The Mortgage House - Home Loans

"Honesty is the Best Policy"
August 23, 2010

Question:
“My parents lost their home and filed for bankruptcy in the last two years. Prior to the last two years they had very good credit; my stepfather was in an accident that put him out of work for an extended period which contributed to their financial trouble. They are looking to buy a new home and have found one that is in their price range.”

“They asked me to consider putting the loan in my name with my grandparents as cosign/buyers. My parents would make the full payments and reside in the home. This would be my first home loan with my personal goal of buying a home in 5 years. My parents would let me keep the tax credits to save for a down payment on my own home. My parents would have the home transferred to their name in 3-4 years. I am unsure if this poses legal problems or would be a problem when I buy a home in 5 years as it would not be my first. Any advice would be helpful as I have very little knowledge of the home buying/lending process.”

K., San Jose, CA

Answer:
It is very admirable that you want to help your parents. Consider, however, that many problems could be encountered in your scenario. Unless I misunderstand your intent, the primary challenge is that it appears it could involve fraudulent activity on your part unless you are totally upfront with your lender that this will not be your primary residence, and your application is treated as an investment property. It will help that your parents will occupy the property and hopefully sign a lease for you and your grandparents.

As to the tax credits, you must meet the IRS requirement for deductions. They are treated differently for primary residences and rentals. Your concerns are good; just be careful. I would suggest a legal contract with everyone involved, to set forth any and all understandings for the future. As a further note, whoever is on the mortgage will usually stay on the mortgage until it is refinanced. Though ownership can be changed fairly easily, you would still be responsible for the debt, and of course it could affect your qualifying for another home loan. Good luck.

All states were required to adopt the provisions of the SAFE Act and establish minimum, uniform standards for licensing and registration of mortgage lending businesses, mortgage brokers and mortgage loan originators. It required the provisions to be in place by August 1, 2009 and activated by January 2010. State bills changed licensing, education, examination and qualification requirements for those persons now as mandated within the law.

Each state may be a little different, but in California, responsibility for most real estate and financial services, including the mortgage lending process, is shared by the Department of Real Estate, the Office of Real Estate Appraisers, the Department of Corporations, and the Department of Financial Institutions. In California, real estate brokers may also act as mortgage brokers, and the DRE has oversight for them. The Department of Corporations (DOC) licenses and regulates mortgage brokers, mortgage lenders and servicers, and the mortgage loan originators licensed under the California Residential Mortgage Lending Act (NRMLA) and the California Finance Lenders Law (CFLL). Confused already?

Simply said, these departments regulate most of the real estate and financial services in California. A key part of the new law is the requirement for the licensing of mortgage loan originators (MLOs) through the Nationwide Mortgage Licensing System (NMLS). The deadline for meeting licensing standards is set at July 31, 2010. Most applications and education began in January 2010 when California, for one, began implementing its conforming regulations.

Anyone who makes, arranges or services loans secured by real property of one to four residential units must be licensed as an MLO unless exempt. Any such person or entity not licensed is breaking the law, as is any lender or broker who hires one.

Real Estate Law in California includes the California Residential Mortgage Lending Act (CRMLA) originally enacted in 1994, effective in 1996 and meant to regulate the originating and servicing of loans and mortgage banking activities under the Department of Corporations. In 2009, bills passed through the State which changed state licensing, education, examination and qualification requirements as mandated by the SAFE Act.

"Are We Safe with S.A.F.E.?" - Part 2
June 7, 2010

We previously talked a little about this overview and mentioned that certain entities are exempt from this CRMLA and its licensing requirements. These include entities governed or administrated through other rules and regulations:

Banks, trust companies, insurance and industrial loan companies.
Federally chartered savings and loan associations, savings banks and credit unions.
State savings and loan associations, savings banks (and their wholly-owned service corporations), state credit unions, and California finance lenders.
Persons solely in business, commercial or agricultural mortgage lending.
Persons making residential mortgages with their own funds, for their own investment; without intent to resell more than 8 in any calendar year.
Federal, state and municipal governments.
Pension plans making residential mortgage loans to their participants.Court-appointed persons acting in a fiduciary capacity, including foreclosure Trustees.
Licensed California real estate brokers.

Conversely, the California Finance Lenders Law covers any person engaged in the business of making consumer loans or commercial loans. Between these two laws, almost everyone involved in originating or servicing mortgage loans is covered except for those not operating in the state under the DOC or DRE. Licenses are now required for mortgage loan originators, and this includes persons who represent to the public, through advertising or other types of communications (business cards, brochures, stationery, signs, etc.) that they can or will perform any activities of a mortgage loan originator.

