Mortgage Forgiveness?

Bloomberg published an article today citing investors, funds, and economists who think principal balances should be reduced to help embattled homeowners

Greg Lippmann, of subprime shorting fame (more on him in a moment) says:

Principal reductions are necessary to help ameliorate the housing crisis. The step will also lower losses on loans underlying mortgage bonds

Who the heck is Greg Lippmann
Greg Lippmann worked for Deutsche Bank as was a key figure among those who made millions or billions by shorting subprime mortgages.  A client of his (forget the name at the moment, which is kind of the point) realized that these subprime mortgage bonds weren't worth the paper they were written on and got Deutsche Bank and others to help him position his investments to benefit from the housing bubble bursting.  Lippmann, realizing the opportunity, then brought the idea to others, including John Paulson who ended up as perhaps the face of the "brilliant" investors as he personally made billions of dollars.  I just gave you the quick summary of the book The Big Short by Michael Lewis - spoiler alert.

So Greg thinks he's got a good idea to help mortgage holders and investors in mortgage bonds, and several funds and economists agree with him.

Who would benefit and who would lose
I think the ship has long sailed on the opportunity for Washington to punish Wall Street on this.  Some of Washington's actions in 2008 and 2009 may have actually done some good - TARP being one of them - but that was in the heat of the crisis.  Laws and capitalism could be set aside to avoid a massive meltdown.  So while #OccupyWallStreet is still raging, I don't think DC has the power to force the banks to write down loans.

One major complicating factor that everyone hopefully remembers from a two years ago is that these evil bankers don't actually hold the loans themselves.  My mortgage is a great example - we used a mortgage broker who priced a loan for us based on what he saw in the market making sure he could sell the loan and make a profit for himself.  So our mortgage was originally funded by the broker's company and the investors who back it.  Within a month, as planned, they sold that loan to Chase.  Every month, we will write a check to Chase.  But chances are that Chase won't hold onto that mortgage for 30 years.  Instead, they'll likely pool our mortgage with many others and sell it to investors.  These investors could be Greg Lippmann's fund LibreMax Capital, or the California Public Employees Retirement System (CALPERS), among others.

My check then goes to Chase as the servicer, who pools all the monthly checks together, and distributes the funds to the investors such as CALPERS.

If, somehow Washington decreed that my mortgage principal should be reduced by 20%, the winner would be me, my mortgage broker and Chase would feel no effect, and CALPERS would be the loser.  This would be a transfer of wealth from CALPERS to me - probably not the intended goal.

How to select mortgages to reduce
You clearly can't reduce ALL mortgages by any amount that would be meaningful enough to solve any problems.  Washington also hasn't grown enough wherein you could reduce mortgages on a case-by-case basis.  Therefore, the program would have to be broad enough to be meaningful to the country and the economy / housing market, but have some parameters.

One would be whether you've defaulted or not.  If you've defaulted, that's a pretty good indication that you've hit rough times and could use help.  Is it because you bought your house at the top and have too much debt?  Is it because you lost your job?  Have you defaulted on a 2nd vacation home in Miami that you bought on speculation?

The government could also look at loan to value.  The difficulty here is what is the "value" part of the equation?  Is it based on the appraisal done when you purchased the house - are these appraisals of any use if they are 15 years old or if they told you your one bedroom shack was worth $2 million in 2006?  Or maybe to apply for this process you'd need to get a new appraisal.  Fun.

What would be the end benefit
Individual homeowners would have lower monthly payments and have money to save or spend (the government surely wants you to spend).  Some homes would be saved from foreclosure, which would help the housing market.

My suggestion
Leave it be.  Again, many are suffering because of the housing crisis, but I don't think the government should be getting involved in private transactions and trying to bail out those who made a bad investment.

If a homeowner was defrauded into paying too much for a home, or buying a home they couldn't afford, they should go through the courts individually.

The solution, in my mind, is time - it is going to take years for the housing market to work through the inventory of foreclosed homes which will keep prices depressed.

Step #8 - Onto Closing!

As you work with your broker / banker to get the final "clear to close", I would advise that you keep an open channel of communication with the seller's team.  They will be quite anxious themselves - it has probably been weeks since you signed the contract and there isn't a lot of information flowing back and forth.  I think it helps all parties to say "just fulfilling the final conditions; we are still on target for our scheduled closing date".  Surprises near closing are never good.

On or About
The closing date you've put in the contract of sale is referred to as an "on or about" date.  That means if you can close early, great.  If not, neither party should be surprised..  There will likely be language in the contract that will put some brackets around that date giving both sides room if delays occur.  Unless you have penalties written into the contract, there isn't much that can be done to force someone to close.


