The room was full of pregnant women with
their husbands.
The instructor said, "Ladies, remember
that exercise is good for you. Walking is especially beneficial. It strengthens
the pelvic muscles and will make delivery that much easier. Just pace yourself,
make plenty of stops and try to stay on a soft surface like grass or a
path."
"Gentlemen, remember -- you're in this
together. It wouldn't hurt you to go walking with her. In fact, that shared
experience would be good for you both."
The room became very quiet as the men
absorbed and pondered this information.
After a few moments, a man at the back of
the room, slowly raised his hand.
"Yes?" asked the instructor.
"I was just wondering if it would be
all right if she carried a golf bag?"
This level of sensitivity just can't be
taught.
Last week's Saturday commentary had some letters that looked at
some broad, industry-wide issues. This week's dives into some loan-level and
program-specific issues of interest. It reminds us that the industry is
filled with folks who love diving into the details.
A few weeks ago, I had some comments on mortgage
insurance, including this note, "Regarding less than 20% down products,
there is a very cost-effective option to the scenario: LPMI, or Lender Paid
Mortgage insurance. Every time I simply do the math compared to getting MI
this option wins all the time..." In response, I received several notes
including these.
Aaron Ninness, a branch manager with New American Funding,
supplied, "I wanted to note that in the last section where the reader
notes LPMI being a lower payment, he doesn't mention that a higher rate does
lower how much of each payment goes towards principal reduction - so in some
cases a client might want to go with monthly MI if they believe a home could be
a short term hold to have more equity for the resale. Bottom line is LPMI does
have its pros but it does have cons that should be explained by an LO to the
consumer."
Brian Hitchcock, a Senior Loan Officer, sent, "On the
reader's comments about lender paid MI (LPMI), I used to say the same thing,
but with the changes in MI premiums, it is no longer true that LPMI is the
best choice, at least not at all credit scores. For example, let's
take a $200,000 purchase with 10% down, par rate is 4.125% with a credit score
of 750. The MI cost monthly would be $64.92 and it would be in place for
95 months for a total cost of $6167. Alternately, the One Time Up-Front MI cost
would be 1.95% which equates to $3,705 as a one-time cost or, if financed in,
$17.96 per month for the life of the loan, totaling $6465 in cost (much less if
you live there less than 30 years). The reader said he would raise the
rate and cover the 1.95% hit, pricing today, that would take the rate from
4.125% to 4.625% and raise the payment by $48 a month for the life of the loan. If
his comment is correct that he can raise the rate as little as a quarter point,
it still raises the payment $24 a month for a total cost of $8,769.
"The 80/10 that the reader dismissed has a total MI
cost of zero, is starting at a rate that is lower than the fixed portion of the
financing, and, if you apply what would be your regular amortized payment and
MI cost, the line would be paid down rapidly and no longer factor into the
payment at all. Equity lines are tools, and buyers need to be educated
on how to use them before getting caught behind an interest only payment. You
can smash your finger with a hammer but, if you use it right, you can build
beautiful things."
Chris C. e-mailed, "When I was actively originating,
I used LPMI for just about ALL deals where the buyers were financing with less
than 20% down. Your article quotes someone who also likes the setup. Since no
one knows whether separate borrower-paid MI will continue to be deductible in
any subsequent tax year, using LPMI ensures full deductibility as long as
Mortgage Interest is still deductible. As your reader said, the rate bump is
small when comparing to BPMI, which is partially offset by the additional tax
savings for the life of the loan."
Gary
Scoma, an industry vet with 25 years in credit policy and underwriting and
who helps companies find and train underwriters, sent a note of warning
about K-1s and "ordinary income vs. distributions. "In the past,
Lenders could simply use ordinary income on the K-1 for qualifying on a Fannie
Mae loan. That all changed on February 1, 2016, when Fannie updated its policy,
requiring lenders to do a more in-depth analysis in order to use this income.
Now, one year later, there is still uncertainty on how to interpret and apply
the guideline.
"The rule states business income, which is defined as
ordinary income, net rental real estate income, and other net rental income on
the K-1 may only be used to qualify if: The Borrower has a stable history
of receiving cash distributions equal to or greater than the business
income; or the business has adequate liquidity to support the
withdrawal of the income. There are many different scenarios that can make it
difficult to apply these new criteria. For example, a borrower may have stable
distributions, but they are less than the business income. And there are many
other examples.
"What if distributions are insufficient to qualify?
If this is the case, you must document that the business had adequate liquidity
to support withdrawal of the earnings. Discretion may be used in selecting the
method to confirm adequate liquidity. Fannie, however, does publish the
following acceptable formulas based on schedule L of the business tax return: Quick
Ratio (1065 business with inventory) = current assets (box 1, 2b, 4, 5,
6) / current liabilities (box 15, 16, 17). Current Ratio (1065
business with no inventory) = current assets (box 1, 2b, 3, 4, 5, 6) / current
liabilities (box 15, 16, 17).
"For either ratio, a result of one or greater is
generally sufficient to confirm liquidity. The challenge is that businesses
come in all shapes and sizes and the accounting method can add another
variable. If you aren't meeting the ratio test, there may be alternative
methods to prove adequate liquidity, such as a YTD P&L or recent business
bank statements. Some underwriters will automatically apply a conservative
approach, so it's important to present a detailed and persuasive argument.
