I attended an interesting seminar yesterday hosted by Wells Fargo where the bank gathered a group of Realtors and asked them to help them cleanse their portfolio of option arms (negative amortization loans) using short sales. Apparently, Wells inherited 15,000 option arms in Arizona from World Savings / Wachovia, and 20% of them are in default.  The Wells presenter indicated that a much larger percentage of the loans in this portfolio are in danger of imminent default. The Realtors were instructed to farm homeowners holding these loans by using data obtained from their title company (Wells wouldn’t just give them a list of homeowners).

 

Wells promised an easy short sale process and a 45-day close.  In fact, the handout title read “Wachovia Short Sales Made Easy.” 

 

What I found interesting about this was that Wells is reaching out to the Realtor community and saying “GET THESE TOXIC LOANS OFF OUR BOOKS!”  Many of the option arm homeowners are being turned down for loan modifications.  The subject of principal reduction via loan modification also came up, and the Wells representative said that they are doing very little in the way of principal reduction.

So it seems that Wells wants to dump these loans and take a hit on a short sale, rather than taking a principal reduction hit to help their struggling borrowers.

I posted about loan officer school several months ago and here's an update.  I've taken the classes, passed both the state and federal tests (and did pretty well, actually), and submitted all of the my paperwork to the AZ Department of Financial Institutions.  I am awaiting the roll-out of electronic fingerprinting (tentatively scheduled to start by January 25th).  Once I submit my electronic fingerprints, AZDFI completes my background check and then grants me a Loan Originator license.

Eventually consumers will be able to go on-line and look up individual loan officers through the Nationwide Mortgage Licensing System (NMLS) and check out their status.

An interesting side note:  a passing grade on the tests is 75.  I understand that the average score so far is 69!  I personally know several loan originators with many years in the business that have failed at least one the tests on their first attempt.  I do think that the tests (particularly the state test) create a barrier to entry to those wanting to get into the business or stay in the business.  But then again, those not able to pass the tests can always go and work for one of the national banks as a loan originator.  Loan originators at national banks are not required to take either test or get licensed!

I've been having a lot of fun with short sales lately.  It is the classic case of "wait then hurry up" once the short sale is approved by the short sale bank.  After waiting for months for the short sale bank to make its decision, we are often given unrealistic deadlines to complete the transaction.  When there is a first and second mortgage involved (usually with different banks), the transaction has to close by the earlier of the two approval expiration dates, adding to the joy.  If you're considering purchasing a short sale, consider the following:

In one case I worked on recently, the buyer waited five months for the bank to make its decision to approve the short sale offer.  
Once the short sale was finally approved, the seller announced that he was declaring bankruptcy.  Of course, this would mean that the bankruptcy court had to approve the sale, indefinitely delaying the process.  The buyer opted to cancel.

In another case, we were two days away from funding the buyers' loan.  They were excited to finally close after waiting many months.  Then I got the email:  the seller decided to cancel the sale and pursue a loan modification.  This, of course, after the buyer had paid for an appraisal and a home inspection, not to mention being put on hold for many months. 

In a third case, we missed the close deadline by about two days, as we had a tough loan where the approval was delayed by the requirement of a corporate exception (which we received).  The short sale bank decided that the property evaluation in the file was too old (it had been done three months earlier) and now they needed another one.  I'm not an appraiser, but I'm thinking that property values haven't gone up between July and October in Gilbert, Arizona.  But the bank felt it was in its best interest to have another property valuation done.  We're now one month past our original closing deadline thanks for the short sale bank's delay, still awaiting their decision.

If you've got the time to wait, it is possible to get a good deal on a short sale.  Just don't book the moving van until you have the keys to the house in your hand.

I’ve signed up to take my classes for loan originator licensing at the end of October.  I call it Loan Officer School.  As an individual originator working for a state chartered bank, I am required to be licensed by July 1, 2010, as per the SAFE Act signed into federal law on July 30, 2008.  The SAFE Act’s intent is to enhance consumer protection and prevent fraud, ostensibly accomplished through education.  I am required to take 20 hours of educational classes covering federal and state laws, and pass a test in order to get my license.  Until now, individual loan officers have not had to hold personal licenses to transact mortgages.  Rather, we work under the license of the Responsible Individual in the office.

