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Economy Report: Changes in Mortgage Lending

Marcus McCue, Vice President of Sales with Guardian Mortgage
Marcus McCue, Vice President of Sales with Guardian Mortgage

By Sam Baker, KERA Morning Edition Host

http://stream.publicbroadcasting.net/production/mp3/kera/local-kera-876822.mp3

Dallas, TX –

INTRO: The Obama administration has implemented numerous changes in mortgage lending to stabilize and hopefully boost the housing market. Much of it's intended to help people in danger of losing their homes. But there are also things people looking to buy their first or next home should keep in mind. In KERA's weekly economy segment, I spoke about mortgage financing with Marcus McCue, Vice President of Sales with Guardian Mortgage, based in Richardson.

Marcus McCue: For those that handle their debts responsibly, those that are truly trying to purchase a home that they can afford, and those that have saved a little bit of money for a down payment, there still is a lot of money available at excellent rates and obviously a lot of homes are available for a discount. However, as we say the fair way has narrowed for those who can get approval and that's approval on a variety of programs from conventional to FHA. So, it is a little bit more difficult for certain individuals to find financing.

Sam Baker: Let's start then with what you need to bring to the table if you are looking to get a loan.

Marcus: The minimum down payment is an important one. On FHA, it's now 3.5%. On conventional loans, it's 5% unless that individual is a first time homebuyer. Homebuyers have the exclusive program for 3% down on conventional. So first, you need to have saved a little bit of a down payment. There's no more 100% financing available. Second, you want to take a look at your credit immediately. We always recommend doing what's called a pre-approval with a lender, contacting a lender at an advance of you actually going to shop for a home because credit is an important factor of not only getting approval, but also the interest rate that will apply to your mortgage. Earlier you look at the credit and have a lender evaluate that, the better chance you have to correct any inaccuracies or to make some changes to some of your credit to make sure that it improves your score. There's a lot of programs that provide you with the best package available with 20% down, meaning the best interest rate, the most options for the loan program. But at the minimum, a buyer needs to have is again 3.5[%] on FHA, 3% for first time homebuyers on conventional, and 5% for all other buyers on conventional.

Sam: Does it matter if you are buying a home or say a condominium in terms of the kind of package you end up getting?

Marcus: Absolutely. Condominiums are getting more difficult to get approvable on these days. Single family homes are less difficult, because the condo projects now has to be approved in addition to the borrower and there's a lot that a buyer will not know about a condo project when they take a look at a unit that's been listed that may affect their approval. Perfect example is if there are individuals in that condo project, more than 15% of those owners who are past due on those association dues, then an individual buying a unit in that development would not be able to get conventional financing approval. So it's something that has nothing to do with the unit they're buying or them as a borrower for their qualifying purpose, but the project itself has made the approval an impossibility for that buyer.

Sam: So on a condo unit, your neighbors matter?

Marcus: Absolutely. Your neighbors matter. The association matters. The number of units owned by individuals as owner-occupied versus investment properties matter. So again, it's underwriting the project, not just the individual, on a condo purchase.

Sam: Will or should the first-time homebuyer's credit continue?

Marcus: I believe it will. I believe that it's been very much an aid to helping stabilize the market.

Sam: But now we're hearing about also credits or incentives for subsequent homebuyers?

Marcus: Initially, we had the first time homebuyer credit that was then revised from $7,500 to $8,000 with the few other changes as far as repayment back to the government. This last extension included a $6,500 credit for subsequent buyers who have occupied that home as their primary residence five out of the last eight years. So the home they are selling, as long as that's been their primary residence five consecutive years out of the last eight, they qualify for the $6,500 tax credit.

Sam: Are the standards higher in terms of credit scores for getting mortgage?

Marcus: If you look back about five years, anybody who had a credit score that was in the 660-680 range would get the best possible rates available. No adjustments. Now it's gone up to 720 and now recently, 740. So now a mid-credit score of 740 is required to get the best possible rates.

Sam: Why?

Marcus: Well what they found is through all of the sub-prime loan crisis, all of these loans that were done previously at lower credit scores is that lenders didn't rely on those credit scores as much. It's not that credit scores failed them. It's that they felt that a credit score of a 600 wasn't quite as bad as they thought because they hadn't seen the defaults that they had expected. But the reason they hadn't seen those defaults is most of those people were refinancing, getting cash out, and making their mortgage payments from that cash they've liquidated not from their cash flow and so if somebody's credit score of 600 shows that they haven't paid some of the other creditors responsibly and haven't done it on a consistent basis, then it's likely that they won't pay the new mortgage lender responsibly. Now they've increased the required rates for this criteria because they've assessed the risks again of what a lower credit score provides and so those who are going to get the best credit score are going to get the best mortgage rates.

Sam: Come January changes, I understand, with the good faith estimate before closing in the HUD one settlement statements signed are closing now. For those who don't know what those are could you explain what they are and how the changes will affect someone buying a home?