License applicants are required to present facts about their residence and work history, provide data for their credit reports to be run and evaluated, be fingerprinted, pass a federal and a state examination at 75% or better, and if under the DOC, take an approved 20-hour study course. The federal exam is three hours and 100 questions; the state two hours and 50 questions.

"Are We Safe with S.A.F.E.?" - Part 3
June 26, 2010

If you have been reading along with me in the last two columns, you now have a great deal of the latest information at your fingertips to recognize the dramatic changes in the mortgage lending world. Will it make a big difference?

At this point, it appears that the S.A.F.E. Act has had a great impact on many parts of the industry, but the changes for good could have been more dramatic without the numerous exemptions. Many persons engaged in the actual origination of residential mortgages, but not all, are required to have an endorsement to their license with annual renewals and continuing education requirements. Even those of us in the business for a long time have had to restudy the old and keep abreast of the latest requirements of lending and its best practices. That’s a good thing, but I would certainly have urged that all mortgage originators, regardless of the size of their organization or their governing body, would have had to meet all of the rules, in the same way.

Continuing with our recap of the legislation, note that applicants for license endorsements may be precluded from obtaining them where their personal history includes:

any liens or judgments for fraud, misrepresentation, dishonest dealing, and/or mishandling of trust funds, or
other liens, judgments, or financial or professional conditions that indicate a pattern of dishonesty on their part.

Companies holding a California Finance Lenders Law license that make or broker loans must have each branch licensed as well as persons working under their direction and demonstrate:

Approval from FHA, VA, FmHA, GNMA, FannieMae or FreddieMac as a lender and/or servicer of loans.
Audited financial statements showing tangible net worth of at least $250,000 and a surety bond not less than $50,000.

All stockholders, principal officers and directors must have background checks performed by the CFLL Department, including the obtaining of any criminal history and civil court checks that may indicate previous involvement in fraud, embezzlement, fraudulent conversion or misappropriation of property.

We will continue a bit more in the next few weeks to further explain criteria of licensing denials, required conduct, and the posting of information to the public.

Are We Safe with S.A.F.E.? - Part 4
July 12, 2010

The financial responsibility requirement in California, and nationwide I am sure, is one of the most important changes of this legislation. Most consumers at some time in their lives will be faced with whether to buy a home and apply for a mortgage, and generally this could be the largest, most important financial decision they make. They need the guidance of honest, trustworthy and experienced counselors (my favorite Soapbox).

Under Federal law, there are three basic criteria for denying an application of a mortgage loan originator:

Prior revocation of a mortgage loan originator’s license
Criminal convictions
Unsatisfactory character or financial fitness

As mentioned previously, the Nationwide Mortgage Loan System and Registry (NMLS) was created to allow a comprehensive licensing database, enabling both governmental entities and consumers to track mortgage loan originators. Candidates for licensing can now be screened in all states, at once source.

Licensees must keep their information current in the NMLS system at all times. Traditionally, a loan officer moving from company to company was routine; now approval must be requested and secured. Standardization of licensing and its renewal process was a primary goal of the SAFE Act. Now a mortgage loan originator’s license or endorsement will expire on December 31 of each year and can only be renewed by meeting applicable requirements prior to that date. Reports must be filed as to all mortgage loan activity conducted by each originator.

The law is made up of both prohibited acts and expected behavior. In the past, when lenders, brokers or originators violated regulatory provisions, it was only considered unethical behavior. Now, being part of the law, it is a violation subject to severe financial penalties and potential loss of license. For example, actions such as influencing an appraiser were extremely damaging; now, they are prohibited by law.

Federal legislation gives the states specific authority to ensure that consumers seeking mortgage credit are protected. Originators are reminded that integrity and transparency in all mortgage lending transactions is critical. There are some interesting new rules about consumer protection, which we will cover as time allows.

The NMLS Resource Center online will be a key reference area for consumers wishing more information about their lenders. All licensees will be required to include their NMLS ID number and, if applicable, their DRE (Dept. of Real Estate) number on nearly all advertising or materials used upfront with consumers. To be continued…

Are We Safe with S.A.F.E.? - Part 5
July 26, 2010

We will conclude this series with a few reminders of the required conduct of mortgage loan originators and real estate brokers acting as loan originators under the SAFE Act. This Act was passed by Congress as part of the Housing and Economic Recovery Act of 2008 (HERA) and mandates that all individual mortgage loan originators (MLOs) either be licensed by the state where they do business or, if they are employed by a federally-regulated depository institution, be registered. Both licensing and registration are done through the Nationwide Mortgage Licensing System and Registry (NMLSR), and online data on each originator will be available to the public beginning January 1, 2011.

HUD is responsible for enforcement of the provisions of the SAFE Act. This is all part of what is perceived as a continued need to strengthen protections for consumers and reduce fraud in the home buying (or refinance) process. States are required to adopt minimum uniform standards to enable a national database of residential mortgage loan originators.