In our case, while we were ready to close on time (and ahead of our lease expiration), the seller wasn't ready.  This can happen for a host of reasons - is the seller closing on a purchase of his/her own new home?  Are they packing up and traveling far away?  Or, perhaps the seller doesn't want to begin packing the house up until he/she knows there is a deal in hand.

If you have some sort of inflexible timeline, such as a rental lease expiring, my first advice is to schedule a closing well in advance.  You'd love to have your lease end and move into your new home the same day, but as in our case, how big of a challenge will it be if you have to move out of your apartment but you and your belongings have no where to go?  What if the seller says he/she needs an additional two weeks?  You could make all sorts of empty threats about walking away, but #1) you won't and #2) depending on your contract, you might lose your deposit if you do so.

In that situation, you'd be livid about the injustice of it all (oh, I know), but there isn't anything you can do about it.  When drafting your contract of sale, you should discuss with the lawyer the idea of putting penalties in place if the closing is delayed outside of the brackets.  More often though, those delays will be the buyer's fault, so be careful.

Scheduling
Closing will require the presence of the buyer, seller, and their respective teams (agent, banker, lawyer).  This can also lead to slight delays, but everyone at this point wants to close the deal and get paid.  A few days before closing, you'll get your Closing Statement - this will be the final tally of closing expenses.  You'll need to get a certified check in this amount.  Take a good look over these expenses and have every item explained to you.  Most of these expenses should be the same as what you've seen on your Good Faith Estimates.

One area that can be a surprise is taxes.  You are required to reimburse the seller for the taxes that they've paid that cover the period beyond closing.  So if the seller paid a tax bill in June that covers July through December, and you close at the end of July, you'll have to reimburse the seller for August through December.  The amount you have to reimburse the seller depends on how many times per year your municipality collects taxes.

Once you've scheduled closing, I would suggest telling your cable / internet company of your planned move.  You can always cancel your request if closing gets pushed back or called off.  In our case, we waited until just before closing and then found we'd be without TV and internet for almost a month!

What Happens the Day of Closing?
On the day of closing, you'll first do a final walk-through of the house.  This is your last chance to spot anything amiss.  If the seller (accidentally or not) took an appliance that was part of the contract, and you don't notice for a few days, you are out of luck.  You'll want to look for the key items in the contract such as washers, dryers, and water heaters, and anything that was specifically written into the contract as an inclusion.  You'll want to check that all the appliances are in working order too.  Check the house to look for any damage caused when the seller moved out, and look for any damage that was maybe hidden by a piece of furniture or decoration.

After you have completed the final walk-through, you'll head to your lawyers office to sign the documentation.  It turns out banks won't lend you hundreds of thousands of dollars without asking you to sign an enormous stack of paper.  Depending on the type of mortgage you've applied for, document signing can take several hours.

At closing, there can be final negotiation of any outstanding items.  Sitting down and discussing things face to face can help bridge any gaps, although there is always a chance that the opposite could happen.  The others in attendance though are very close to getting paid and will likely help to push the two sides together.  In some cases, Realtors have agreed to reduce their commission if there is a small dollar difference on an issue that seems irreconcilable. 

Once the paperwork is signed, the seller should hand you the keys to the house.  Make sure to have the seller explain which key goes to which lock.

At this point, the house is yours!  You've just purchased a house and locked yourself into a mountain of debt.

At Least Some Good News

We are still trying to resolve this whole issue about not having a place to move our stuff or stay, we did get some good news.

Our mortgage broker called to let us know we would be getting a lower rate!

We had locked in a 4.5% rate early in our process, although we decided to "sell" 0.25% to the broker who would then fund a large portion of our closing costs.

Our rate now moves down to 4.25% (and that includes the 0.25% we are still selling).

This is great news!  Using the Mortgage Rate Comparison tab, we will now be saving more than $100 per month for the next 30 years.

Preparing Your Financial Docs

Getting your financial documentation in order for a mortgage is quite an undertaking.  I can't imagine what it must have been like before we could all pull our statements off the internet.

This post is designed to fill you in on what your banker or broker will be looking for in order to get your mortgage approved then cleared to close.

You can be assured that they'll request two months of statements from your checking, saving, investment, retirement, credit card, and student loan accounts.  If you already own a home, they'll want a copy of your original promissory note and recent statements.

