I’m Here From the Government and I’m Here to Help

The Qualified Residential Mortgage
By Greg Parrish

The Federal government is in the process of changing the guidelines of purchasing residential real estate. The FHFA (Federal Housing Finance Authority) and a group of real estate industry organizations have produced white papers that speak to QRM. The Qualified Residential Mortgage has emerged from the Dodd-Frank Act like ketchup does when stepping on the packet. It’s all about “risk retention”. It will affect a broad range of asset types, but has gained the most notoriety by requiring mortgage lenders to have some “skin in the game” after the mortgage loan has closed and funded. The proposal would establish a definition for QRMs, which will incorporate such criteria as borrower credit history, payment terms, down payment for purchase mortgages, loan-to-value ratios, and debt to income ratios. All this is designed to ensure mortgage loans are of the high credit quality. QRM will affect the real estate industry in a big way. There are three aspects that warrant additional scrutiny.

1. It will require that lenders retain 5% of the purchase price if the borrower places less than 20% down

2. To obtain the best market interest rates, debt to income ratios will be kept at a mandatory cap of 28/36

3. To obtain the best market interest rates when refinancing you must have at least 25% equity in your property. If you want a cash/out refinance you must have 30% equity position.

The big exception is mortgage loans with a Federal guarantee as FHA, VA, and Fannie Mae & Freddie Mac (until they emerge from conservatorship). In today’s market, government guaranteed loans comprise virtually the entire mortgage market. So, the silver lining is that, right now, the effect will be minimal. But, when it does take effect, most likely sometime in 2012, it will impact your ability and the way you purchase real estate.

By requiring mortgage lenders to retain 5% of the loan amount after the loan closes and funds, interest rates will necessarily increase to off-set the “loss” of capital available to earn interest. Higher interest rates will make it more expensive to get a mortgage.

Capping the borrower’s debt-to-income ratios at 28/36 to obtain the best interest rate will have the effect of closing many potential homebuyers out of the market. While most would be homebuyers would love to have a debt-to-income ratio as prescribed, the reality is that most are somewhat higher. Forcing a higher interest rate on homebuyers with a debt-to-income ratio of say 29/39 is preposterous! These caps will needlessly increase the monthly mortgage costs of millions of homebuyers and make it more difficult to qualify for their mortgage, even if they had they requisite 20% down payment.

Considering just these two aspects of the Dodd/Frank Act (we haven’t even discussed how this affects refinancing or what is expected of a person’s credit report) would due such damage to our industry and the economy as a whole that to say it would screw tight the lid on coffin of the real estate industry, in my opinion, would be a massive understatement.

The conundrum is that the groups of borrowers who will be hit the hardest are the first time homebuyers and those with moderate incomes. These are precisely the groups that the Feds wanted to help purchase a home in the first place! The pendulum has swung about as far in the opposite direction as it can.

Public comments are being accepted by the Federal Reserve until June 10th, 2011.

9 Money Personalities: What's Yours?

The word “money” creates different emotions with different people. Some love it. Others hate it. Some fear it. Some worship it. Regardless of how you feel about it, it’s what makes the world go round!

Dr. Kathleen Gurney, CEO Financial Psychology Corporation, says that not only do we have a physical self, and emotional self and a social self, we also have a “money/financial” self. In fact, she describes 9 distinct money personality types! Which one are you?

Achiever – Usually a college graduate—mostly married! They feel work and effort will pay off in the long run. They tend to distrust others’ honesty when it comes to money. Being the “take-charge” type, they have a strong need to control their money.

Entrepreneurs – Usually rank as the higher income earners, they tend to be workaholics who are not motivated by money alone. They use it as a scorecard to measure their success. They reward themselves with the best cars, homes, wines, and investing in the stock market is their favored strategy.

High Rollers – Money brings them instant power and recognition. They are creative, competitive, and extroverted—they work hard and play harder and money for them is an emotional release. They prefer to risk their assets rather than sit back and be bored by financial security.

Hunters – Usually highly educated, average to above-average income earners who make purchase decisions with their hearts rather than their heads. They have a strong work ethic, but attribute their success to “luck” versus ability and judgment. They lack confidence when it comes to making good decisions about money.