Loan originators, under the legislation and certainly ethically, have an obligation to make sure that underwriting standards are properly applied to their client’s circumstances and to analyze a borrower’s repayment capacity to include an evaluation of their ability to repay the loan. They must avoid combining nontraditional loan features unless there are strong mitigating factors such as high credit scores, low loan-to-value ratios and debt-to-income ratios, significant liquid assets, mortgage insurance or other credit enhancements. A nontraditional loan is one that allows borrowers, for example, to defer repayment of principal or interest (does not include reverse mortgages or home equity lines of credit).

Any stated income or reduced documentation loans (if available) are severely limited by required mitigating factors. Consumers are required to be well informed about the potential risks of any non-traditional mortgage products. Originators are charged with a responsibility to assist the consumer in selecting a loan product that enables them to understand the material terms, costs and risks. Clear, detailed information must be provided about any potential payment shock, negative amortization, prepayment penalties, balloon payments and costs.

We could continue for many more articles on this subject, but enough said at this point. I hope you have gained at least a modest understanding of the new rules under the SAFE Act. Please follow your best instincts and discuss any further questions with your authorized mortgage advisor. Most of us have followed these guidelines as part of our honest and ethical practices. Unfortunately, the adage about a few bad apples certainly can apply in the mortgage lending business. Good luck.

Copyright © 2010 Roxanne Carr
This article is a forum to explore real estate principles. It is not intended to provide tax, legal, insurance or investment advice and should not be relied upon for any of these purposes.
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"FHA is Changing"
March 9, 2010

Question:
“I need your advice. I am really in a bind here and at this point do not even trust my attorney. I was issued a mortgage commitment for an FHA mortgage on a condo (new construction). Now I come to find out that the condo project was not approved by HUD and the complex is only about 85% sold and they do not turn over the control of the HOA until they are 95% sold. The bank has not closed the loan yet; they tell me that they sell the loan to investors, and that they cannot get spot approval on the purchase because of these two factors even though they keep telling me they are working on it. I went past my "time of the essence” date in the contract and now the developer is trying to charge me $150 per day penalty for not closing.

My attorney tells me that I have to close because I have been approved and have a commitment. What good is a commitment if the bank won't close? Am I going to lose my down payment? How do I protect myself? Please help. I am desperate.”

Answer:
I know in your state you use attorneys for real estate transactions. In this instance, it seems you certainly have the wrong one. Read your purchase agreement very, very carefully. Most are “subject to mortgage financing” or mortgage approval. If the bank you have chosen cannot close your loan, get documentation of that fact and you will surely have cause for cancelling the transaction without loss of your money.

Not all lenders are alike, especially when it comes to FHA financing. Choose one that is very experienced and well versed in the latest regulations. FHA has changed and is changing many of its requirements and regulations, which we will speak of in future columns. In your particular case, note that January 31, 2010 was the last day FHA allowed processing of spot condominium approvals. The procedure no longer exists. All condo projects must be on the HUD-approved list. New projects under construction can be submitted for its approval with required documentation. Good luck.

Copyright © 2010 Roxanne Carr
This article is a forum to explore real estate principles. It is not intended to provide tax, legal, insurance or investment advice and should not be relied upon for any of these purposes.
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"What About the New Good Faith Estimates?"
February 15, 2010

Question:
“Please explain the use of the new Good Faith Estimate that I have heard about. Our lender has given us a ‘work sheet’ but not a Good Faith Estimate yet.”

Answer:
It can be complicated to understand, especially in today’s environment when the rules are changing constantly. The Good Faith Estimate (“GFE”), which lenders are required to give, should include an estimate of your mortgage settlement charges and loan terms. To shop for the best loan, borrowers may compare all GFE’s obtained to find what they consider the best loan.

Under the revised rules, many lenders have adopted worksheets in lieu of using the more complete and somewhat more complicated form required by the Department of Housing and Urban Development (“HUD”). The goal of requiring the use of the new GFE form was to make the information as accurate as possible with little room for variance. This practice is intended to minimize the ability of mortgage bankers and brokers to “bait and switch” --by showing lower charges on GFE’s upfront than what they will actually charge at final signing. When borrowers get to signing tables and fees have grown, sometimes considerably, it may be too late. They are often forced to proceed or lose their deposits and other associated costs (such as appraisals) and possibly suffer a higher interest rate.

There are six elements stated by HUD which constitute “an application” to the lender and require the issuance of a full GFE. They are:

name of applicant
social security number
income of applicant
address of property
value of property
loan amount

If any of these elements are not available to the lender, they are allowed to issue a “loan scenario” or worksheet in lieu of a full GFE. The new HUD “Settlement Costs” booklet explains the new rules and requirements. You may order it through HUD by calling 1-800-552-9410, but every lender is required to give you one when you apply for a mortgage.