Our process got a little gummed up due to a few things that could have been avoided:

• Cash deposits - if you deposit a large check (depends on your situation, but we got flagged for amounts >$500), they will ask for a letter of explanation and for you to paper trail the source (copy of check or deposit slip).  In our case, we got flagged because Pamela wrote me checks to be the holder of the funds for the down payment.  These were easy to paper trail.  We ran into trouble with a cash gift that Pamela's parents deposited into her account.  The broker requested Pamela's parents checking account statement along with a signed gift letter stating that we didn't have to repay it.
• A note on gifts - our broker told us that you can have your application denied if you receive a substantial gift.  The thinking is that the banks don't want to loan people money who can't make a down payment on their own.  So keep this in mind if you might need help on your down payment - if the gift is made far enough in advance, it won't show up on recent bank statements.  Otherwise, gift givers should wait until after you close.
• I also received regular monthly checks from our renters in PA (see rental property).  When my Brother and I came into possession of the house, we were never put on the mortgage so it didn't come up in my credit report.  Needless to say, we should have discussed this more up front.  As we were hoping to close, they asked for the original promissory note - from 1986.  I had my mother mail me a book of documents that she had on the house, but the note wasn't among them.  I was able to get a copy from the mortgage holding bank, but this took time.
• Loans from retirement accounts - this was probably the first situation where online statements caused problems.  Pamela's pension fund is not the most technologically savvy, so when a large direct deposit showed up in her checking account (the pension loan) we were unable to provide a statement.  She called the administrator only to be told that statements are printed quarterly.  They offered to write a letter confirming the loan, but this would require time to process.  In the end, she printed a screen shot of the website and wrote a letter explaining the situation.

Your broker will process through all of these documents and then provide you with a Commitment Letter.  This essentially says that the lender thinks you are worthy of the mortgage you are asking for and will outline the rate and the terms.  The Commitment Letter will come with conditions.  This is the lender saying "we'll give you your loan based on what you gave us, but we see a few things that we want more information on.  If we don't like what we see, we aren't obligated to give you the loan."  Once you complete those conditions, you may be "cleared to close" or the lender may provide you with more conditions.

Besides being mindful of the issues we ran into listed above, I would suggest you stay on top of whoever is processing your loan.  In fact, being proactive is the best option.  If you have received a gift, get the documents in advance.  You don't want your broker to be doing one final run through and come across something he/she missed that will take days to complete.

Conflicts of Interest

There are a few inherent conflicts of interest that you will likely run into during your home buying process.  I think it is useful for you to be aware, although hopefully you won't run into any bad situations.  You should interview as many real estate professionals as possible and rely on the advice of your friends to find someone who is trustworthy.

Your Realtor (Buyer's Agent)
The Realtor only gets paid a commission if you purchase a house.  So, like any other salesperson, you should have some skepticism if you aren't finding anything you like, but the Realtor is pushing you to reconsider.  A good Realtor will help you to understand if your expectations aren't realistic.  A bad Realtor will pressure you to move forward on a house that you are only luke-warm about.

This conflict can also come up after you've had your offer accepted - perhaps you discover something during the inspection that makes you consider walking away.  If you walk away from the deal, the Realtor's time to that point could be considered "wasted".  A good Realtor, of course, will be happy to help you look for a new house.

The buyer's agent also gets paid a percentage of the sale price.  It is in your best interest to pay the lowest price possible, but this does not help your Realtor.  Consider this when you are placing an offer on a house.  If you are a first time home buyer like I am, you'll probably rely heavily on your Realtor's advice.  If you feel strongly about what you want to bid, but your Realtor thinks you should go higher, take this advice with a grain of salt.  Consider the extensive budgeting and spreadsheet work you have done and don't let anyone push you into a house you cannot afford.

Your Banker / Mortgage Broker
Your banker / mortgage broker's job (I'll just refer to this person as a broker) is to generate business for his/her firm.  He is trying to make the most profit off of you as possible, without scaring you away.  Your best defense here is to shop around.  You can speak to multiple brokers and you can compare what they are offering on Bankrate.com.

Now, just because Bankrate says you should get a 5.00% mortgage but your broker is offering 5.15% doesn't mean he is trying to take advantage of you.  Rates on Bankrate are quoted using the most basic parameters (zip code, purchase price, % down, range of credit score).  Some lenders on the site will also show a rate such as 5%, but they will charge substantial fees.

Brokers earn money in two ways - fees and selling your loan.  Fees are pretty straight-forward - they'll charge you an application fees, processing fees, bank appraisal fees, etc.  If your broker doesn't work for a major bank, there is a good chance that they will not hold your loan.  In this situation, their goal is to charge you as high of an interest rate as possible (without you going elsewhere).  They are then able to sell that loan to a major bank which, for example, is happy to buy a 5.15% 30 year loan if you have a 800 credit score, when they know that would usually be priced at 4.75%.