 

Now once again, the government in their infinite wisdom has set higher standards for loan officers working for state chartered banks than they have for those working for federally chartered banks.  I will have to pay for and attend pre-licensing classes, pay for the test, pay for the license, and pay to take continuing education classes each year.  I am not complaining about this at all.  Actually, I’m kind of looking forward to the week-long class because I’m guaranteed to learn something and I’ll get to interact with some of my peers in the industry.  But my counterpart at, say Bank of America, is exempt from the educational requirements of the SAFE Act by virtue of the fact that he works for a federally chartered bank.  Why shouldn’t he be required to take classes on ethics and lending law just as I have to?  One could infer that the government feels that a loan originator working for a big bank is automatically more ethical or knowledgeable than one working for a smaller one.  I beg to differ.  I have encountered loan officers along the way who were engaged in fraud and deception; just because you work directly for a big bank doesn’t mean that you’re honest in your business dealings, or particularly smart.

 

I am not opposed to loan originator licensing, but I don’t think it will have the effect that the government wants it to have.  California has required individual loan originators to be licensed for years, and California has had more than their fair share of mortgage fraud.  I would like to see all loan originators treated equally, regardless of whom they work for.  I am sure that my peer at BofA has as much to learn as I do.

We were notified recently that one wholesale lender has raised their minimum credit score threshold to 650 for both FHA and Conventional loans.  650!  They commented that the mortgage industry continues to struggle to find ways to increase loan quality.  For now, there are other players that will take a conventional loan with a 620, and some that will take an FHA in the 500’s.

Plaza Home Mortgage, Inc. announced this week that effective immediately, they would no longer accept appraisals ordered by and transferred from other lenders.  Up until this week, Plaza had been one of the few lenders that would allow a transferred appraisal.  Since the Home Valuation Code of Conduct (HVCC) was adopted by Fannie & Freddie last May, most lenders refuse to accept appraisals ordered by other lenders.  This means that if a borrower needs to switch lenders for any reason, they will very likely have to pay for another appraisal.

The Home Affordable Refinance Program (HARP), which was originally announced by President Obama at Dobson High School earlier this year, will now go to 125% of the appraised value of the home and is now being offered by several lenders.  There are some restrictions, so please call or email if you have specific questions. 

We are beginning to see some lenders become more comfortable with the new RESPA disclosure rules brought about by the Mortgage Disclosure Improvement Act (MDIA) rolled out in July.  Some lenders are sending their initial disclosures via email, allowing fees for such items as the appraisal to be collected almost immediately.  One wholesale lender will allow the broker’s Truth in Lending disclosure (TIL) to be the initial TIL, rather than having to wait for the lender to generate their own TIL.  This will certainly help to speed up the process.  Hopefully other lenders will follow suit. 

FHA is adopting new rules that mimic Fannie & Freddie's Home Valuation Code of Conduct (HVCC) process for ordering appraisals.  Effective with FHA case numbers assigned after January 1, 2010, FHA-approved lenders will be prohibited from accepting appraisals prepared by FHA appraisers who are selected, retained or compensated in any manner by a mortgage broker or any member of a lender’s staff who is compensated on a commission basis tied to the successful completion of a loan.  

Lenders will begin the use of third-party Appraisal Management Companies to separate the originator from the appraiser.  It is a foregone conclusion that the price of an FHA appraisal will increase, just as the price of conventional appraisals did when the HVCC rolled out several months ago.

Per HUD Mortgagee Letter 2009-28, issued September 18, 2009

So you’re considering trying to get a sweet deal on a bank-owned property?  The bidding game has certainly changed since the go-go era of several years ago.  This article focuses on several tips that describe what to be prepared for when bidding on bank-owned (REO) property.