The form is now more seriously meant to be used as a potential borrower’s comparison tool. All lenders are required to use the same method, manner and terminology in presenting a loan scenario to a prospective borrower. In the past, lenders utilized different means when expressing charges to the borrower, and this was deemed to allow opportunities for misleading or confusing information. With the new GFE, it is expected the standardized form will allow borrowers to compare any quotes they receive and ensure there are no hidden fees or events to expect.
The new format was officially activated as of January 1, 2010. The changes went from a one-page to a three-page layout and are too numerous to list in a short article, but I do want to highlight the significant changes.

The new form requires any interest rate lock period of time be stated (rate can be locked or floating - this is material for a later discussion). Also, all the details must be available to the borrower for a minimum of ten days. The new form also tells the borrower whether the type of loan proposed has any sudden demand feature, such as a balloon payment or prepayment penalty. It must also declare whether the payments may rise in the future even if payments are made in accordance with an original contract.

Loan charges and additional services to obtain the loan must be itemized These may include appraisal fees, title insurance, escrow or legal fees, as well as any expected fees for termite inspection, roof, well or septic certifications. There are many other line items for listing other fees in the event they are needed for the completion of the loan. If any of these charges vary during the loan processing after the initial disclosure, the lender is now required to re-disclose. If the new disclosure results in a variance of the APR (Annual Percentage Rate) by even 1/8 point, it will also cause a delay of signing final loan documents by six business days.

The new rules and regulations for the Good Faith Estimates allow very little (if any) room for error or variance. How borrowers will be impacted or lending practices improved is yet to be seen. Please talk with your mortgage advisor for more complete details. Good luck.

Copyright © 2010 Roxanne Carr
This article is a forum to explore real estate principles. It is not intended to provide tax, legal, insurance or investment advice and should not be relied upon for any of these purposes.
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"Taking Over House Payments in the Wrong Way"
January 26, 2010

Question:
“My husband and I were looking to buy a home when our lease expired on our apartment in July. We then found out his sister had fallen behind in her mortgage payments, and her home was about to be foreclosed on. She informed us that we could take over the payments and finish paying for it. Since my credit was not good, but my husband's was, we jumped at the deal. Well, we paid nearly $15,000 upfront to make up the delinquent payments to stop the foreclosure, and we started paying the payments the next month. We were told my husband's name would be added to the deed until he could qualify to get the house financed in his name. That has not happened, and we have done repairs to the house and are paying a very high mortgage payment. We do not want to continue this if we are not going to be the owners, and are just renting. Can a name be added to the deed? Should we pursue this, or just get out now?”

Answer:
His sister should have quitclaimed her interest to him before you paid the dollars it took to bring the loan current and certainly before you started making repairs. It is rather easy to be added to title, but not to the mortgage. Possibly negotiations with the lender could have had your husband added to the mortgage. It was certainly worth pursuing at that time, when the lender might have allowed an assumption due to the circumstances.

I suggest you get legal advice immediately, and you might consult with your local title company for assistance with the necessary forms for his sister to sign and have them properly recorded. Really, such a big step should never be taken without the proper legal assistance. The minor cost involved can save you so very much in the future. Now that you have spent so much in dollars and effort, I urge you to stay with it, but get the proper paperwork done so you are protected. Good luck.

"Needs Cosigning Help?"
January 18, 2010

Question:
“I'm very interested in a townhome and unfortunately I would need a cosigner. My parents have bad credit. My fiancé does not show income (he works off the books) and we are getting 20% down as a gift. What can I do in order to get this house with out a cosigner??? Please advise!”

Answer:
You are truly lucky that you are getting 20% down as a gift. Beyond that, you certainly need help. Are you positive you cannot qualify alone? First, check with an experienced FHA lender in your area, one highly recommended to you and see how far you are from qualification. FHA only requires a 3.5% down payment, and 20% down is considered a very strong compensating factor for high debt ratios, if all else is in order.

Hopefully, your parents are working diligently on their credit cleanup. Most programs do require that any cosignor be related, and of course you must consider the responsibilities of cosigning for the person or persons doing it.

If it is accurate that you cannot qualify alone and you have no other close family person able or willing to cosign, your best alternative is to wait, be frugal, save your money and get rid of any debt you have. There will be other properties you are interested in and opportunities will come along at the right time. Build your credit and maintain a good work history, and work closely with that experienced mortgage lender.

Of course, if at all possible, your fiancé should be declaring his income and establishing a work and income profile. He will definitely need it in the future; working for cash can hurt one in many ways. Good luck.