The only way to truly understand what caused the housing crisis is to break down the mortgage financing process and understand it’s complexities; both upon consumers and amongst the industry participants needed to get financing in place.

The number of people, documents, & steps required to complete a transaction in order to obtain home financing makes the mortgage process one of the most complex transactions a consumer will face in their lifetime.  The process has remained difficult despite advances in technology. Increased workflow complexity is stifling production.

As with anything not understood & studied, incorrect conclusions have been drawn about the true cause of our housing malaise.  Mortgage brokers have been singled out as the primary culprit for the current state of affairs. I agree that some mortgage originators (bank-employed originators included) abused the system. Low professional standards, limited educational requirements, & fragmented regulatory governance allowed our ranks to swell with those only looking to make a fast buck.

However, other factors like cheap money, non-existent appraisal regulatory enforcement, irrational lending standards, and an industry challenged with sharing data are not receiving enough attention and scrutiny.

Why is this happening?

The media is ill-equipped to understand what has happened and exacerbates the misappropriation of information. Non-profit agencies, regulators, legislators, and the public-at-large are often influenced by these reports and react with haste. This results in additional well-intentioned but misguided burdens that inhibit lending activity.  For example, rules like HVCC, have decimated the independent appraisal industry and added millions of dollars of expense to consumer’s financing transactions. People want action. Unfortunately, they take action before understanding. Fire first, aim later.

Perhaps the biggest tragedy, large lenders, including many that profiteered from irresponsible mortgage loans (like negative amortization Option Arms), are now capturing market share at the expense of small less capitalized mortgage professionals. This independent class of originator, many of whom, did not participate in selling unsavory mortgage products are under pressure and quickly disappearing.

I’ve spoken to some industry watchers that believe mortgage broker numbers have shrunk by 65%. The problem, well financed banks, backed with taxpayer money, have large budgets for media campaigns & lobbyists. These folks work tirelessly to perpetuate the placement of blame squarely on the backs of small independent mortgage brokers for the US housing crisis. This strategy accomplishes two things. It removes the scrutiny of the media and public from the bank’s role in the crisis. It also increases the burden upon a once thriving class of originators as they are subject to an increasing set of special rules that bank-employed originators avoid.

It’s important to note, mortgage brokers didn’t create, incentivize, or securitize any mortgage products. Mortgage brokers didn’t benefit from the bailout when these bad loans went sour. Mortgage brokers aren’t buying up these bad loan assets at rock-bottom prices on Wall Street. Lending needs an overhaul. The mortgage process is unnecessarily complicated. All origination parties should be subject to and governed by an equal set of rules. Anything less and consumers lose.

Already, we are seeing signs of this. On any particular day, The J. Berman Group pricing on a 30 year fixed mortgage is .25% lower than Wells Fargo. With reduced competition, bank margins grow and it becomes easier to pass on higher rates and fees to unaware consumers.

I believe the subprime housing crisis can be summed up by one word, greed. Unbridled greed. We are all to blame. The crisis cannot be attributed to one group; the blame should be borne by realtors, appraisers, mortgage originators, and home owners alike. Pointing fingers at any group in particular is an unsophisticated approach that prevents diagnosing and correcting the real underlying problems.

It’s not rational to blame car dealers for global warming, and mortgage brokers are not the root cause of the foreclosure crisis. The lending industry is in danger of an entire production channel undeservedly disappearing. If this happens, consumers will pay more for their home financing and the US housing market will take longer to recover.

The opportunity to perform an exhaustive common-sense reform of standards & workflow is now. What do you think?

Question: Can I get a mortgage for less than 30 years? Is that a good deal? – Avi, Westminster, CO

The quick answer is yes & maybe.

Mortgages are available in a variety of loan terms. The two most common are 30 year fixed and 15 year fixed. However, 25 year and 20 year options are becoming more popular with consumers. Many people like the idea of refinancing to a shorter term and paying off their home more quickly. In some instances, dropping the rate will offset the shorter maturity of the new loan and result in paying off faster with the same monthly investment.

The second part of the question is a little harder to discern. Terms such as the 20 year and 25 year often offer little rate incentive. These options do however offer a price incentive. Typically, 12.5bps-25bps ($250-$500 on a $200,000 loan) of a price improvement for these options. So while these options are the same as the 30 year mortgage rate, the consumer does get the benefit of an additional credit from the lender at closing.

