"It's now or never...," Elvis Presley sang. That line also applies to purchasing a home. At risk of sounding like a cheesy salesman, I can honestly say that it has never been a better time to purchase a new home.
Okay, that probably did sound cheesy. I make fun of car commercials that consistently tell us that "Now is the best time to buy a -insert car brand here-!" In fact, even real estate professionals were saying a few years ago, at the peak of the market, that it was the best time to buy. For a moment forget the cheesiness, and past mistakes of real estate & mortgage professionals. I will make my case as to why potential homebuyers are foolish (yes I said "foolish") not to purchase a home now.
I must give credit to Barry Habib, Chairman of Mortgage Success Source, whom I had the opportunity to spend some time with this week when he made a trip to Phoenix. He made this case by telling the story through the eyes of Rip Van Winkle. I took his idea and made some changes of my own.
The classic Washington Irving story of Rip Van Winkle starts before the American Revolution in a village in colonial New York. Forgoing the details, Rip falls asleep for 20 years and awakens after the Revolution. For our purposes we will revise the story a bit. Before he fell asleep Rip put some money away for a down payment on a house. And instead of colonial New York, our story takes place in suburban Phoenix.
Rip Van Winkle wakes up today after a multi-decade slumber. He takes his money that he had set aside before his prolonged nap and immediately begins shopping for a home. He does some research and discovers that home prices have dropped around 50% in four years. He is astonished. "You mean that if I woke up just four years ago, I would be paying double for a house?" he asked his Realtor. "I can't believe how lucky I am."
Rip researched further and realized that he could get an $8,000 federal tax credit if he has a contract prior to April 30 and closes by June 30. "Unbelievable!" Rip exclaims. "If I had slept in for just a few more months, I would have missed out on this opportunity. Thank goodness I woke up when I did. This seems to good to be true!" Then he thought for a moment.
"There has to be a catch," he thought to himself. "Interest rates must be high. They are probably going to stick it to me on my home loan." So he asked his loan officer about it, and he was again astonished to learn that rates were near historic loans. " Do you mean to tell me that along with a 50% discount from home prices four years ago, and an $8,000 tax credit, I can get an interest rate on a 30 year fixed mortgage that is within .25% of all-time lows? I can't believe how lucky I am to have woken up when I did!"
Rip was indeed lucky to wake up at the right time in history. Don't miss your opportunity.
Friday, March 5, 2010
Sunday, February 21, 2010
OMG! - The Fed Raised the Discount Rate
Last week the Federal Reserve raised the Discount Rate by .25% to .75%. "OMG!" was the response by the markets on Thursday. We also saw mortgage rates rise last week. What did the Fed really do, and what does it mean to you?
Discount Rate, Fed Funds Rate & Their Purpose
The Federal Reserve (Fed for short) controls two interest rates: the Fed Funds Rate; and the Discount Rate. Both are short term interest rates used by the Fed to make monetary policy. It is important to know the difference between the two rates. The Fed Funds Rate is the rate that banks charge each other to borrow funds overnight. The Discount Rate is the cost to banks to borrow funds directly from the Federal Reserve.
The Fed prefers the banks to lend to each other (via the Fed Funds Rate) so that it does not have to lend directly to banks. Therefore historically, the Discount Rate has been a full percentage point higher than the Fed Funds Rate, so that the Fed was the lender of last resort to banks. However, that practice changed in August of 2007 when credit markets began to show signs of weakness and the Fed wanted banks to be able to borrow from the Fed if necessary. At that time the Discount rate was lowered by .5% without changing the Fed Funds. Subsequent rate decreases followed as the recession began and the credit freeze took hold.
What They Did & Why
So the Fed raised the interest rate tied to funds that it lends to banks from .5% to .75%, why? In a statement the Fed gave their reason as, "to encourage depository institutions to rely on private funding markets for short term credit." In other words, lend to each other so that we (the Fed) don't have to.
That seems fairly benign. Only $15 billion is currently being borrowed from the Fed. So why were the markets startled at first? Some are concerned that this is the first step in a new climate of tighter monetary policy, better known as higher interest rates.
Atlanta Fed President Lockhart seemed very clear on Thursday when he said that people "should not interpret this action as a tightening of monetary policy or even a sign that a tightening is imminent."
