This post orginally was published on my Active Rain Blog. It is the first in a series of interviews I call 10 Questions. Here Darel Ansley a Real Estate Lender with Peoples Bank takes the hot seat.
1. What questions aren't consumers asking their mortgage lender? There is an important question, but more important is who do you ask the question of? I suggest shopping around and getting 3 or 4 Good Faith Estimates (GFE) for a potential purchase. Get these in person, because out of these interviews and GFEs, you are going to learn who you can trust. Once you find that lending professional, you have someone you can stick with for the future. Now you have someone intelligent enough to ask the big question which can save you thousands of dollars in interest. People should ask, “What is my best rate and fee option if I plan to live in this house X number of years.” Many people ask for the lowest rate or they want no origination, when these choices are often not the best for them Points, origination, and discount are all pre-paid interest. The more you pay upfront, the less you have to pay over the life of your loan. People who plan to be in a home less than five years will do better to have a higher rate/less upfront option. If you will be there long term, go with more upfront/lower rate. Have your lender show you the math.
2. Are we as a society going to pay a price for the exotic mortgages of the past few years? Yes and no. There is a price to pay in many markets, but some of these problems actually benefit buyers in our area. First, let me explain the two different exotic type time-bombs that are out there: The one in the press right now is the subprime mortgage which is primarily used for people with bad credit. The other one which is used for people who are generally buying homes they can’t afford, goes by many names such as Option ARM, Cofi ARM, and NegAM ARM. These buyers generally have good credit. The subprime mortgages are usually called a 2/28 or a 3/27. This means they are at a low fixed rate for either 2 or 3 years, after which,for the remainder of their thirty year life, they become adjustable and the interest rate can jump substantially. The typical person with bad credit buys the house and continues their poor spending habits. When the rate jumps up on them, and they can’t afford the new payment, they can sell the house, or refinance and roll in a bunch of consumer debt, and get a new 2/28. This can work as long as home prices are rising. In markets that have gone flat or worse, they owe more than the house is worth, so neither of these options work, and you have people giving their homes back to the bank. This of course has a negative effect on home prices if it happens in large enough numbers. The Option ARM is a little different. Generally, these people have good credit, they are just trying to buy a house they can’t afford. This loan type was very popular in California as prices accelerated much faster than wages. Basically it allows the buyer to make a monthly payment that doesn’t even cover the interest due. This is why it is called a Negative Amortization loan; a fully amortizing loan spreads the principle payments over the life of the loan, so it is paid off in the typical 30 years. Negative amortization means that the unpaid interest actually gets added to the principle balance each month. So after 5 years, you can owe much more that when you started. Again, this works in rising markets, so you owe $20,000 more on the house, but it is worth $200,000 more than when you bought it-not a bad investment. But if prices should fall, you can end up owing more than the home is worth. These mortgages are ‘re-cast’ every 5 years, which has generally been long enough to span most market fluctuations. So typically, by the time they recalculate the mortgage, the value of the home has grown enough, the additional principal balance is not a big issue. However, if we ever hit a sustained downturn in home values, the wheels come off the bus in a big way. I am curious to see if this one gets much attention in the current media and government investigations of lenders, because for big lenders like Washington Mutual, this accounts for roughly 30% of the loans on their books. So I feel the price society will pay is actually just regional. In areas where these loans have been used and where prices are already falling or flat, this could stall the market, or accelerate a downturn as too many of these foreclosures hit the market (over supply). In our market, we will actually tend to benefit: we don’t see a lot of these loan types, and our prices are growing, not falling; but we don’t just miss the bullet, we actually benefit, because of what is taking place in the secondary market. The secondary market is where the money for most mortgages actually comes from; Fannie Mae and other large consolidators package millions of dollars worth of mortgages together and sell them to investors in the form of Mortgage Backed Securities (MBS). The investors who used to buy these hybrid or subprime MBS’ will now seek higher quality mortgages. As demand for the safer ‘A-paper’ mortgages grows, like any other bond-type instrument, the interest rate drops. So I expect this will hold down or even drop mortgage rates for our typical buyers for the foreseeable future.
