products "bad loans for most [borrowers], but if they understand it and need it because they have feast or famine" income, they could work. Since much of Hollywood works on inconsistent income flow, these loans could prove popular.

To mitigate the potential for default that comes when 1% "teaser" loans are set to switch to their full payment schedule, some banks are converting those loans to five-year, interest-only adjustable-rate mortgages. The banks, he said, miss out on some of the money they would have been due under the old loan, but "would rather take a small loss now than a big loss in two years."

The retooled offerings and tightened requirements coincide with a slight uptick in loan activity. The Mortgage Bankers Assn., a national trade group, reported on Nov. 14 that its Market Composite Index -- a measure of mortgage loan application volume -- had increased by nearly 2% over the previous four weeks, although it noted that the increase was heavily weighted toward refinance over purchase activity.

At the same time, according to DataQuick Information Systems, a La Jolla-based real estate information service, home sales in Southern California in October fell by more than 45% compared to the year earlier. Such slackened activity put added pressure on lenders to come up with ways to generate business.

The combination of low interest rates and flexible mortgage products that helped keep payments even lower fed the overheated sales market that led to the rapid run-up in prices, and the pullback in that market is seen as contributing to the slowdown in sales.

That's why Jay Prag, a professor of finance at the Drucker School of Business at the Claremont Graduate University, is concerned about lenders and mortgage brokers using new products to generate more business.

Even with tighter lending standards and new, presumably safer, products on the market, he said a larger problem remains.

"I don't think many people fully understand the ramifications of sophisticated mortgage products," he said.

"Also, when rates are low, the idea of having a rate float isn't scary," he added. "The more they tweak the product, it really isn't dealing with the problem: A lot of people believe they can own a house and handle the mortgage payments, and a lot just can't do that."

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source: latimes.com

Sunday's Top Story: Low fee? Let's deal

IF you think these must be tough times for real estate agents, John Thyne has news for you.

"The current market is great for us," says the co-founder of Santa Barbara-based Goodwin & Thyne Properties, one of a growing number of discount brokers serving Southern California.

The depressed state of the housing market has renewed debate over commission charges, with some people arguing they're too high and should come down while others make the case for raising rates. In this uncertain environment, sellers are starting to pay more attention to discount brokerages and those that offer flat-fee services.

That doesn't surprise Thyne, who reckons that homeowners, squeezed between stagnant sales and static prices, and watching already skinny profit margins shrink even more, are looking for alternatives to traditional, more expensive brokers.

And that's just what Goodwin & Thyne has been offering since January 2004. The company, trumpeting "full service at a fair price," charges sellers only 1.5% commission, a far cry from an industry average hovering just above 5%, of which half typically would go to the seller's agent.

"It rose to 5.18% in 2006, and I expect a similar rate in 2007," said Steve Murray, editor of REAL Trends, a Colorado-based publishing and communications company offering analysis and information on the residential brokerage industry.

The discount brokerage business model, permutations of which have been pressed into service by major players such as Help-U-Sell, CataList Homes and Assist-2-Sell, has long ruffled the feathers of traditional realty agents, who argue that you get what you pay for. Pay less, they say, and you get less -- exposure, time, attention and service.

Not so, insists Thyne, ticking off all the usual marketing initiatives offered by his company, such as signs, lockboxes, open houses, print and online advertising, photographs, fliers and direct mail.

He added that his firm stays engaged with clients all the way, helping conduct contract negotiations, arranging inspections and repairs, and acting as a liaison with title and escrow companies.

But real estate transactions usually involve agents on both sides of the table expecting to be paid. Thyne says that in about 40% of their transactions there is no buyer's agent. In cases, for example, where his company finds the buyer, there is no commission paid on the buying side. In the other 60% or so of cases, the company leaves it up to the seller to offer what he or she likes to the buyer's agent. He says the majority offer 2.25%.

When Goodwin & Thyne acts as a buyer's agent, it takes all of the commission offered and rebates anything above its 1.5% limit to the buyer.

Though rival operators may not appreciate this brand of competition, it appeals to homeowners such as Debbie Phelps.

"It's all about walking away with money in your pocket at the end of the day," said Phelps, who estimates she and husband Doug saved about $30,000 when they listed with Goodwin & Thyne and sold their Goleta home in June.

The couple decided to purchase the 2,800-square-foot, three-bedroom, three-bathroom property for $1.1 million in 2003 and then sold it for $1,375,000 when Doug Phelps, a school principal, changed jobs. They have since bought in Newport Beach, paying slightly above their Goleta sales price for a 50-year-old, remodeled family home with three bedrooms and an office.