I believe him. Our economy is still much to week to begin tightening credit. Credit is already too tight. Rather this move seems to only to attempt to get closer to the 1% spread between the Discount Rate and the Fed Funds Rate that existed prior to August 2007.
What Does the Discount Rate Matter to You?
Unless you are a bank that borrows money from the Fed, then this probably won't impact you at all. The Fed will keep short term rates low (via the Fed Funds Rate) until the economy shows signs of improvement.
The larger concern for mortgage rates rests in the Feds Mortgage Bank Security purchase program (see January 9 post) which is slated to end next month. Expect to see rates bump up unless the program is extended.
Discount Rate, Fed Funds Rate & Their Purpose
The Federal Reserve (Fed for short) controls two interest rates: the Fed Funds Rate; and the Discount Rate. Both are short term interest rates used by the Fed to make monetary policy. It is important to know the difference between the two rates. The Fed Funds Rate is the rate that banks charge each other to borrow funds overnight. The Discount Rate is the cost to banks to borrow funds directly from the Federal Reserve.
The Fed prefers the banks to lend to each other (via the Fed Funds Rate) so that it does not have to lend directly to banks. Therefore historically, the Discount Rate has been a full percentage point higher than the Fed Funds Rate, so that the Fed was the lender of last resort to banks. However, that practice changed in August of 2007 when credit markets began to show signs of weakness and the Fed wanted banks to be able to borrow from the Fed if necessary. At that time the Discount rate was lowered by .5% without changing the Fed Funds. Subsequent rate decreases followed as the recession began and the credit freeze took hold.
What They Did & Why
So the Fed raised the interest rate tied to funds that it lends to banks from .5% to .75%, why? In a statement the Fed gave their reason as, "to encourage depository institutions to rely on private funding markets for short term credit." In other words, lend to each other so that we (the Fed) don't have to.
That seems fairly benign. Only $15 billion is currently being borrowed from the Fed. So why were the markets startled at first? Some are concerned that this is the first step in a new climate of tighter monetary policy, better known as higher interest rates.
Atlanta Fed President Lockhart seemed very clear on Thursday when he said that people "should not interpret this action as a tightening of monetary policy or even a sign that a tightening is imminent."
I believe him. Our economy is still much to week to begin tightening credit. Credit is already too tight. Rather this move seems to only to attempt to get closer to the 1% spread between the Discount Rate and the Fed Funds Rate that existed prior to August 2007.
What Does the Discount Rate Matter to You?
Unless you are a bank that borrows money from the Fed, then this probably won't impact you at all. The Fed will keep short term rates low (via the Fed Funds Rate) until the economy shows signs of improvement.
The larger concern for mortgage rates rests in the Feds Mortgage Bank Security purchase program (see January 9 post) which is slated to end next month. Expect to see rates bump up unless the program is extended.
Sunday, January 17, 2010
FHA Rule Change Helps First Time Home Buyers
The majority of the home sales in depressed real estate markets like Phoenix, Southern California, Las Vegas, & Florida are lender owned properties. The deluge of foreclosures in those markets has greatly increased the number of home sales as lenders take ownership, and then sell those homes. That increase in sales is good news for those of us whose livelihood depends on homes being bought and sold. But let's look at who is buying those foreclosures. A great number are investors.
Investors Role Important
I have been critical of the large number of home sales in our markets where the new owner is an investor. My argument is that true stability in the housing market can only come from homeowners who intend to occupy the properties. Investors that intend to flip properties only contribute to a bubble that will eventually pop after being over-inflated. However, even I must admit that investors play an important role in rebuilding our market.
That role involves the remodeling and even rebuilding of homes. Unfortunately many of the homes that lenders foreclose are in terrible shape. Prior owners often strip homes of appliances, fixtures, counters, cabinets, wiring, plumbing, and anything else that seems valuable. Homes are even damaged out of spite as angry occupants move out.
The average prospective home buyer cannot afford to make the repairs needed to make the home habitable. First time home buyers are typically scraping together savings to afford a minimum down payment. Investors have the funds to pay cash for the properties and make the necessary repairs. After the investor's work is through, the home is in move-in ready condition. They list the property and sell it to a willing buyer.