Multiple offers and competing with cash offers

When you make an offer on a bank-owned property, yours may be one of many that the bank receives on that property.  Although banks have made some incredible blunders over the last several years, they are still more sophisticated than the average private party seller.  For example, the bidder with the highest bid may not necessarily be the successful bidder.  A bank may look at an all-cash offer at a lower amount and accept that bid because it means their odds increase that the deal can close quickly, and it can subsequently get the house off its books right away.  A buyer using a mortgage and having to compete with cash buyers is simply a reality in today’s market.

Make a realistic offer

Although banks have more inventory than they can handle right now, a ridiculously lowball offer will probably get rejected.  In fact, lately I have seen buyers make full price offers (and sometimes offer more than the list price) on bank owned properties in an effort to win the bid (this type of strategy has become more common in homes priced under $200,000 in Maricopa county).  The actual offer you make will depend on many variables, thus a thorough discussion and analysis with your Realtor is recommended.

Understand what can and cannot be financed

There are some bank-owned, turn-key homes out there, but there are also many homes that have been damaged or stripped of the fixtures, appliances, cabinetry, etc.  Even if this doesn’t scare you and you’re comfortable taking on this kind of property, lenders considering the home for a new loan may not be so comfortable.  Banks want to lend on homes that they consider habitable, and if the home has been stripped of a kitchen, for instance, it is not considered habitable.  This can create a problem for financing.  Minor repairs generally are acceptable, but green pools, missing entrance doors and windows, or exposed electrical wiring create health and safety issues.  So for buyers wishing to take on damaged collateral, financing can become more difficult.  One option for buyers purchasing a home to live in as their primary residence is an FHA program known as the 203(k) rehab program.  This will allow the buyer to close on the house prior to the repairs being made, and then have the repairs done within the first 90 to 180 days of ownership.  The 203(k) program allows the cost of the repairs to be rolled into the new mortgage. 

Patience is a virtue

Buyers bidding on foreclosed properties likely will need to have a good deal of patience.  Once the offer is submitted to the REO bank, it is not unusual for the bank to take several days to a few weeks to give a response.  Bidding on this type of collateral is not like putting in an offer to a private party seller.  It is an offer to a corporation, and these wheels can turn slowly.  This can be frustrating to a buyer, because the buyer is shut down and on hold waiting for the bank’s response.

What to look out for in REO contracts

One thing that many buyers are not aware of is that banks selling REO properties will require that the buyer sign the bank’s addendum to the purchase contract.  Unlike the standard Arizona Association of Realtors contract, which is a fairly neutral document, the bank’s addendum favors the bank.  These addendums are drawn up by the bank’s attorneys and are designed to put the bank in the most favorable position possible.  For instance, most of the addendums that I’ve seen allow the bank to cancel the contract up to and including the day of funding for any reason (or no reason).  The buyer is only allowed to have his earnest money deposit returned to him. If he has paid for a home inspection or appraisal, he will have to absorb that cost and move on to the next property.  As a practical matter, I have not seen any last minute cancellations by a bank, but this is an example of how one-sided the bank addendums are written.

Approved Again and Again and Again

Many buyers are surprised to find, even after they’ve been through the application process with their lender of choice, that they are required by the REO bank to get approved by that bank as well (Bank of America and Wells Fargo both do this).  This may include filling out another loan application, getting credit pulled, providing bank statements, tax returns, pay stubs, etc., just to be able to submit a bid.  So a buyer making offers on several houses may find that they have to go through the pre-approval process several times with different banks.  Banks may require pre-approval because they want to make certain that the bidder is truly qualified to purchase the home, and hope to capture the mortgage business along the way. Although buyers may be reluctant to do this, especially if they have already decided on a lender, it has become part of the process with some REO banks in order to be considered a viable buyer.

 

Bidding on bank-owned properties is its own animal.  A buyer armed with an understanding of the current market, plus a load of patience, can still negotiate a good deal and purchase a great house.