Now 15 year fixed mortgages are a different story, they are much more attractive in terms of rate than a 30 year fixed mortgage. The spread between these two products is typically 50bps or ½%. Over time that reduction in rate adds up to a significant lower overall cost of borrowing than a 30 year fixed. The downside, higher payments.

If flexibility and cash flow are your primary concerns, I’d recommend sticking with a 30 year fixed. If you are more interested in paying down the balance on your home, the 15 year fixed mortgage remains the most attractive option available to consumers.

With today’s low rates, consider looking into your options. We’d love to help. Give us a call at 970.455.4131 or “Contact Us” by email for a quick and simple review.

Clinton Gulch Dam Reservoir

Did you know that Summit County, Colorado home owners get preferred treatment over just about every other county in Colorado?

It’s true. There are only four counties in all of Colorado that are considered “High Balance, High Cost” counties. These areas get to take advantage of lower rates for loan amounts, that traditionally, are considered Jumbo mortgages in other parts of the state. Take a look, Colorado High Balance Counties (pdf).

The four counties that get this special treatment include some of Colorado’s most picturesque portions of the state. Eagle, Lake, Pitkin, & Summit counties are home to many of Colorado’s mountain communities. Average home prices are high. In response, Fannie Mae designates these areas as high cost which allows homebuyers & refinancers to obtain conforming fixed and adjustable rate mortgages with balances up to $729,750.

The difference in rates can produce significant savings. For example a $500,000, 30 year fixed mortgage at 5.5% has a principal and interest payment of $2,838.95. Drop that interest rate down by .5% and the P&I payment goes down to $2,684.11.

If you live in Summit County and purchased your home between 2002 & 2008, when the loan maximums were lower, it’s possible that you received higher Jumbo interest rates and may now be eligible for lower Non-Jumbo conventional financing.

With today’s low rates, you should look into your options. We’d love to help. Give us a call at 970.455.4131 or “Contact Us” by email for a quick and simple review.

“I’m confused about the different ways one can hold title to a home. I’m a first-time buyer and my mom is interested in being on the loan with me. Would you please explain the options?” – Eve in Denver

Answer:

Several options as to how title to a home can be held exist, each has its advantages. It’s important to know your options before signing the final papers.

SOLE OWNERSHIP. For a single person buying a home, this is the most often used title-holding option. Even married couples can choose this Sole Ownership if one of the spouses signs a quick claim deed terminating marital rights to the property. The primary reason couples would choose this option would be for business purposes.

TENANTS IN COMMON. A piece of property can be owned by two or more people. Owners do not have to be living on the property and owners can own unequal shares in the property. For instance, three people can own a piece of property, with one person owning 50%, another owning 30% and the third owning 20%. This becomes especially important when the property sells or when one of the owners wants to sell. He or she can sell their portion without the approval of the other owners. Tenants in Common is used especially with second marriage partners who want to leave a portion of their property to children from previous marriages.

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP. This option of title holding is most often used by married couples. Each has full title to the property and upon death of one spouse, the other spouse solely owns the entire property. This type of title holding does not require the addition of a Will to implement. A drawback of Joint Tenancy is that either owner of the property can transfer their share without permission from the other, possibly ending the Joint Tenancy and creating a Tenants in Common.

COMMUNITY PROPERTY. To date, ten states allow couples to purchase property as Community Property. This means that each person owns 50% of the property and a Will must be in place stating who will get the 50% share upon the death of either of the partners – it is not automatic, as it is in Joint Tenancy with Right of Survivorship.

LIVING TRUSTS. Utilizing a Living Trust is like having another “entity” own and control your assets, including your home. But that “entity” is yours, or others designated as trustees, who “own” the entity. While the creator of the Living Trust lives, the Trust is revocable (can be changed) during his or her life. Upon the death of the creator of the Living Trust, it becomes irrevocable (cannot be changed), and probate costs and delays are avoided because the assets in the Trust automatically pass according to the dictates of the Trust. Privacy is a major attraction in setting up a Living Trust. A trust document does not become public upon the death of the trust-holder like a Will does.