90 Day Seller Seasoning
Most home purchases today are financed with an FHA insured mortgage. However FHA rules require a seller to own the property for at least 90 days before a buyer can use an FHA to finance the purchase. Most of the time, the investor can make the necessary repairs to a home in a few weeks. So they were required to hold the property, unoccupied for an extra couple of months before they could sell to an FHA buyer.
On Friday FHA announced a temporary waiver of the 90 day rule. Investors, and any seller for that matter, can now sell the property immediately. There are some restrictions.
- The waiver begins February 1, and lasts for one year.
- Sales must be arm's-length transactions.
- Restrictions apply to sales that increase by 20% or more.
This is good news for markets that need lender owned properties to turn over. It will motivate more investors to purchase and repair distressed properties, and get them into the hands of homeowners that will live in these homes.
Saturday, January 9, 2010
Are Higher Rates on the Horizon?
"What goes up must come down...," the song goes. In the world of interest rates gravity works both ways, and so the reverse "What goes down must come up..." also applies.
Federal Reserve MBS Purchases
There is some concern that 2010 will mark higher rates than in 2009. That shouldn't be a surprise. The Federal Reserve kept rates down last year to try and stabilize the economy. Not only has the Fed Funds (short term) rate been at near zero, the Federal Reserve helped to keep mortgage rates low with a massive spending spree for mortgage backed securities. The fact that it is a "spree" implies it cannot last forever, and it won't.
The Fed now holds $909 billion in mortgage backed securities. It sounds like a big number, and it is. Last year, the Fed and Treasury combined to purchase 73% of all Fannie Mae, Freddie Mac, and Ginnie Mae mortgage backed securities. The Fed's spending spree, when completed in March will result in $1.25 trillion in MBS purchases. Unless you are a politician, $1.25 trillion is a lot of money.
Effect on Interest Rates
Those purchases had a big impact on mortgage rates, and therefore on housing affordability. Home prices are based on what potential buyers are willing to pay, and what they can afford. Rising rates will result in higher monthly payments on new mortgages. That means for someone to be able to afford the same payment with a higher rate, the loan amount (and the sales price) must go down. The bottom line, higher rates equals further declines in home values. Further declines in home values equals more foreclosures. Therefore higher interest rates equals more foreclosures. Here are the equations for any math nerds that are reading this.
Higher Rates = Lower Home Values;
Lower Home Values = More Foreclosures;
Higher Rates = More Foreclosures.
With continued falling home values, and rising foreclosures, will the Fed really stop the MBS purchase program. They recently warned banks to be prepared for "instantaneous and significant changes in rates, substantial changes in rates over times, changes in the relationships between key market rates (mortgages versus Treasuries?) and changes in the slope and shape of the yield curve."
Prediction or Regulation?
Was that a warning from the Fed as to what is to come? Or are they just trying to be a better regulator since they did an obscenely poor job leading up to the recession? What about the President and Congress; will they let allow rising rates to beat down an already bloody housing market? Reeling from worse than expected unemployment numbers for December, there is political pressure to continue to stimulate the housing market.
Knowing that the Fed is ending its MBS purchase program in March, the Treasury's announcement of "unlimited support" for Fannie Mae and Freddie Mac makes sense. Perhaps they will pick up where the Fed is leaving off in the purchase of mortgage backed securities. If not, the absence of such a large buyer will drive up mortgage rates as yields must be bid up to attract new investors.
The Bottom Line
There is great pressure on the government to continue stimulating housing. One way or another they should keeps rates low (continue Fed MBS purchase plan, or use Fannie & Freddie). We are still in the midst of a housing crisis, so it is undesirable to intentionally trigger another one. Eventionally the housing market must be weaned off the stimulants, but this market is not yet ready for that.
Federal Reserve MBS Purchases
There is some concern that 2010 will mark higher rates than in 2009. That shouldn't be a surprise. The Federal Reserve kept rates down last year to try and stabilize the economy. Not only has the Fed Funds (short term) rate been at near zero, the Federal Reserve helped to keep mortgage rates low with a massive spending spree for mortgage backed securities. The fact that it is a "spree" implies it cannot last forever, and it won't.