Marcus: Yes, the good faith estimate is what the borrower sees prior to closing. It gives them all the financial numbers regarding their transaction. Historically, it's provided with either your loan amount, your down payment, how much cash you'd need to bring to closing as well as a detailed itemization of the costs included in that transaction. It also provided you with your principal and interest payment plus the insurance and taxes that may be included to get a total monthly payment which we in the industry call a PITI payment, principal interest taxes and insurance. That good faith estimate is what that borrower relies on to know what they will see at closing. Now, the HUD one settlement statement is what the title company uses at closing. Same numbers. It's just the government version of the settlement statement that the title company runs through that provides them with the actual cash needed to close not the estimated, like the good faith estimate was. The reason that these have changed is that there has been too much of a deviation between that good faith estimate ahead of time and the final HUD one settlement statement at closing so the government wanted to make it more simple, more transparent for borrowers to see what's going to happen with their loan ahead of time and then they also wanted to ensure that they had the opportunity to shop in a way that it was easy to understand and also make lenders more responsible for the numbers that are on their good faith estimate. So the good faith estimate now has changed dramatically and this is what we as the lender believe are the most significant changes that is happening in 2010, because it will take a lot more time for us to explain, also the title companies at closing to explain that HUD one settlement statement. But overall, it's better for buyers. There's a specific three-page good faith estimate that all mortgage companies, whether they are mortgage banker or mortgage broker, have to use. So for the clients, previously there was no standardized form. They could get three estimates from three different lenders and each of those good faith estimates could look complete different, which makes that comparison shopping difficult. So now the new good faith estimate is standardized, required by all lenders and there's more wording, more explanation to the buyers. Less just numbers. So hopefully they are trying to make it more transparent for the borrower to understand what's happening, but there are some significant shortcomings to that good faith estimate.

Sam: Which would be?

Marcus: Well first of all, the new good faith estimate does not have any display or any calculation of the down payment the borrowers pay in closing. So therefore, it does not provide anywhere on it the actual cash that the borrower will need to bring to closing. It shows only an estimated settlement charge, but that estimated settlement charge is not the cash they have to bring to closing. In fact, that estimated settlement charge also includes things that are customarily paid by the seller here in Texas, like in owners' title insurance policy. So this estimated settlement charge's number is what the borrowers is going to be looking at thinking this is what I need to rely on to bring to closing but there's no addition of the down payment end of that?' There's no credits as far as the earnest money provided ahead of time that's credited back to them. The option fee that may be credited back to them. So there's going to be a lot of confusion with borrowers as far as how this estimated settlement charges translates into what they actually have to bring to closing.

Sam: So what should borrowers do then to protect themselves?

Marcus: What they need to do again is the pre-approval process is a great way to get exposed to that new good faith estimate. This new good faith estimate is going to be provided after January 1 to all loan applicants who may get an application after that time and is provided once they've selected a property. So all borrowers need done are understand that a lender may provide with some type of a loan summary or loan terms ahead of time. It's not going to be this new good faith estimate until they've actually found a property to purchase. Then when they've found one, they will get this new three-page estimate and the lender will show them which of these charges can change, which of them are subject to a 10% tolerance and then show them the opportunities they have to compare this loan to other loan programs from different lenders.

Sam: We're seeing increases in home sales lately in the D-FW area. I think what maybe two straight months or so of that. What's behind that do you think? Is it a willingness of people? Are they feeling more comfortable about the idea of buying a home or is it a result of changes with lenders? What?

Marcus: I think it's a combination of many things. Most importantly, the large number of homes that are being sold are in that price range that fits the first time home buyer credit. Obviously, the numbers that we'd seen from October and the ones from November are going to be reflective of those homebuyers who believe that credit would expire at the end of November. So there is a lot of activity in October and November for people to purchase those homes, but in addition, there are more lenders who are out there now pushing programs that are available because there are credits now that are being extended for the first-time home buyer credit, the subsequent buyer credit. But the low rates are a big function and our rates have stayed low all year and we had rates that climbed in the summer time. They were up over 6%. Now dropping back down again and so that significant drop is a value to buyers. It provides them with an opportunity to buy homes within a certain price range that may not have been available at those higher interest rates and the mortgage industry has always "rates drive volume" over and over again whether its refinance or purchase volume. I think lastly people are getting more comfortable with the fact that the market may be stabilizing. They've seen, you know, that the activity is happening, people are buying, prices have decreased now for a significant amount of time and they think may be it's time where they're going to stabilize and I can make my move.

Sam: We're hearing reports of little signs of recovery here and there is there any reason why a person thinking of buying a home should be wary of that?

Marcus: I don't believe they should be wary. I think, first and foremost, they need to get in contact with a lender and a lender that they've been referred to that they can trust. Not someone that they've just found through a web site or through necessarily a commercial. Contact a real estate professional that they trust or friends, family members, other advisors. Contact a lender you can trust and ask them whether they should be concerned about their opportunities for buying a new home. There's nothing out here that should keep people from taking that opportunity to speak to a lender and really let a lender assess whether it is an opportunity they can take advantage now or maybe they need to rent for another year, maybe get some things with their credit in line, maybe save for a down payment and then pursue purchasing later.

Marcus McCue is Vice President of Sales at Guardian Mortgage Company.

You can find more information about mortgage lending issues at kera.org/economy