"Also, be aware that different Lenders may have
overlays and or a more-narrow interpretation on this topic so proceed
carefully." (Thank you, Gary! If you'd like to reach Gary about training
underwriters, click on the link above.)
Shifting to the vagaries in relying on a single credit
score, and how a skilled LO can help a client, I received this note.
"Client #1 has a perfect credit report - extensive history of all types of
credit (revolving and installment) with NO LATE PAYMENTS ever. The client has
extremely low credit card balances as compared to the card limits, and has no
public records for judgments etc. Client's score: 704. Not bad, right?
Let's say for the sake of argument the rate available to this client on a 30-year
fixed rate was 4% (obviously, items factors in here). Looking at the credit
report we see two medical collection accounts each for $100, each about a year
old, and each paid about a year prior to running the current credit report. By
entirely REMOVING the insignificant (paid) collection accounts from the report
the clients score went from 704 to 798 which resulted in an available rate
almost .375% lower than what was previously available with the 704 score...and
in the case where a client needed private mortgage insurance there would be a
significant savings for scores over 720 than those under 720. Hmmm.
"Client #2: all factors were essentially the same as
Client #1 with a score of 697. Client #2 had a $90 open collection account
(collection account was first reported about 2 years earlier and was currently
being reported as an outstanding obligation) with Comcast. By removing the
account entirely (NOT simply paying it off and updating the account but
actually having the collection company advise the reporting bureaus to REMOVE
the account entirely from the client's credit report profile) the score
increased from 694 to 804 resulting in a most significant lowering of the
available rate to the client."
"These are not anomalies, but are very typical
examples of how small items on someone's report disproportionally impact the
credit score resulting in significantly higher interest rate offerings.
Patently unfair and more common than you might think. Does a $100 medical
collection really portend future bill-paying calamity for a client? Should a
$90 collection account really change a client's score by over 100 points?"
And this in-depth note from a veteran capital markets
exec. "How much did the CFPB cost consumers through financial
institutions increasing fees / rates to cover expected costs? How much
has the CFPB cost consumers with DTI > 43% (those who need the most relief)
by either a) forcing them to continue to pay rent, or b) actual cost of
financing loans with >43% DTI?
"For example, when I run a program search on a very
popular pricing engine and compare a 43 DTI vs a 44 DTI in the non-conforming
space, for a 60% LTV / 800 FICO (ZERO CREDIT RISK by anyone's standards...well,
anyone with a functioning brain that has a couple weeks of experience in mortgage
credit analysis), 97.68 (2 lenders total show up), 102.5 (40 lenders show up).
"So, the CFPB's myopic assessment of 43% as some
meaningful cutoff in mortgage toxicity (just as ignorant as the rating agency
assumption stated vs. full doc performance could be extrapolated from low LTV
to high LTV with no performance history in a recession) resulted in a 482bp
cost for borrowers, if they can find one of the two lenders offering it on this
pricing engine (down from 40 lenders at 43% DTI).
"Translating that into origination dollars in
comparison to what they 'saved' consumers over 5 years, we are talking about a
break even for the consumer at $50 billion of originations per year with DTI
over 43% (that rule cost consumers $12 billion over 5 years if the industry
would have originated $50B / year of the product or ~3% of the total
originations).
"Outside of the CFPB QM / NON-QM 43% DTI cutoff,
nobody charges for 44% or 48% or 52% DTI (there is no such adjustment on any
AGENCY or FHA or VA rate sheets I have seen), so this is purely a regulatory
cost the borrowers are facing because their rules destroyed market
liquidity for any non-agency loan with a DTI over 43%.
"Those loans made up much more than 3% of the market
prior to the regulation taking effect, and the much bigger cost to consumers
and the economy today is that those borrowers largely just get shut out of the
market because there are so few lending options for them. The increased
rate increases their DTI as well.
Furthering the example, let's say you have a 43% DTI on a
$500k loan at 4.5%. Your friend has a 46% DTI with the same
attributes...however, the extra 482bps in price translates to ~1.25% higher in
rate in non-QM land so he is going to get charged 5.75%. That's HPML
territory (with even fewer lenders), but more importantly, your friend's DTI at
the higher rate is no longer 46% (it's now over 50% where virtually nobody
lends in the non-GSE / non-government space).
"So, the bigger cost isn't the billions of dollars
consumers are charged for the arbitrary 'QM' rules, it's the fact that they are
watching rents skyrocket as they get shut out of the housing market all
together. Many in Washington wonder why the purchase market has been so
slow during the recover ($300B / year slower than one would expect)...it's not
rocket science we're talking about, it's basic economics 101.
"The real cost to the economy and consumers over the
past 5 years could easily top $300 billion with the purchase market getting
shorted by $300B / year over the past 5 years (relative to a normal recovery)
and consumers watching home prices go up by ~35% over that time
(Case-Schiller). Let's just call it average gains of 17% on $2.5T of
missed purchases ($255B), + how much extra they paid in rent (as rents increased)
vs. the mortgage payment (likely another $100B).
I do think the consumer needs to understand this next time
they vote, and the lawmakers that put this in place need to understand the
context of the $12 billion in savings vs. what they cost consumers.... it's
just insane that the CFPB touts saving $12B over 5 years...how is that even
worth mentioning?"