The Fed now holds $909 billion in mortgage backed securities. It sounds like a big number, and it is. Last year, the Fed and Treasury combined to purchase 73% of all Fannie Mae, Freddie Mac, and Ginnie Mae mortgage backed securities. The Fed's spending spree, when completed in March will result in $1.25 trillion in MBS purchases. Unless you are a politician, $1.25 trillion is a lot of money.
Effect on Interest Rates
Those purchases had a big impact on mortgage rates, and therefore on housing affordability. Home prices are based on what potential buyers are willing to pay, and what they can afford. Rising rates will result in higher monthly payments on new mortgages. That means for someone to be able to afford the same payment with a higher rate, the loan amount (and the sales price) must go down. The bottom line, higher rates equals further declines in home values. Further declines in home values equals more foreclosures. Therefore higher interest rates equals more foreclosures. Here are the equations for any math nerds that are reading this.
Higher Rates = Lower Home Values;
Lower Home Values = More Foreclosures;
Higher Rates = More Foreclosures.
With continued falling home values, and rising foreclosures, will the Fed really stop the MBS purchase program. They recently warned banks to be prepared for "instantaneous and significant changes in rates, substantial changes in rates over times, changes in the relationships between key market rates (mortgages versus Treasuries?) and changes in the slope and shape of the yield curve."
Prediction or Regulation?
Was that a warning from the Fed as to what is to come? Or are they just trying to be a better regulator since they did an obscenely poor job leading up to the recession? What about the President and Congress; will they let allow rising rates to beat down an already bloody housing market? Reeling from worse than expected unemployment numbers for December, there is political pressure to continue to stimulate the housing market.
Knowing that the Fed is ending its MBS purchase program in March, the Treasury's announcement of "unlimited support" for Fannie Mae and Freddie Mac makes sense. Perhaps they will pick up where the Fed is leaving off in the purchase of mortgage backed securities. If not, the absence of such a large buyer will drive up mortgage rates as yields must be bid up to attract new investors.
The Bottom Line
There is great pressure on the government to continue stimulating housing. One way or another they should keeps rates low (continue Fed MBS purchase plan, or use Fannie & Freddie). We are still in the midst of a housing crisis, so it is undesirable to intentionally trigger another one. Eventionally the housing market must be weaned off the stimulants, but this market is not yet ready for that.
Tuesday, November 24, 2009
FHA - The Last Man Standing
As we get set to give thanks for what we still have, those of us in the mortgage business are also giving thanks for FHA. After all, the population of home buyers these days consists mainly of investors buying at the bottom (or the perceived bottom) and first time home buyers utilizing an FHA insured mortgage.
FHA mortgages are loans that are 100% insured by the Federal Housing Administration in case the borrower defaults. Most of the mortgage loans used to purchase homes over the past couple of years are FHA loans. The reason for this is that a borrower only needs a down payment of 3.5% and a credit score around 640. Other conventional mortgage guidelines require higher down payments and have stricter credit score requirements.
For several years, FHA was much less relevant in the mortgage marketplace. There was discussion of dissolving FHA during the 1996 election campaign. I even referred to FHA as obsolete a number of times as the private sector had plenty of 3% down payment, and even zero down payment loans available for people with marginal or no credit history. Those private sector organizations I referred to were Fannie Mae & Freddie Mac which ironically have been rescued by the federal government and are therefore no longer private. In addition the private mortgage insurers who made those low down payment programs possible have reeled back after heavy losses from a tidal wave of claims.
Therefore FHA is now the mortgage program of choice. It meets the needs for many first time home buyers who, due to falling home prices, can finally afford to buy their first home. Also armed with the incentive of a tax credit, first time home buyers are the big winners in today's market. FHA = Sunshine & Rainbows.
Before you skip away singing Zip-a-dee-do-dah, there is a black cloud on the horizon for FHA. Just as the private mortgage insurers had their losses, now FHA is suffering from similar losses due to a massive rise in claims from lenders who are seeing their customers default. All of the FHA loans are fully document, in other words no stated income (liar's loans). And the vast majority are have fixed rates. So why are FHA borrowers defaulting?
