That new debt just might put the breaks on your mortgage application process. It might not kill the deal, but it might. Or it might just slow everything down and send you through another round of paperwork. Lenders, now more than ever, are looking for stability in their customers’ financial lives. So before you buy that hog (or take on some other big life change) consider these to-be-avoided, attention-getting events…

New Debt. Lenders like debt-averse folks (as long as they’re willing to go into mortgage debt, that is), and taking another financial burden at the same time you’re buying a new house doesn’t exactly shout conservative. Of course, big-purchase potential seems to abound at new-house time (appliances, furniture, renovations). That doesn’t matter. WAIT. If you can avoid the temptation, you’ll avoid increasing your debt-to-income ratio, the “back-end” ratio, as we call it.

New car lease. Oddly enough, new car leases are very popular with people moving into new homes. Maybe they just think it’s time for change all around. But leasing a car is no different than going out and buying one because it has the exact same effect on your back-end ratio. So wait on the lease. Your old car will fit into your new garage just fine.

The Job Change. Lengthy employment suggests stability, responsibility, and security—top-spot traits on any good-customer profile. Even a promotion bringing more income can be a liability if it suggests risk. Now, you don’t always have the luxury of postponing a promotion, but you can postpone quitting your job and enrolling in community college to “find yourself.” At least for a few weeks. Yourself will wait. It’s not going anywhere.

Packed paperwork. Keep close at hand any and all files and papers that have anything to do with your finances. Yes, it’s a strong temptation to box up all that stuff for the moving van, but if a new round of paperwork has to be initiated or a number substantiated, you don’t want to make matters worse by adding to the delay. There’s plenty of delay built into the process without your contribution.

Gifts. On an FHA loan, a gift as a source of funds is acceptable, but only from a blood relative, so make sure the relationship is documented. The idea here is that no funds have originated from any debt-increasing source, that the gift is truly a gift.

Tax returns. Yours have been filed over the past three years, right? Tax returns aren’t collected at application, but they are randomly checked thru the 4506 IRS tax form. Unless they’re needed for an MCC credit or a self-employed / commissioned borrower, returns are only checked for a “filed” status. But an un-filed return can halt the process real quick.

Bottom line? Go static. Put all major life changes (those you can somewhat control, anyway) on hold. Keep in mind that the mortgage application process is not a fixed snapshot of your financial life. Think of it more as surveillance footage watching you right up to closing. So go along quietly, responsibly, like you always have, sign your papers, and then go change careers or buy a motorcycle.

Article excerpt:

Senator Isakson believes lawmakers will eventually move to extend the credit in one form or another. “I don’t believe either this administration or the current leadership would look November 30 in the eye and let this thing die,” he says. White House spokesman Robert Gibbs said this week that the administration is evaluating the credit’s impact and will make a recommendation to the president, the Associated Press reported. The outlook for an extension appears to have brightened. Scott Talbott, a top lobbyist at the Financial Services Roundtable, put the odds of its extension at 50-50 earlier this week, but he said that the chances improved to 75-25 after Reid endorsed the six-month extension.

-Read the entire article here-

My two cents:

I am among what I hope is a growing number of people involved in the Real Estate Industry who are NOT in favor of the credit and “free money for some.”  The reality is that $8000 given to a relative few will cost all of us much more than the estimated $100 billion it will end up having cost the US Government when this is all said and done.

Thinking logically:

1.  The free market sets prices of homes.

2.  The government gives $8000 to some people who buy some homes.

3.  This has increased sales demand.

4.  Any increase in demand, while it exists, will always increase prices (or slow price declines).

5.  Next, the goverment does one of two things:

a)  Ends the credit at some point.  This will cause all housing values to drop by around $8000 more than they already are (even for those who just paid $8000 more for their home to get the credit). Or,

b)  Continues to give credits to some people who buy homes – forever.  This would be the only way to make sure that prices don’t adjust back to their former price; but then it would soon become “normal” and would no longer stimulate future home sales.

I think that (a.) will be their choice (at some point).

When the article says that they will be “evaluating the credit’s impact” they must be ignoring the greater impact of the total cost of the credit in their evaluation.  The cost is greater than just paying back the money.  The higher cost is the cost of entitling people.

Entitlement is something we’ve all felt already with respect to the credit already. After all, we think to ourselves:  “they can’t take that away now?!”.

The cost of entitlement is devastating and should be avoided at every turn.  Lets get it out of our thinking, out of our politicking, and out of our conversations with each other.  It will kill our ability to think clearly.

The Facts are these:

1.  Mid-Michigan is a great place to live and work.

2.  Home prices around here are making it very easy and attractive to own a home.

3.  There is a lot of expansion in the business, insurance, technology and education sectors that says we will be a growing region.

