You’ve heard it a million times — life’s just not fair. Yuck. And a brand-new 270-page study undertaken for the US Department of Housing and Urban Development (HUD) confirms that in the world of mortgage lending life is in fact not fair. The study, which looked at over 8,000 mortgages, concluded that minorities and less-educated borrowers paid more than white or college-educated borrowers. In fact, those with college degrees paid over $1,000 less for their mortgages than those with no college education.
Sarah E. Woodward, the author of the study and formerly an economist with HUD, speculated that this is due to lenders assuming that educated or white borrowers were more likely to shop around and to understand what the going rates for mortgages in their areas were. So they got better quotes from the get-go.
But borrowers don’t need to just take it. College degree or not, you are anonymous when you are online. No one giving you a rate quote knows what your education is, or your race, or if you prefer dogs to cats. What lenders can assume is that you are savvy enough to do your research online and that you are obviously shopping–both reasons for them to offer up their best when you ask for a quote.
Those of us who remember typing DOS commands into PCs, waiting forever to establish 9600 baud Internet connections, and carrying a brick-sized phone in our cars know that mortgage financing has come a long way. From completing applications by hand to waiting for a processor to call our employers, check our credit references, and make sure we didn’t bounce any checks, to getting an appraisal (also done by hand), and finally to holding our breath for an underwriter’s decision, the process was extended and exhausting. Shopping for a mortgage? And going through all that more than once?! Not likely.
Today, underwriting is largely automated, credit reports can be pulled in a few minutes, appraisers use digital technology and special software, and lenders’ rates and terms can be compared easily online. And we are getting increasingly comfortable with this technology and we demand the speedy decisions it affords. According to Realty Times three quarters of us check rates online and over 80% of us would be willing to complete a mortgage application online.
Technology has made the process more efficient and less expensive. Customers get faster approvals and pay less. Those of us most comfortable with technology and the Internet can use them to gather information, shop for a great deal, and complete our mortgage applications — without wasting gas driving all over town.
Talk about poetic justice — one of the primary culprits in the derailing of the mortgage industry was the packaging and marketing of mortgage loans as mortgage-backed securities. These were classified as safe by many investment ratings firms but as it turned out few investors had any idea of what they were really buying — until their investments went belly up. This confusion allowed lenders to make increasingly risky and imprudent loans as long as they could be sold. And now Lewis Ranieri, credited by many for the creation of mortgage-backed securities, is himself in hot water over these investments. His own company, Franklin Bank, is in serious trouble, with tumbling asset values, non-performing loans, and disclosure and audit issues that prompted an SEC inquiry and forced at least one senior manager into early retirement.
If the guy who created the system can’t deal with it you know it’s time for a do-over. The problem with the current system is that the originators of mortgages have been able to offload a large part of their risk onto unsuspecting investors, in some cases by bundling less desirable riskier loans together with solid projects and selling the whole thing as a safe investment. Well, now investors are skittish (fool me once….) and sometimes even loans once considered “no-brainers” are impossible to get done these days. For example, a borrower moved into town with a nice chunk of cash and found the perfect home. He offered to put 50% down but needed a no-doc loan because he hadn’t found a job yet. The guy has perfect credit and enough money in the bank to keep going for two years even without a job. No lender will touch this deal. However if this guy had a job, a credit score as low as 580, and only 5% down he could probably get an FHA mortgage. That’s because the risk isn’t born by the lender, it’s born by….drum roll please…US! Taxpayers and insurers will bear the brunt of the fallout if this loan goes bad, so lenders are more than willing to make this loan. Yet I know if it was my own money which loan I’d feel safer doing…
Mortgage giants Fannie Mae and Freddie Mac have spent a lot of time in the news lately. And while few know exactly what these two government-sponsored enterprises (GSEs) do we all know they have a lot of influence over the American mortgage market. Because they buy and sell such a large percentage of mortgages we kind of have to play by their rules.
Right now, the rules are getting tough. Unless you walk on water when it comes to credit scores and you have a substantial down payment, you will find yourself being hit with surcharges when you get your mortgage. Fannie Mae’s Loan Level Pricing Matrix indicates that a borrower with a credit score of 679 can expect to pay a surcharge of 1.25% for a mortgage — even if he or she is putting 25% down! But wait, there’s more — if the property is in a soft or “adverse” market there is a .25% delivery charge, and larger loans (called jumbo conforming), loans for multi-family properties, and financing for condominiums can add a slew of extra fees to the deal.
Adversity is opportunity. Consider that it’s a buyer’s market in most parts of the country, and with financing getting harder to find and more expensive things won’t get better for sellers any time soon. Yet it seems like everyone is afraid, waiting for housing to pick up and the moment to be right. Markets, however, are infamously hard to time, and by hanging with the herd you may be forgoing a chance to make a great investment and lock in a low rate. So check with lenders and see if you qualify for a mortgage and what fees might apply to you. Then find a motivated seller (about as tough as finding a needle in a needle stack right now) and see how many of those fees the seller would be willing to pay.
You may be loosing your house, but there is a resolution. The newest plan is to “reach out to borrowers” and give them the information they need to save their houses. The goal is to let borrowers know what programs are out there that may help them keep their homes. But are the homeowners who are embarrassed by the fact that they can’t pay their mortgage going to bite?
At the same time, lenders have tightened underwriting standards, requiring better credit scores, higher income, and larger down payments before granting mortgages. So those who might have become homeowners as home prices fell are finding that home ownership remains just out of reach. Finally, fear of making a homebuying mistake has kept a sizable portion of the population from buying — pushing rents up.