Phelps doubts they would have gotten a better price for the Goleta property with a non-discounted realty agent. "Why would you pay someone else much more money when you can get the same job for a fraction of the cost?" she asked.

The number of people considering that question -- and coming up with the same answer -- has boosted Goodwin & Thyne's bottom line. In 2004, the company completed 22 transactions worth around $13.5 million; last year, 74 transactions worth $67 million.

They have already passed that dollar amount this year, Thyne said, with the help of deals ranging from a $137,000 mobile home on leased land in Ventura to a $6.75-million home in Carpinteria.

In less than four years, the staff has mushroomed to 28 agents, and the company has just opened its fifth office, adding Santa Monica to branches in Ventura, San Luis Obispo, Lompoc and Santa Barbara.

Why then is Goodwin & Thyne willing to work for less? Thyne said its founding philosophy was to charge less because it believes it's the right thing to do and because it could see no justification for charging the same high rates year after year as property prices rose dramatically. On a purely practical level, he said, the company's performance to date shows it can still operate a profitable and successful business even while charging less.

Providing another alternative to traditional firms is the growing number of brokerages such as Irvine-based Help-U-Sell and Reno-headquartered Assist-2-Sell, which allow homeowners to choose from a menu of flat-fee services.

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source: latimes.com

The long and short of discount brokerages

A discount broker can save a seller money in the short run, but ultimately in the bigger picture, you may lose more with one. A full-service residential broker, namely a Realtor, has more of an incentive to sell your home because he or she will get more in commission -- and usually negotiate a higher percentage than a discount agent -- if the home or condo does sell.

Discount brokerages deal more in bulk, so even though they charge less in commissions, they also provide much less in the way of marketing and services.

Due to their inherent business structure, more often than not, they just want to take a listing and if it sells, it sells. They are playing a bulk numbers game, which is not necessarily bad, but they do not have anywhere near as much of an incentive to sell your home -- and sell it in a timely manner -- as a full-serviced agent, broker or Realtor would.

Also, if there is a down market, you want to have all the negotiating, marketing and people skills on your side, and a reputable full-service Realtor should offer that.

It's a lot harder to sell a home when times are tough than when times are easy.

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source: latimes.com

For veterans, a no-nonsense march to homeownership

At a time when American servicemen and women are risking their lives in Iraq and Afghanistan, they deserve all the help they can get.

And after battling overseas, the last thing they need is to return home and have to wage another fight against the red tape of the VA.

To that end, author David Reed has set out to ensure that at least VA loans are easier to access, and in many ways his no-nonsense book looks certain to become a useful resource.

Reed first charts the qualifying criteria -- in times of war and peace, dating back to 1940 -- applying to almost 25 million veterans, the spouses of deceased veterans, select reservists and National Guard members, not forgetting today's active duty personnel.

Skimming through those criteria, plus the paperwork needed to locate military records and obtain proof of eligibility, gives a sense of the scale of that dreaded departmental red tape. But Reed says the process is becoming more streamlined and user-friendly.

Those same changes also have made life easier for others in the real estate industry.

"Lenders can approve VA loans in minutes, order appraisals directly and work with VA loans under a highly automated process," Reed says.

The VA itself does not provide funding, but it does the next best thing: guaranteeing up to a quarter of a conventional loan limit. That now stands at $417,000, which means the VA will guarantee up to $104,250, a huge advantage for borrowers as they go mortgage shopping. The guarantee provides a safety net for lenders. It means that if the loan is approved in accordance with VA guidelines and then goes bad, the lender will be reimbursed the amount of the VA guarantee.

Qualifying veterans still must meet certain credit rating and income levels. Reed says VA loans are "a bit more lenient" on credit standards, while the income equation requires that monthly mortgage payments, plus homeowners insurance and property tax, be no more than 41% of gross income.

VA loans can mean lower interest rates, no down payments, fewer closing costs and no need for mortgage insurance. Other benefits can extend to such things as grants, of up to $50,000, to retrofit homes for disabled veterans.

There's another big advantage, Reed says, when it comes to refinancing. No matter how circumstances may change, veterans do not need to requalify; they automatically get a new loan so long as it lowers their monthly payment.

Despite these many benefits, Reed takes care to address situations in which VA loans don't apply, such as for investment properties or second homes, or are not necessarily the best financial option.

The author of two other books on mortgages and a mortgage banker by profession, Reed picks his way meticulously through the property-buying maze. He dissects a mortgage application form, discusses key issues including credit scores, finding a lender and realty agent, and examines broader topics such as bankruptcy and foreclosure.

