A second practice of concern to agencies and addressed in the Statement on Subprime Mortgage Lending is failure to disclose fully to the borrower how these ARMs will affect future payments. In addition, so-called “liar loans” are being underwritten by some less scrupulous lenders. These loans are more politely referred to as “statement of income” loans: a potential borrower simply states on an application form how much money he makes. No verification of this income is required, nor is any attempted by the lender. Such total lack of due diligence and documentation of the borrower’s repay ability means that the lender assumes greater risk of default, while the borrower is more likely to fail to meet the financial responsibility. “Statement of income” loans were originally intended for people who are self-employed, and would be unable to produce pay stubs or a W2 form to substantiate their income claims. Liar loans are a clear abuse of this intention.

A third concern described in the Statement on Mortgage Lending refers to penalties for early prepayment extending far into the term of the loan. Such penalties are usually quite substantial, and are not always fully explained in advance to the borrower. Moreover, borrowers are not always informed about additional monthly payments, like insurance, taxes, and closing costs that accompany the purchase of property but are not part of the loan itself.

Three months before releasing the final Statement, the agencies released it for comment from the public, as well as from members of Congress and various financial institutions. It is interesting that the lending industry’s most repeated comments were in opposition to the requirement of full disclosure of rates and fees relating to ARMs. Such full disclosure was described as “information overload.” We find it difficult to understand how non-disclosure of all costs connected with a loan could be considered anything other than deceptive lending practices. It is only when lenders offer full disclosure and open discussion to borrowers that they will be thought of as reputable entities. To fight mandatory disclosure of costs and fees seems to indicate that they have something to hide.

Most comments on the Statement also pointed out the need for a better, more inclusive definition of the term “subprime.” The final 2007 Statement references the Expanded Guidance (2001) for full criteria for considering a borrower “subprime”.

The 2007 Statement recommends that the borrower be given a full schedule for repayment of the loan, including an informed estimate of associated closing costs, insurance, and taxes. This should be provided by the lender at the time the loan originates. The document also recommends that these extra charges be calculated into the borrower’s debt-ratio status.

All in all, the 2007 Statement on Mortgage Lending provides excellent guidance for the many questionable practices that seem to have become intrinsic to subprime lending. It is inclusive of other earlier such statements, and refers the reader to the earlier 2001 Expanded Guidance document when necessary.

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When buying your home, it is imperative to have as much money as possible for your down payment. Not only should you save for your down payment, but also tap your personal savings, any stocks, bonds and real estate, and gather your family gifts. Customarily, lenders require a down payment of at least 20% of the home’s purchase price, as well as require a ratio of at least 75% for your loan to be approved.

What is the LTV Ratio?

The LTV, or lending risk ratio, is determined by dividing the mortgage loan amount (after subtracting your down payment) by the value of the property. The higher your down payment, the lower this ratio will be. The lower the LTV the cheaper your mortgage costs in the end, and the better chances you have at securing your loan.

High LTV Disadvantages

If your LTV is high, it can affect your ability to secure the loan in a myriad of ways. A high LTV is a risky situation in the lender’s perspective, because high LTV loans are more at risk to default. If you are competing with other buyers, the lender will most always go with the lower LTV and a larger cash down payment. It can affect your chances of buying.

If you have a high LTV, you are also most likely going to be dealing with higher interest rates and additional insurance costs to protect the lender. These extra costs will increase the cost of your mortgage in the long run and make your payments higher. If you don’t have the 20 percent cash down payment, some lenders will require you to have a larger monthly income to qualify for a 95 percent LTV mortgage. The loan amount is the same, but if your down payment is low, they will need more security.

Prepare When Obtaining a Mortgage Loan

With a little preparation, and possibly some patience, you can save 20 percent or more of the home’s purchase price and steer clear of the hassle and extra costs. If you find this is not possible, it may be time to look at a home with a lower price. It’s better to be able to afford your home, than to tie yourself in a situation with a chance of default.

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Over the past 18 months or so, maybe longer, the mortgage origination industry has seen significant change. Most of our competition is gone, but so are the programs and lenders that provided so much of the money homeowners and homebuyers needed. With those programs gone, we originators are left to re-tool our kit and get out there and keep originating - or quit, I guess.

For me, when it came to re-tooling, I tried everything, and as I became comfortable - there was change. Whether the sources dried up, or underwriting guidelines tightened - whatever it was it seemed like I was constantly re-tooling - and my volume of production slipped by 80%! Because I have been doing this since the late 80’s - I simply had to find a new niche, a new way to grow my business and support my family. What was I going to do?!

When I started in this business, back with thermal paper fax machines (anybody remember those?!), there were really only 2 kinds of loan programs, government or Savings and Loan money. I stayed away from the government stuff, heard it was too hard and took too long and the government limited origination fees to just 1%, so I stayed with the S&L stuff. Now, with S&L’s gone and WallStreet money still not back yet - seems like the old days are here again - with the major focus on FHA loans!

I have seen statistics that expectations for FHA are in the range of growth near 1000% - seems as thought this time, I am not going to miss this wave! So, I read all I could, I even purchased some great training and reference manuals to ensure my understanding - and then I went out to originate. Although the learning curve was steep, I am now back to production levels I haven’t seen since the refinance boom of 5-7years ago. Although the numbers are similar, the revenue is not! Yes, it is true that origination fees are limited, but to encourage the use of these products, seems that YSP (yield spread premium) is what will fuel the economics of this new wave of FHA loan production.

Don’t miss it this time, learn all you can - the guidelines are strict - but with the millions of homeowners needing help our of those payment option arm, and high rate subprime loans pending their next adjustment - there is quite a demand for our services. Remember, there will always be a need for home loans, we as mortgage professionals just need to be ahead of the curve and ride the different waves of the market to serve our clients and earn our living - don’t quit, just do your homework, and ride this FHA wave!

Anyone who is in this business and is not making FHA loans, should learn how to get yourself or your company FHA approved.

To learn how, Download this: How to Get a FHA License

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