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Monday Morning Mortgages>
Monday Morning Mortgages
March 8, 2010
21 dayDeparting Property Rules
In “lendspeak” “departing property” is the property a home buyer is moving out of, but will retain, as they buy a new home to upgrade, downgrade or relocate. In this tumultuous market of valuations and “walk aways”, lenders are very particular about ‘departing properties’ as a liability for a home buyer.
If the buyer can easily qualify to carry both mortgage PITI payments, and can show they have 2 months reserves after closing the new home purchase, a lender is comfortable. But many home buyers may intend to rent out their old home instead of selling in such a down market. And the home buyer may need to show that rental income in order to qualify for the new mortgage, especially in the environment of more conservation DTIs (debt-to-income-ratios).
To use departing residence income, the lender will require 4 things to be documented in the file.
1. A letter of explanation as to why the home buyer is purchasing the new home if they already have a home.
2. An executed rental agreement on the departing property for the time period soon after close of escrow on the new purchase.
3. A copy of the security deposit check from the new tenant.
4. A bank statement of the home buyer showing the rental security deposit check deposited to their account.
The departing property can be in the process of short sale as long as the mortgage payments history doesn’t contain more than 1 x 30day late in the last 12 months.
WARNING. If the departing residence was refinanced in the last 12 months as an owner occupied home, the new lender may not accept the loan as a new owner occupied mortgage since the previous home refi paperwork sometimes states that the home owner intended to live in the property for at least 12 months. I hit that problem recently as Bank of America was the mortgage bank’s investor for the new loan and also the holder of the former home’s refi. Luckily as a broker, I could change course to a new lender who doesn’t use Bank of America as the investor purchasing the new loan. This brings me to the issue of “investors”.
Investors Affect on the Lending Industry
Gone are the days where the bank that gives a loan for a home purchase is the owner of that loan for its life. Now loans are originated by retail bank branches and loan brokers or their agents. Then a lending bank, whether a retail mammoth like B of A or Chase, or a small mortgage bank like Sierra Pacific or Austin Perry will underwrite and fund the loan, and then sell it to an investor by way of previous agreements and relationships. Some mortgage banks have multiple investors. A retail bank like Citi will have Citi Mortgage as its investor.
Why does this matter? With the rise in loan defaults and the finger-pointing going on in the industry, none of the loan origination players want to be held responsible for the liability of a ‘bad loan”. So besides the standard Fannie Mae/Freddie Mac/FHA published guidelines followed by underwriters, each investor will initiate their own set of “overlays” required to accept that loan. These overlays make the underwriting more restrictive to protect the investor further. If the underwriter does not follow the investor’s added guidelines, the investor will refuse to purchase that loan after origination, and the originating bank will have to “buy back” or keep the loan, or try to sell it at a discount to another investor, losing money as a result. Needless to say, that poor underwriter would be in deep doo-doo.
Using the departing property story above, investor Bank of America has an overlay that says they will not buy an owner occupied mortgage when the home buyer refinanced their previous home mortgage as owner occupied within the last 12 months. So this loan would have to go to a mortgage bank that has another investor besides Bank of America to accept the loan. Some mortgage banks have only one investor, but many have multiple outlets to pass these loans onto. Large banks like Chase or Wells Fargo use their own name investor only.
21 Day Close
Fast closes are back on track, as a couple of lenders perfect the new disclosure laws with the new GFE for both conventional and FHA lending. The lenders that can perform fast closes usually have some restrictions. For example, 80% max LTV on conventional and not accepting the FHA anti flip waiver. Rates may be very slightly higher too, but for a needed fast close, it is again possible to save your deal.
Rates
Obviously the end of the Fed's purchase program is coming to an end in a matter of weeks - but maybe mortgage rates won't skyrocket. Once should keep in mind, however, that every estimate out there points to a mortgage origination market that is 40-50% less than 2009's, so there is some hope that supply & demand functions enter into keeping mortgage rates relatively low - so maybe the rate increase will be less than 50 basis point. Traditionally, mortgage rates widen when Treasury prices rally (rates go down), and tighten when Treasury prices worsen (and rates go up). "Negative convexity." In addition, Fannie and Freddie will be buying hundreds of billions of delinquent loans. This has hurt the pricing on higher rate mortgages, but overall could be positive for the markets and mortgage rates.
Last week rates were moved around by economic data. By Friday rates had improved slightly, and locks appeared to be picking up a little, but then a better-than-expected employment number pushed them higher.
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