It might not be a "conflict" but I think it is also important to make clear that once you've started down a process with a broker, it is difficult to change.  Over the past few years, new legislation has been introduced that requires brokers to provide a "Good Faith Estimate" or GFE which should detail all the costs of your mortgage.  Pay close attention to this, ask lots of questions about what each item means, and ask what numbers could change.  As you get closer or reach closing, make sure these numbers don't change.

Your Lawyer
You should actually feel pretty safe here.  Your lawyer gets paid whether you complete a deal or not.  The only conflict that could arise might be if your lawyer and your Realtor or broker have a close relationship.  If you are being charged hourly, of course they have incentive to bill you for more hours.

Your Inspector
Again, not much to worry about here.  He/she gets paid either way.

The good news is that Realtors, brokers, lawyers, and inspectors find a lot of business through referrals so it is most definitely not in their interest to treat you unfairly.  They also could face serious consequences for treating you unfairly.  It is up to you though to seek out real estate professionals you can trust.

Bad Home Buyers and the Real Estate Professionals Who Hate Them
From their point of view, there are a few bad behaviors that will leave them frustrated and less willing to help you:

• Home buyers who are unwilling to sign paperwork saying they are represented by a specific Realtor
• Home buyers who think house hunting is a fun way to spend their weekends but have no real intention of buying (and don't say so)
• Home buyers who get too excited, make offers, but then realize they can't afford the house
• Home buyers who get cold feet and try to create ways to get out of a deal
• Home buyers who try to negotiate with a seller on the side to reduce the purchase price on paper - this can lower the loan amount you need or could allow you to pay with income you haven't declared, but a lower purchase price means less commission for the Realtor and can raise red flags with your broker and lawyer
• Home buyers who drag their feet in getting paperwork to their broker, but then dump a pile of documents on them and get frustrated at the turnaround time

Buyer's Guide - Step #4 - Getting Pre-Qualified and Finding a Realtor

Up until this point in the process, it's been your time and energy spent on this endeavor and you will feel no shame if you wake up one day and decide you don't want to pursue this any further.  In this next step, you'll start to involve some others so it's probably a good idea to be past the point of just casually browsing.

I will pretty much guarantee that if you get pre-qualified or find a Realtor earlier in your process, they will be absolutely supportive if you all put forth some effort but decide to bail on your plan to buy a home.  They will tell you "I understand, you've got my card, please think of me if you start looking again" and they will mean it.  So I will also say, if you want to get others involved earlier in your process, go for it.  It might make more sense too - maybe you've got more debt than you'd like to admit to and you'd rather have a professional run some numbers to see if you can really get as big of a mortgage as you think.

I think the key message here in the intro is to recognize that these professionals are spending time with you when they could be with another potential client, so be respectful of their time.

Getting Pre-Qualified
Getting pre-qualified helps you find out (again, in rough terms) how much money a bank would be willing to loan you.  Once you have been pre-qualified, it's also a good signal to a Realtor that you are serious.

You can feel free to get pre-qualified online through a big bank like Bank of America, or go to your local bank to do so.  You might want to consider calling a Realtor first, if you have a reference, and tell them "I want you to help me look for a home, but I'd first like to get pre-qualified so that I have a better sense of what I can afford.  Could you recommend someone to me?".

Real Estate is a local business, and you'll find that many Realtors and mortgage brokers work together frequently and have a good sense of who gets deals done, whose deals tend to be hectic, and who shouldn't be dealt with at all.

The process of getting pre-qualified is simple.  A website or banker will ask for some basic information about your income, checking / savings levels, and your social security number so that they can pull your credit report.
* Warning *  I was told by one banker that I should be concerned about having my credit report pulled by multiple bankers / brokers because it can negatively affect my credit score.  I was later told and have more or less confirmed through research that this is not true.  Yes, having your credit pulled multiple times can affect your score, but the systems are actually more sophisticated - if your credit is pulled for a real estate related transaction, it doesn't matter if another mortgage broker pulls it.  I think the erroneous statement stems from the generalization that having your credit pulled means you are opening a line of credit, which isn't always the case, and it also might come from those who don't want you to shop around / go elsewhere.  There isn't a real purpose to shopping around for a pre-qualification, but don't feel like getting pre-qualified by Bank of America somehow obligates you to choose them for your mortgage.  They will, however, call you and follow up to try and get your business.