3. What mortgage products do you see being under utilized by the general public? This is kind of strange, because human nature and math are at odds with this one. Math would tell you that you should go for things like 40 year loans and then invest the monthly savings (over a 30 year) in a retirement account, and you will finish out money ahead at the end. In my experience, people who save money on their mortgage by going for longer amortization or something exotic, rarely invest the savings. Like going to Costco, the savings on one item just gets spent on something you weren’t going to buy. As most people are that way, people who plan to stay in a house long term should look at a 20 year loan instead of a 30. For example, with a $200,000 loan at 6% (for both 20 and 30), you would pay an extra $233 per month, but save close to $90,000 in interest over the life of the loan. 15 years would be even better, but most people don’t like the payments. People can run their own numbers and see at http://mortgage-x.com/calculators/default.htm
4. What should would-be real estate investors know about getting a loan? There are a couple of things that are different with an investment property loan, so people would be well advised to have their loan officer run an approval on them for a likely loan scenario. Here are a few things that are different: If you don’t have 2 years of landlord experience, most loans are going to require some cash reserves after closing, sometimes equivalent to 6 months of payments. If you plan to be in the rental business long term, it is good to establish a relationship with a local community bank. If people have a relationship and a successful history, we can look at their investing as a business and lend to them on commercial terms. These can include lending on the appraised value instead of the purchase price (some of the books make this seem common, but it is not allowed in conventional lending). Also, we have given some people lines of credit so they can close deals quickly for cash. The key to these things is successful experience.
5. What role has the internet played in the mortgage industry? The internet has played two key roles, one positive and one negative. For people who know how to do real research online and not fall victim to the ads, it has made for a much more educated mortgage shopper, and that has been great. On the downside, the internet has expanded bad lending into all markets. The Real Estate business in a given market is a community of Realtors, lenders, appraisers, escrow officers, etc. If someone is ripping people off or even just performing poorly, word quickly spreads. If the lender happens to be someone found online across the country, we as a local community have no leverage to control their actions.
6. If you could change one lending regulation what would it be? I think it should be easier for parents or grandparents to help their family members get their first house. As it is now, about the only thing they can do is gift them some money. A co-signer can’t really help anyone qualify as they can for auto loans, I think this area needs some work.
7. What does the future of real estate lending look like? I have already seen the major lenders starting to tighten up their lending parameters and scrutinizing loan files like never before. So the buyer who wants to make a killing in Real Estate without putting in any of their own cash is going to find fewer options available. As prices continue to rise we will see 40 and 50 year mortgages become more popular. Banks are going to seek out safer loans, so people buying their own home with good credit and a job will find an abundance of loan products, even up to 100% financing.
8. Prices are going up, affordability is going down. How do we make the dream of homeownership possible while still avoiding the risks related to exotic mortgages? In the State of Washington, this will be difficult, because the answer lies with government entities partnering with the building industry. The good financing programs already exist such as Washington’s HouseKey program and Fannie Mae’s My Community product. These allow for 100% financing at very reasonable fixed rates. The issue is the supply of the affordable homes. Affordable housing typically ends up being smaller units further away from town, or in less than desirable areas. In states with property taxes, the municipalities have taken in a huge bundle of money recently because of the acceleration of home values within their borders. The city or county did nothing to earn this money, it is just a windfall. Plus- there should not have been any corresponding increase in the operating expenses for these governments. So I think they should spend some of this money on extending utilities out into areas of cheaper land (if they have any) and if necessary increasing the zoning density in these areas so a builder can build something affordable. In blighted areas, they should offer inducements to builders to come in and build low cost housing. In our state in order to do this, the state and planning departments are going to have to listen to builders to see where they can cut out some regulations that add unnecessarily to the cost of homes. Simple economics would tell you that if a city or county spent this money, the net result would be an increase in their tax base, plus all the positive elements that come from having a higher percentage of homeownership in their area.
9. What changes have you seen in the industry over the past few years? The industry thankfully changes with the times. So as more people have second homes, more lending options are now available. Also, our documentation guidelines are relaxed a little bit, so people don’t have to bring a file cabinet with them to get approved, and things like frequent job changes are not as big an issue anymore. As with most industries, change never seems to happen as fast as we would like, but overall, I would say the changes are positive and benefit the consumer.
10. If you could ask 10 questions of anyone alive today, who would it be and why? I have the need, I just don’t know who the person is yet. About 15 years ago I met a Navy SEAL turned banker turned pastor in San Diego who became a Life mentor to me. He passed away a couple years ago, and I haven’t yet found someone to fill that roll for me. I think it is important to find people who are further ahead in marriage, parenting, business and any important arena of your life and tap into their experience. One thing I think is a downside of our culture is that we all think we can make it alone, so the average person spends the first 50 years gaining experience and then wishes they had had that wisdom when they were younger. I learned early on to find the people who are already there, and use their experience as your wisdom.