Money Masters – They are the number one wealth accumulators—even though they don’t earn the most money. They enjoy being involved in investing their money and enjoy what money brings them. They trust the recommendations of others and make sound investments.

Perfectionists – They are afraid of making a mistake—so they also avoid making decisions with their money. They consider every angle and find fault with almost all investment decisions. They do TRY to save, but often lack self-esteem when it comes to investing.

Producers – They work hard, desire more money, but they feel that they have difficulty in “getting ahead”. They don’t understand how the money system works and lack the confidence to make financial decisions—because they don’t take the time to understand them.

Optimists – They are often near retirement age—and the money they have saved has brought them peace of mind. Their money decisions may be impulsive, but not high risk. However, they are not highly involved with investments or taxes—which could cause stress later on.

Safety Players – They are average earners and most of their money goes into safe and secure investments. They miss opportunities for more financial growth by not taking calculated risks. They feel they are doing just fine—and are resistant to making any changes to their investment strategies.

Want to take a quiz? Google “Money Personality Quiz” and you’ll find several of them online.

Epitaph for the 30 Year Fixed?

by Greg Parrish on Saturday, March 5, 2011 at 6:14am

People are talking about the 30 year fixed mortgage "going away." Pundits like to imply that with the exit of Fannie/Freddie that mortgage term will disappear. First, IF Fannie/Freddie do go away they will be replaced with some other gov. entity. Second, the 30 year fixed fits extremely well with the American consumer AND mortgage lenders.

The Straight Up Answer: No need to worry. The 30 year fixed isn't going anywhere any time soon. This loan product is the number one asked for mortgage loan in America. It's here to stay.

Evaluating a Neighborhood

As you begin the search for your new home, not only do you need to find the right house, but you’ll also need to find the right neighborhood. The “perfect” house in the wrong neighborhood can spell disaster. Here are a few guidelines and search tools you can use to size up your next neighborhood.

Location, Location, Location – This famous mantra has always been, and will always be, the single best piece of advice one can receive when buying real estate. How close is the house to your work? What are the road conditions? What are the developer’s plans for improvement? What are the long-range plans for the area? Answers to these questions are very important factors when you decide to put an offer on a home.

Demographics - If your family has young children, you’re going to be looking for a “kid friendly” neighborhood. On the other hand, if you’re empty-nesters, are there other couples around your age? It’s vital to identify the demographics of your future neighborhood.

Night and Day Difference - The feel of a neighborhood and can change significantly after the sun goes down. Drive by at night to see what type of activity is going on. Check it out on different days of the week, especially Friday and Saturday nights. You may not want to move into a neighborhood that turns into a disco after dark.

Proximity to Services – How close and convenient are the businesses you patronize? How easy is it to get to these companies? Will you have to cross busy streets and intersections or make U-turns to get to them? Find out what the walk score is. This will give you a great amount of information on the area surrounding your next home.

Talk to Neighbors – Meeting your prospective new neighbors will allow you to evaluate and judge whether you’ll want to live next door to them. I once lived next door to a guy who turned out to be a weekend motorcycle warrior. Every Saturday morning, spring through fall, he’d start his Harley at 7:30 a.m. and let it “warm up” for about 10 minutes before blasting off. Talking to neighbors may help you avoid a situation like this.

Crime Statistics – It’s always a good idea to check with the Police to get an idea of the criminal activity in the neighborhood and surrounding area. Most municipalities and/or local newspapers have websites you can search for information on “undesirables” who reside in the neighborhood you’re considering. It’s prudent to get as much info as possible on this topic

You’ll be pleased you took the time to look at these important, but often overlooked aspects of buying a home. These tips may save you from getting into a disastrous housing situation, and keep you happy in your home for many years to come.

Greg Parrish is a Mortgage Loan Officer with WR Starkey Mortgage, LLP(CO LMB #100032297 NMLS #304686) located in the Denver Tech Center in Denver, Colorado. He specializes in FHA, VA, and Conventional home loans. For more information, call 303.808.3407

The views expressed here are those of the author and do not necessarily reflect the views of WRSM. WR Starkey Mortgage CO LMB #2146 6025 S Quebec Street Suite 110, Centennial CO 80111. To check the status of a Mortgage Loan Originators Colorado State License, please go to: http://www.dora.state.co.us/real-estate/mortgagebrokerregistration.htm