 

I hate the new appraisal rules.  There, I said it.  I really hate them.  The HVCC (Home Valuation Code of Conduct) rolled out on May 1, 2009, and so far, it has cost several of my clients hundreds of dollars in additional fees.

 

Simply put, HVCC no longer allows a loan officer to choose the appraiser on a conventional mortgage.  Unfortunately, the Code has done nothing but cause delays and increase the cost of getting a mortgage.  Prior to HVCC, a typical residential appraisal cost $350.  Now the same appraisal costs upwards of $450, and I have no way to predict or control the quality of the work on the appraisal that will be submitted to the underwriter.

 

The extra 100 bucks tacked onto the cost of the appraisal is courtesy of an entity known as an Appraisal Management Company.  The AMC is a third party vendor that farms out the appraisal assignment and acts as the liaison between the appraiser and the lender.  I cannot talk to the AMC, nor can I talk to the appraiser.   The appraiser who gets the appraisal gig is the one who clicks “accept assignment” first when a request is emailed by the lender.

 

On one of my recent transactions, my buyer was purchasing a home Show Low.  The appraiser that accepted the assignment lived in Queen Creek, approximately 200 miles away, and he took over two weeks to return the appraisal.  A local appraiser typically would have been able to turn the appraisal in about one week.  Fortunately, we were able to avoid a “final inspection” of the property, which would have required the appraiser to make a second 400 mile round trip to the home.  The week delay in receiving the appraisal pushed our closing back.  My client had a vacation to Hawaii planned but still needed to close.  We had to locate a mobile notary in Hawaii so that the buyer could sign loan documents, which created an additional expense of $250.

 

The HVCC requires that the borrower have three days to review the appraisal after it is “completed.”  Fannie Mae considers “completed” as having been reviewed, corrected and accepted by underwriting.  HVCC allows the borrower to waive the review, but whether the borrower can waive the three day waiting period is open to interpretation by the lender.  I had another borrower recently who would have gladly waived the 3 day review period on the appraisal, as the seller was charging her for every day that she missed her closing deadline.  Sadly, the lender would not let her waive the three day review period, and she racked up an additional costs just waiting for the review period to expire.  But according to the lender and Fannie Mae, it was in her best interest to have to wait the three days, so she had ample time to review the appraisal report.

 

A residential appraisal report is an incredibly complex document loaded with pages and pages of data.  Because appraisals are so complex, banks require their underwriters to attend hours of specialized training on how to evaluate the data on them.  The fact that Fannie Mae and Freddie Mac expect a borrower/layman to review the data represented in the appraisal report as a condition of closing the loan lacks any kind of common sense.

 

Another huge problem that has surfaced is regarding the “portability” of a conventional appraisal.  HVCC states that appraisals are “portable.”  In other words, Lender A can accept an appraisal from Lender B, in the event that the loan file needs to be moved (say, to take advantage of a better program).  But virtually none of the banks will accept an appraisal ordered through another lender’s AMC.  Why?  Because the lenders don’t want the liability that comes from accepting someone else’s appraisal, as they have no way of knowing if the transferring lender followed the rules and complied with HVCC when they ordered the appraisal in the first place.

 

Some in members of Congress have recognized the problems that HVCC has brought upon the mortgage and real estate industry, and there is a bill that would place an 18-month moratorium on the HVCC.  Great news.  But in reality, even if a moratorium were to be imposed, I seriously doubt that any of the lenders would change the way they are handling appraisals.  I think that they would continue to use the AMCs.  Heck, most of the major lenders own their own AMC and they seem to like the new system.  If you’re Wells Fargo, why would you want to begin accepting appraisals from outside appraisers, particularly when that means the AMC that you own would no longer get a piece of the appraisal action?

 

The road to Hell is paved with good intentions.  The intent of the HVCC was to protect the consumer from the effects of loan officers pressuring appraisers to hit a “predetermined” value to make the numbers work.  But the result has been increase in bureaucracy, expense and unnecessary delays in an already complex process.