His attention to detail, spread across a wide range of lending-related issues, adds value to the book and extends its appeal and application to a wider audience than just those with military connections.

Reed also keeps a calculator close by and isn't afraid to use it. The results can be helpful -- such as a breakdown of income and expenditures showing how much a veteran can afford to borrow -- although, at times, the text is so dense with charts and figures that it's hard to follow.

Similarly, Reed's description of the mechanics underlying changing bond, interest and loan rates is more than the average home buyer needs to know, and almost eight pages calculating mortgage payments, from 2.5% to 18%, seems excessive.

However, this book does include a handy reference of the VA's regional loan centers and state headquarters. Reed says some states offer variations and additions to the basic VA package, and he directs readers to www.cdva.ca.gov to learn more about California's CalVet loans.

Of note: California has more veterans than any other state. Department of Veterans Affairs figures at the end of September showed 2.1 million veterans in the state, well ahead of Florida's 1.7 million and the 1.6 million in Texas.

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source: latimes.com

Ouch! Fee hikes pinch borrowers who can't raise the bucks

WASHINGTON -- Home buyers and refinancers who can't come up with sizable down payments and whose FICO credit scores are below 680 are about to get squeezed.

Giant investors Fannie Mae and Freddie Mac are imposing significant increases in fees for a broad range of borrowers who have lower than 30% down payments and formerly were treated as "prime" credit applicants. At the same time, the two largest private mortgage insurers -- MGIC Corp. and PMI Group -- are raising premiums on consumers who have low down payments and FICO scores in the mid- to upper-600s. The added costs for some buyers could mount to thousands of dollars either upfront at the closing or in the form of higher interest rates.

Each of the companies says it has experienced unexpected high losses on loans with these characteristics and must now revise prices upward to handle the risks.

But some mortgage bankers and brokers say the higher costs and down payments will make homeownership impossible or very difficult for a large number of borrowers and slow any housing market recovery.

Though Fannie Mae's and Freddie Mac's revised fees won't take effect until March 1, major lenders that sell loans to the two investors began imposing the surcharges on applicants at the start of December.

Some mortgage loan officers are upset that clients with FICO scores close to 700 -- far above the once-traditional 620 cutoff point between "prime" and "sub-prime" -- are now being charged more. "This is outrageous," said Steven Moore, a mortgage broker with 1st Solution Mortgage in Falls Church, Va. "On a loan of $300,000 and with a credit score of 675 -- which is not a bad score -- and a 75% loan-to-value ratio [25% down payment], the cost is an additional $2,250 per loan." If the same borrower wants to do a cash-out refinancing to consolidate debt, the new Fannie-Freddie fee schedule will add an additional $1,500 to total costs on a $300,000 mortgage, Moore said. On a $400,000 loan, he estimated, the extra fees would total $5,000.

Jeff Lipes, president of Family Choice Mortgage in Wethersfield, Conn., said the new emphasis on higher FICO scores and larger down payments could greatly complicate rate quotations. Under previous standards, applicants with scores comfortably above 620 "could reasonably assume" they would qualify for a good rate, Lipes said. "But now we've got this whole new gray area between 620 and 680" FICOs under the revised Fannie/Freddie risk-based pricing guidelines. Joint applicants, in which one spouse or partner has a FICO score below the new guidelines, will need to take special care, said Lipes, so as not to trigger higher credit-risk fees.

Lipes predicts loan officers and brokers will make far greater use of so-called rapid rescoring services offered by some local credit bureaus to increase applicants' scores legally by correcting errors, lowering debt utilization ratios on credit card accounts and other techniques.

Here's a quick overview of the new policies from Fannie and Freddie affecting loan applications where the down payment amount is less than 30%: If the borrower's credit score is less than 620, a new 2% fee will be imposed. If the score is between 620 and 639, the surcharge will be 1.75%. If it is between 640 and 659, the add-on will be 1.25%. On scores between 660 and 679, the surcharge will be 0.75%.

According to mortgage banker Lipes, if applicants choose to roll the higher fees into the interest rate on the mortgage, the new Fannie/Freddie charges generally will increase rates by anywhere from one-eighth to one-half of 1%.

The MGIC mortgage insurance premium increases are expected to have the heaviest impact on borrowers making down payments of less than 3% and whose FICO scores are below 660, according to company officials. On such loans, MGIC is expected to raise premiums to 1.7% per $100,000 of loan amount, up from the current premium level of 0.96%.

The PMI Group's increased premium levels, which have already taken effect, are roughly similar, but the company will no longer insure any mortgages where the down payment is less than 5% and the borrower's FICO score is below 620.

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source: latimes.com