Defaults in the FHA universe are occurring for the same reason they occur with other mortgages: a reduction in the borrower's income; and/or the property is now worth less than the balance on the loan. Certainly the ongoing recession contributes to the defaults, but when someone owes more than the property can be sold for, it makes the decision to walk away much easier. With only a 3.5% down payment, there is little "skin in the game," and in many cases there was no down payment due to a down payment assistance program. Also, since FHA is an insurance program, the borrower pays a premium (at closing, and monthly). The upfront portion is financed into the loan amount therefore eating into the already paltry 3.5% equity. Therefore it takes only minimal price declines to put a home owner upside-down when the down payment is small.
A Wall Street Journal report this morning indicated that one in every four home owners is upside down. That number is one in every two here in Arizona according to the graphic that accompanied the report. Another number that was a bit more startling is that one out of every ten homes purchased this year is already upside down. This year! If you are wondering how that has happened, remember the popularity of FHA loans and re-read the previous paragraph.
When the only bright light for aspiring homeowners is taking a financial hit, what is to be done? There is a bill in the House to increase the minimum down payment to 5%. That's not a terrible idea. While it will make it a bit tougher for home buyer's to come up with a down payment, it is not so big to make FHA loans out of reach for a significant number of first time home buyers. There has also been some discussion about raising the minimum down payment to 10%. Now that is a terrible idea, and would make buying a home near impossible for a large portion of the population.
The most palatable solution is to raise mortgage insurance premiums. The most equitable way to do that is to raise premiums for the highest risk borrowers (those with the lowest credit scores). By keeping premiums the same for borrowers with higher creidt scores, they can be rewarded for maintaining excellent credit.
We need FHA because it is the best solution for most home buyers to purchase a home. Our legislators need to find a way to keep it solvent. If that means raising premiums, then that is what needs to be done, let's just do it in a way that benefits those borrower's with the strongest credit history.
FHA mortgages are loans that are 100% insured by the Federal Housing Administration in case the borrower defaults. Most of the mortgage loans used to purchase homes over the past couple of years are FHA loans. The reason for this is that a borrower only needs a down payment of 3.5% and a credit score around 640. Other conventional mortgage guidelines require higher down payments and have stricter credit score requirements.
For several years, FHA was much less relevant in the mortgage marketplace. There was discussion of dissolving FHA during the 1996 election campaign. I even referred to FHA as obsolete a number of times as the private sector had plenty of 3% down payment, and even zero down payment loans available for people with marginal or no credit history. Those private sector organizations I referred to were Fannie Mae & Freddie Mac which ironically have been rescued by the federal government and are therefore no longer private. In addition the private mortgage insurers who made those low down payment programs possible have reeled back after heavy losses from a tidal wave of claims.
Therefore FHA is now the mortgage program of choice. It meets the needs for many first time home buyers who, due to falling home prices, can finally afford to buy their first home. Also armed with the incentive of a tax credit, first time home buyers are the big winners in today's market. FHA = Sunshine & Rainbows.
Before you skip away singing Zip-a-dee-do-dah, there is a black cloud on the horizon for FHA. Just as the private mortgage insurers had their losses, now FHA is suffering from similar losses due to a massive rise in claims from lenders who are seeing their customers default. All of the FHA loans are fully document, in other words no stated income (liar's loans). And the vast majority are have fixed rates. So why are FHA borrowers defaulting?
Defaults in the FHA universe are occurring for the same reason they occur with other mortgages: a reduction in the borrower's income; and/or the property is now worth less than the balance on the loan. Certainly the ongoing recession contributes to the defaults, but when someone owes more than the property can be sold for, it makes the decision to walk away much easier. With only a 3.5% down payment, there is little "skin in the game," and in many cases there was no down payment due to a down payment assistance program. Also, since FHA is an insurance program, the borrower pays a premium (at closing, and monthly). The upfront portion is financed into the loan amount therefore eating into the already paltry 3.5% equity. Therefore it takes only minimal price declines to put a home owner upside-down when the down payment is small.
A Wall Street Journal report this morning indicated that one in every four home owners is upside down. That number is one in every two here in Arizona according to the graphic that accompanied the report. Another number that was a bit more startling is that one out of every ten homes purchased this year is already upside down. This year! If you are wondering how that has happened, remember the popularity of FHA loans and re-read the previous paragraph.
