Ono island is a secluded paradise within a stones throw of the Gulf of Mexico in south Alabama. This private gated island is home to some of the most beautiful homes on the Gulf Coast, and there are deals available.
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Remember the good old days (2002 to 2005), when all you had to do to buy a house was be able to fog a mirror and prove that you had a heart beat? Well, those days are over, and here’s why.
Some of you may remember other industries that have had “price wars”, gas stations across the street from each other is a classic example. Something similar was happening about 6 years ago in the mortgage industry. With mortgage companies, and Wall Street investors becoming increasingly hungry to cash in on the booming real estate market, they got more and more aggressive with their underwriting guidelines allowing more and more people to qualify for a mortgage loan. As the mortgage paper continued to perform (and provide profitable for investors), the guidelines continued to loosen. Finally in 2005, it was almost a joke (in the industry and among my colleagues) at how many people were able to get approved for a loan.
Of course, in true American style, no one thinks about tomorrow, they only see the shiny brass ring and say “I want it now”, with little regard to the long term affects. Enter 2007 when adjustable rates starting adjusting right about the same time that the market was cooling, and all those that were convinced they could take and adjustable rate and refinance later were slapped with the reality that a refinance is not an option if there is no longer any equity in the home. It has been more than a year now since that storm cloud began forming, and we are not out of the woods yet, but here is where we stand in the mortgage industry today.
- Fannie Mae (the nations top backer of mortgage loans) has had many changes in the way that they will underwrite and execute a mortgage loan. The term “Declining Markets” has entered the vocabulary of many mortgage professionals meaning that if a property is located in a zip code that is deemed to have declining values, the amount of the required down payment is increased by 5%. This means that if you are looking to buy a house in Florida with a Fannie Mae loan, and the property shows up in the database for declining markets, you will have to come up with more money out of pocket. This has a ripple effect because the value of your home is what someone is willing to pay for it in an unbiased open market transaction. However, if the available buyers are limited to only those who can come up with the extra cash, you as a seller have just had your pool of available buyers drained.
- Subprime companies came into existence as an alternative to borrowers that wanted to buy a home, but for one reason or another, could not meet the underwriting criteria placed by Fannie Mae. In exchange, they charge higher rates and give worse terms for taking the added risk associated with the borrower. Five years ago, life was good for the subprime companies, but their “Ready…Fire….Aim” policies proved to be their own demise and consequently 95% of them are out of business today. The ones left have been so debilitated by the investors willing to buy their mortgage backed securities that there is very little difference between them and Fannie Mae (only with worse terms).
- Welcome back FHA and VA! Add the words “Government” and “Loan Program” together and you hear the collective groaning of mortgage people everywhere. There was a time where I would rather stab myself in the eye with a rusty spoon than deal with government underwriting….and today….there is no choice. In today’s market (as a mortgage professional), you fall into one of 2 categories: 1) Those who are writing government loans, or 2) Those who are looking for a new job. It really is that simple.
FHA was the original “subprime” mortgage. Allowing people with outside of the box credit or income criteria to still get qualified for a mortgage. And the VA loan has always been available to qualified military personnel, but it hasn’t always been the best option due to the costs of the VA funding fee. Today, if you want to get 100% financing, the VA loan one one of the handful of options left.
In summary, there are still loans available for qualified buyers, it just may be harder to qualify than it was when you bought your last home.
Something you may or may not be aware of is how valuable your name is to those who sell information.
When you apply for a home loan (or any loan for that matter), the lender will perform a credit check with Equifax, Transunion and Experian. These are the 3 primary credit repositories, and an inquiry with all three is necessary for a mortgage approval. This is common, and obvious to most people.
What you may not know is that when an inquiry is made on your credit file, you become a “hot lead” in the eyes of the credit bureau. This means that they know that you are now actively seeking new lines of credit, and therefore they seize the opportunity by selling your personal information as a “lead” to other lenders that may be competing with the lender that you are already working with. If you are on this hot lead list, you will instantly be farmed out to any of dozens of other lending institutions that have paid for the right to access your personal information. The information acquired may include your name, address, phone number (including unlisted numbers), date of birth, credit score, debt history, property info, and more. Put aside the obvious concerns about identity theft in a time where you are statistically more likely to have your identity stolen than to have your car stolen, and focus instead on the reason for the lead sales in the first place, competition.
So What’s Wrong With A Little Competition?
Free market and competition is nothing new, and in fact, it is one of the core values that makes this country great. That being said, competition just for the sake of competition is not always a good thing. Lets take a look at just 5 of the reasons that this could be bad for you as a consumer.
1) Bait and switch - I know, there are laws in place to protect consumers. But it may also come as no shock that not everyone in this world follows the law by the letter. The mortgage business is highly competitive, and this can drive loan officers to give “misleading” information in an attempt to make a sale. If you have done your due diligence, and chosen the person you trust, don’t switch in the middle of the process because someone in a cubicle 1000 miles away just quoted you something that is $100 less. You will be better off later if you exercise good business practices in the beginning.
2) Costs - The lenders that purchase such leads are not non-profit organizations, and they fully intend to recover the costs spent to acquire such leads. This can result in hidden fees and misunderstandings.
3) Time - Just because you chose to go with another lender in the middle of the process doesn’t mean that the seller of the property will care that you are saving a few bucks. When a lender takes over a file, there is time involved with putting it together. If you decide to change lenders the week of closing, most likely you will not meet your deadline. If you do not meet your deadline, the seller is under no obligation to continue to sell to you, especially if another buyer came along and offered more money.
4) Recourse - Most lenders require that the appraisal fee be paid up front, this fee is typically $300 to $400 depending on your area. What you may not know is that regardless whether the appraisal has already been paid or not, it is the property of the lender who ordered it. It is at their sole discretion as to whether they allow it to be released to another lender who undercut them after work was done and time was spent. In this case, you would be out the cost of the appraisal, and be forced to order a new one, again with the out of pocket expense to the new lender. This not only can happen, but it does happen on a daily basis.
5) The Golden Rule - Ok, maybe this one is a stretch. But if you believe that what goes around comes around, it is bad Karma to cancel a deal in the middle of the process to switch to another vendor for a small savings. Most mortgage originators are only paid when a loan closes, but there is a lot of work that goes into the file prior to that. Consider for a moment if after working for a week at your job, you go in to get your paycheck, and your boss says to you “Sorry, I found someone that will do the same job for $100 less, so I don’t need you anymore”.
All of this assumes that the original person you are dealing with is trustworthy, and you are comfortable doing business with them. If you are being taken advantage of, move on to someone else. Just do it for the right reasons.
The consumer credit reporting industry has devised a way to “opt out” , or remove yourself from these lead lists. You may do so by visiting OptOutPrescreen.com or call 1-888-567-8688. You must do this at least 48 hours before getting a credit check to make sure there is enough time for the request to process.
By doing this, you will also be removed from the list for pre-approved credit card offers to arrive in the mail. These offers are a breeding ground for identity thieves, and it is best to have them stopped immediately.
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