Whether or not the credit is extended, buying a home in Lansing right now is a very good idea for most people who are thinking about doing it.

One of the financial magazines I read weekly is Business Week. It can be a little bit politically charged, but depending on who’s writing the economics ‘short’, it can be very good.

This week’s is written by Peter Coy. Google his name and you’ll find him to be a bit pessimistic on the economic recovery and not quick to get on band wagons that others are riding. His is a level-headed report of the facts, and he doesn’t generally over play his theories. Just the kind of guy you want to hear good news from.

The article I’m referring to – linked here – will not disappoint you. It explains simply and clearly why Bernanke is so committed to a VERY low rate standard.

His reason in a nutshell:  The economy at large has a ton of excess capacity right now, which will take a long time work through. What do we mean by capacity? You see it practically as high unemployment and high inventory of homes on the market. Both examples are resources that are more plentiful, more in “supply” than we need. It will take a lot of economic growth just to work through what is already here and to use up this excess.

Another reason for extra capacity is the recent rise in productivity. The productivity numbers rose again this month, though they were expected to remain flat. So, not only do we have an excess in resources, we;re also getting more efficient at producing them. This will create slow growth in the economy, in Big Ben’s opinion, and support for his theory is growing.

Take five minutes and read the article. You might also consider who you know who might appreciate this information.

Some concluding thoughts:

WHAT IF BERNANKE IS RIGHT?
Then we’ll have slow economic growth and keep interest rates low for some years to come. We can live with this. Let’s be honest – putting our Lansing hat back on – we’ve been living with it for some years already. But here is where we might see light on the horizon – a bright spot. It may just be Mid-Michigan’s turn for moderate jobs growth. If this happens while the rest of the country (world) is lagging, then we could have both rising home values AND low rates. Let’s not be too much the ‘realists’ to think this couldn’t happen.

WHAT IF BERNANKE IS WRONG?
Then the economy at large heats up, rates rise sooner – not a lot, most likely, but sooner. AND our 401k’s rebound again. We can handle this too! Even if he’s wrong, 1982 inflation and rates are not a likely event based on the slow growth expectations.  At least not for a while.  Most of us who need a fixed rate will get one while they’re low and few will remain by the time anything wild happens.

WHY IS THIS IMPORTANT TO ME?
If you are buying a home or refinancing a mortgage right now, then you should still consider a fixed rate.  Mostly because they’re very low right now (see my blog 24/7 for daily averages).  If you are currently in an Adjustible Rate Mortgage, you should get some advice as to what to do.  Your rate will likely be very low for the next few years.  Let’s not allow fear or greed to dictate these decisions.  A good level-headed decision based on the facts of your situation and the realities of your goals is what is needed.

LAST THOUGHTS
Let’s also be very honest with ourselves. As “smart” as Mr. Bernanke is, he does not know or hold the future.  Only time will tell if his contributions were beneficial. He’s helping us navigate right now, and I am thankful for that, as am I thankful for all like him who are in positions of great weight and difficulty. I would urge us to remember the phrase written ON our money when we think ABOUT our money:  “IN GOD WE TRUST”.  After all, low rates, housing credits, and three shifts running at General Motors will all pass away in time.

I thought about these things when I got an email this week describing a sales technique banks are using with potential mortgage clients. In a nutshell, they’re arguing that if you originate your loan with a broker, there’s a very good chance you’ll have your closing delayed due to the re-disclosure provisions of Reg Z; whereas a bank, unhindered by such nuisances, can get you to closing quicker. Therefore—by this logic—banks are the better bet.

hmmm…This is clearly folly. So do I answer it? Or do I let it go?

At the risk of “being like him myself” and just adding to the noise, I’m going to answer it because there’s more to this than an argument between banker and broker. There’s also the client whom these rules are meant to protect.

As I pondered how to respond, my first thought was—naturally—defensive. After all, I’m a broker, and them are fightin words. But then I thought, hang on. Rather than turn this into a mud fight, this might actually be an open door for re-emphasizing how a good broker is still your client’s best option.

Let’s start with Reg Z. The re-disclosure piece to TIL (truth in lending) was intended to prevent the bait and switch. You know how it works. A client is informed early in the process about the rate and certain fees (the bait), but when she sits down at the closing table, lo and behold, they’ve changed, gotten bigger, multiplied even (the switch). Most people don’t walk away from the table at this point, and that’s why the practice has been so lucrative.

A couple of observations…

1.  The law was meant to protect consumers from a dishonest practice. So why originate a loan with someone exempt from it? The incentive to be as truthful as possible as early as possible on disclosure of all the costs involved lies not with the bank LO who’s exempt from this part of Reg Z, but on the broker whose livelihood depends on compliance with it. Your client has a stronger basis for trust with the one who has the stronger incentive for full disclosure.