When the only bright light for aspiring homeowners is taking a financial hit, what is to be done? There is a bill in the House to increase the minimum down payment to 5%. That's not a terrible idea. While it will make it a bit tougher for home buyer's to come up with a down payment, it is not so big to make FHA loans out of reach for a significant number of first time home buyers. There has also been some discussion about raising the minimum down payment to 10%. Now that is a terrible idea, and would make buying a home near impossible for a large portion of the population.
The most palatable solution is to raise mortgage insurance premiums. The most equitable way to do that is to raise premiums for the highest risk borrowers (those with the lowest credit scores). By keeping premiums the same for borrowers with higher creidt scores, they can be rewarded for maintaining excellent credit.
We need FHA because it is the best solution for most home buyers to purchase a home. Our legislators need to find a way to keep it solvent. If that means raising premiums, then that is what needs to be done, let's just do it in a way that benefits those borrower's with the strongest credit history.
Friday, November 6, 2009
Tax Credit Extended (with some enhancements)
The first time home buyer tax credit that was set to expire at the end of this month has been extended through April 30, 2010. Both the House & Senate have passed the legislation which is expected to be signed by President Obama very soon. Let's discuss what the extension does, then we can talk about whether or not it is a good thing.
Like the previous tax credit, this extension offers up to $8000 in the form of a tax credit to first time home buyers. It extends the credit through April 30 of next year. In order to be eligible, buyers must have an executed contract by April 30, and then close on the transaction within 60 days of the April 30 deadline. Here are some enhancements to the new plan:
Move-up buyers may have a more difficult time taking advantage of the program since they will typically have to sell another home in order to qualify. The $6500 tax credit will provide some financial incentive for them, but it hardly seems to be enough in markets that have seen steep devaluation like Arizona, Nevada, California, & Florida.
Some will argue that the tax credits are just another "Cash for Clunkers" type program that will provide only temporary relief, then cause another decline in sales when the program is ended. That's probably true. Any government rebate or incentive has some affect in affronting the free market process.
The government cannot continue to extend the program in perpetuity. It must end sometime as they will eventually need to collect tax revenue to pay for dramatic increases in spending. Can the government continue these tax credits until the housing market has rebounded? How will we know when the market has rebounded? What is our definition of rebound? Sorry for all the questions, but there should be some definition if the plan is to continue these incentives until there is a rebound. Prices going back to 2005 levels should definitely NOT be the definition. If the definition is to be based on the number of sales taking place, then we have already rebounded. But that shouldn't be the definition either since a large portion of current sales are investors (another issue I will write about soon). Perhaps owner occupied sales should be the definition of the rebound.
At some point we have to stop the tax credit. I am glad that it has been extended for several more months, but we need to be ready to move on when it eventually ends.
Like the previous tax credit, this extension offers up to $8000 in the form of a tax credit to first time home buyers. It extends the credit through April 30 of next year. In order to be eligible, buyers must have an executed contract by April 30, and then close on the transaction within 60 days of the April 30 deadline. Here are some enhancements to the new plan:
- Income limits raised to $125,000 for single buyers and $225,000 for married couples
- Up to $6500 tax credit for "move-up" buyers that are not first time homeowners
- Extends tax credit through April 30, 2010
Move-up buyers may have a more difficult time taking advantage of the program since they will typically have to sell another home in order to qualify. The $6500 tax credit will provide some financial incentive for them, but it hardly seems to be enough in markets that have seen steep devaluation like Arizona, Nevada, California, & Florida.
Some will argue that the tax credits are just another "Cash for Clunkers" type program that will provide only temporary relief, then cause another decline in sales when the program is ended. That's probably true. Any government rebate or incentive has some affect in affronting the free market process.
The government cannot continue to extend the program in perpetuity. It must end sometime as they will eventually need to collect tax revenue to pay for dramatic increases in spending. Can the government continue these tax credits until the housing market has rebounded? How will we know when the market has rebounded? What is our definition of rebound? Sorry for all the questions, but there should be some definition if the plan is to continue these incentives until there is a rebound. Prices going back to 2005 levels should definitely NOT be the definition. If the definition is to be based on the number of sales taking place, then we have already rebounded. But that shouldn't be the definition either since a large portion of current sales are investors (another issue I will write about soon). Perhaps owner occupied sales should be the definition of the rebound.