After the bank has your information, credit report, and credit score, they will give you a piece of paper saying you are pre-qualified for a $xxx,xxx mortgage.  It by no means says they are ready to write you a loan, but more says "based on our initial impression, we'd guess we could give you a mortgage of this amount if everything checks out".

Finding a Realtor
If you're reading my blog then you are likely new to the home purchasing process.  So the answer to the basic question of "do I need a realtor" is YES.  If a realtor is representing you, they are known as a Buyer's Agent.  When you and your Buyer's Agent go to an open house that you are interested in, the agent running the open house is known as the Listing Agent or Seller's Agent.  One more complicated situation can arise if your Buyer's Agent is the Seller's Agent for a home you want to purchase.  In this case, his allegiance is to the Seller, so you should be aware.

First things first - in the most simple terms, the Buyer's Agent works for free.  You will never receive a bill from a Buyer's Agent for anything.  He or she gets paid when you buy a house.  The Seller's Agent might get a 5% commission on the value of a house that he/she sells.  If you come make an offer with your Buyer's Agent, and you are the winning bid, the seller of the home will have to pay 6% in commission, which is split 3% and 3% between the Buyer's and Seller's agents.

You can also make the argument that this commission is baked into the sale price, and therefore you, as the buyer are paying both agents.  I agree this is a more accurate statement, but as a buyer, you are likely working through the math of what your mortgage payment will be and are worried about receiving a bill from a Realtor for his/her commission - it won't come, so don't worry.

Finding a Realtor seems to most often come via reference.  If you know anyone in the area who has bought or sold a home, ask them about their experience with their broker and for a referral.  Sites like Zillow.com have lots of Realtor listings and advertisements.

Finding a Realtor who has completed lots of transactions goes back to my earlier point about being connected.  A good Realtor will know the other Realtors and be able to help you in your negotiations if and when you put in an offer.  He/she will also know lots of mortgage brokers, lawyers, and inspectors and they will all owe him/her a favor which could come in handy for you.

In our case, our Realtor helped us find our mortgage broker, lawyer, home inspector, and was also able to push them a bit since we were trying to get a deal done on a shorter time frame.  He also was able to speak with the Seller's Agent and work with him to get the seller comfortable with the idea that we would be buying using an FHA loan and that we would not be putting much down.  I could easily see us having lost our home without this kind of help.


Now you are pre-qualified and you've found a Realtor.  You know about how much you can afford, and you have someone on your team ready to answer you question (simple, complex, or in between).  You are almost ready to Get Out There - See Some Houses

When to Get Pre-Approved?
Getting pre-qualified is simple.  Getting pre-approved is more involved.  A letter of pre-approval will be necessary if you are putting in a bid on a house.  So if you are going to go out and see houses with the hope of finding the right one, it would make sense to be pre-approved so that you can put in a bid if you are ready.

To get pre-approved, you must first choose your bank or mortgage broker.  This is a serious decision and will have profound implications on your home buying process.  I will probably write a completely separate post on whether to get a mortgage broker or not, but I will try to quickly distill the concepts here.

A mortgage broker is someone who will hold your hand through the process and make sure you are moving along at a fast enough pace.  They have access to many ultimate lenders, and therefore can likely get you very good rates.  Your Realtor should have some recommendations as to which mortgage broker to use.  You want someone that is local and someone that will be available, not someone at a 1-800 number that you can only get on the phone on rare occasions.

So why not use a mortgage broker?  They will charge you origination and/or processing fees, and they also might be earning a spread between what the lender is willing to quote and what you will ultimately have to pay.  This can increase your costs.  There are also plenty of horror stories out there where an unscrupulous  mortgage broker can provide you with false information and end up blowing up your whole deal.

On the other hand, you can use a site like www.bankrate.com to see what kinds of mortgage rates you might be able to get.  You can then work directly with a bank of your choosing, which will assign you to a loan officer.  This may be someone at your local branch or it could be someone from the loan division which is located hundreds of miles away.

In either case, the person you work with has plenty of incentive to make sure you get a mortgage.

Onto the Pre-Approval
Now that you've got your broker / banker lined up (we selected a mortgage broker), they'll start requesting every financial document you have and you'll have to put together a mortgage application.

After they've reviewed your documentation, a pre-approval letter is issued.  This letter enables you to make an offer on a house, but really doesn't mean much.  No one has committed to loaning you the money you need and a lot can change.


Whether you've gone ahead with pre-approval or decided to wait, it's time to get out there and start searching.