2.  Brokers who used such practices were also those likely to push b-grade paper, and those guys are gone. If your broker has survived the shake-out of the industry, then you’re most likely dealing with someone who’s been doing things right and above-board. Banks haven’t experienced the same “refining” effect of the housing crisis that mortgage brokers have. And if such brokers have survived, there’s a good chance that they’re doing it as bank LOs.

A couple of strong arguments aside from Reg Z considerations…

1.  Speaking of survival, you might not realize just what keeping the doors open has entailed for me—and brokers like me—over the past few years. Those still standing went through something like this:

• 3 hour state-administered test on everything from calculating APR to TIL to past laws pertaining to the mortgage-lending industry
• An audit of accounting books, procedures, financial position, and a random audit of ALL files (closed and withdrawn) from the past 36 months
• A net worth requirement at all times of $70,000 liquid cash in a bank

…and no bank LO can say any of that. Don’t hear me wrong. There are good, conscientious loan officers working out of banks, but they simply haven’t proven their professional commitment to the industry in the same concrete, measurable ways.

2.  And this may get to the heart of the matter better than anything else–By definition a broker provides flexibility that a bank LO just can’t. When my client is declined a loan from Lender A, I find out why, look for a remedy, help my client make adjustments, and then move on to Lender B. And I can do the same for Lenders C,D,E,F,G,H…you get the idea. But a NO from the bank is a NO to that client. No loan, no mortgage, no house, not from us anyway.

I hope that you can hear in this, and in all of my letters and blog posts and emails, that this is not just a “job” for me. It has been and continues to be a crucial part of my life’s purpose. Bringing excellent advice, service and rates to the mortgage industry—as low as it has stooped in the past—is what I do. And I’m not going anywhere.

I’m no Solomon, but I do know the mortgage lending business. And while banks are promoting their Reg Z exemption as an advantage and calling it wisdom, a closer look shows such thinking for the folly that it really is.

Does that mean you should dump your home and rent? Not at all. In fact, if you’re renting now, this may be just the right time to cross over into home ownership.

Some things to consider:

1. Affordability. Prices are very low, but there’s good evidence out there that we’ve seen the bottom and are now starting back up. We may spend some time at this level, we may not, but it’s not likely that we’ll go any lower.

1. Rates have hit an all-time low in the past week. Again, we may be here (or very near it) for months. We may not. But no one’s expecting rates to go much lower.

1. Tax credits. Included in Obama’s stimulus plan is an $8,000 tax credit for first-time homebuyers. This is a credit, not a deduction like mortgage interest, so it represents real tax savings. The program is scheduled to end Dec. 1 of this year, and while it’s likely to be extended, there’s no guarantee of it.

1. Reality. You’re less likely to believe that buying home is an air-tight investment, and more likely to see it for what it is—a chance to own the house you live in, make it your own, grow deep roots, and then look forward (15 years? 30 years?) down the road to no more payments.

So while conventional wisdom may be going through a revision, there’s still plenty of good wisdom out there today that says home ownership is a good thing.

Let’s look over these latest stats and just breathe deep for a minute…

• Single-family starts and permits up. The most depressed segment of the real-estate industry over the past two years, homebuilders, are pulling permits again. Single-family starts are up almost 2% and at the highest levels since last October. Permits for single-family construction are up 6%. That’s 6 of 7 monthly increases for 2009 (March showed a slight downturn).

• Mortgage apps jumped 4% for a 3^rd straight week of increases. The recent drop in rates should see this statistic holding.

• Pending home sales index shows an increase for the fifth consecutive month, the first such streak in six years. A still-glutted inventory will feed this trend for a while.

• NAR’s Housing Affordability Index has the Midwest at a whopping 188, down from an incredible 206 for last month. (The HAI is set against a value of 100, which means that a median-income family can exactly qualify for a mortgage on a median-priced, single-family home. A value of 200 means the same family could “afford” twice as much home.) We need to be careful with this one: affordability is being driven—the larger part of it, at least—by the record number of short sales and foreclosures. So it’s great for buyers, but not a great sign of overall economic health. Look for this one to slip back as the next indicator, home prices, improves…

• Home prices nationwide are on the rise. This is one economic indicator that everyone wants to see rebound as it’s our best sign that the market as a whole is on the mend. Great housing affordability is fine, but no business thrives by holding an indefinite fire sale.

So the encouraging news is beginning to show some consistency to it. And though we’re still being warned that we may bounce along at these levels for some time, still, there’s a sense that we can, at last, stop holding our breath.


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