At some point we have to stop the tax credit. I am glad that it has been extended for several more months, but we need to be ready to move on when it eventually ends.
Wednesday, September 30, 2009
Licensed to Originate
You need a license to do a lot of things. A license to drive; a license to sell insurance; a license to cut hair; a license to kill (007 reference); and a license to ill (Beastie Boys reference). In most states, my state of Arizona included, today one does not need a license to originate a mortgage loan. Now before you panic and wonder who the idiot was that did your last mortgage loan for you, a law was passed last year that requires all 50 states to license loan originators.
Whew! That is good news. You might be wondering why the loan officer you worked with that handled all of your financial information, your credit report, copies of your bank statements and tax returns, and helped you make decisions about the largest debt you will ever have in your life wasn't required to have a minimum amount of education, training, or even a criminal background check. This is probably why we had so many loan originators that did not have the borrowers' best interests at heart during the height of the housing boom.
In Arizona, starting in July of next year all loan originators must be licensed with the Department of Financial Institutions. What do originators need to do to get this license? Take 20 hours of education about various mortgage and regulatory topics, pass a test to demonstrate their knowledge, and pass a criminal background check. While this process won't guaranty a loan originator is smart, ethical, and always has their client's best interests at heart, it does help to eliminate the riff-raff. It will also eliminate loan originators who really don't know what the heck they are doing.
It is also interesting to note that only loan originators that work for a mortgage broker or mortgage banker will be getting licensed. Loan originators that work for a federally regulated bank or a credit union won't be licensed. So originators that work for Wells Fargo, Chase, Bank of America, MetLife, and others will not be licensed. Those institutions lobbied very hard to make sure they didn't have to license their employees, many of which sit in cubicles in large corporate buildings and take calls from customers all over the country. Does that mean those originators won't be as qualified as loan originators that work for mortgage brokers and mortgage bankers? No, but you can be confident that the loan originate that works locally for a mortgage banker or broker had to meet minimum education requirements, pass a test, and a background check to make sure they are qualified to help you with your mortgage loan.
I am teaching classes in Arizona for loan originators to get their education hours. I took and passed the test last night. While I don't think the test was that hard, it does take some studying, and I predict that a lot of current loan originators will either fail the test (75% needed to pass) or make a decision to find another line of work. The other option for them is to take a job with a bank.
Whew! That is good news. You might be wondering why the loan officer you worked with that handled all of your financial information, your credit report, copies of your bank statements and tax returns, and helped you make decisions about the largest debt you will ever have in your life wasn't required to have a minimum amount of education, training, or even a criminal background check. This is probably why we had so many loan originators that did not have the borrowers' best interests at heart during the height of the housing boom.
In Arizona, starting in July of next year all loan originators must be licensed with the Department of Financial Institutions. What do originators need to do to get this license? Take 20 hours of education about various mortgage and regulatory topics, pass a test to demonstrate their knowledge, and pass a criminal background check. While this process won't guaranty a loan originator is smart, ethical, and always has their client's best interests at heart, it does help to eliminate the riff-raff. It will also eliminate loan originators who really don't know what the heck they are doing.
It is also interesting to note that only loan originators that work for a mortgage broker or mortgage banker will be getting licensed. Loan originators that work for a federally regulated bank or a credit union won't be licensed. So originators that work for Wells Fargo, Chase, Bank of America, MetLife, and others will not be licensed. Those institutions lobbied very hard to make sure they didn't have to license their employees, many of which sit in cubicles in large corporate buildings and take calls from customers all over the country. Does that mean those originators won't be as qualified as loan originators that work for mortgage brokers and mortgage bankers? No, but you can be confident that the loan originate that works locally for a mortgage banker or broker had to meet minimum education requirements, pass a test, and a background check to make sure they are qualified to help you with your mortgage loan.
I am teaching classes in Arizona for loan originators to get their education hours. I took and passed the test last night. While I don't think the test was that hard, it does take some studying, and I predict that a lot of current loan originators will either fail the test (75% needed to pass) or make a decision to find another line of work. The other option for them is to take a job with a bank.
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