5 Tips That Will Set You Apart

As A Family Law Attorney

If you include some or all of these 5 elements into your divorce settlements, you will set yourself apart from the thousands of family law attorneys in Texas who do not know these principles of mortgage qualifying. Yet, there is no “down side” to applying what I am about to tell you. Moreover, no one is saying these things to family law attorneys. We at The Mortgage Institute apply these principles in the context of a specific case wherein a client is actually qualifying, real-time, for a mortgage transaction. (These include, especially, refinances to remove a spouse from the mortgage obligation, refinancing to include a buyout to an ex-spouse and purchasing a new home using support as qualifying income, et al).

Of course there is a disclaimer – DO NOT TRY THIS AT HOME. You can actually describe and discuss these principles in meetings to the benefit of all concerned. But, as in all of mortgage qualifying, your client needs a specific Assessment/Approval with recommendations for the settlement. You can call or write me for that.

1.      First, structure income as support income wherever possible. You will see (#3) that, in the mortgage world, there is a difference between income and qualifying income. And, certain rules of documentation apply. Whereas child or spousal support requires a pay history of 3-6 months, receipt of payments from a “note” or “payout” requires a 12-month pay history. In a recent case, the agreement was for one spouse to pay $3,000/month in child support and $5,000 in a payout over time for the other spouse’s interest in a company. Mortgage guidelines require a longer pay history for the payout of the “note” (12 months) than they do for child support (3-6 months). So, while the spouse is receiving $8,000 each month, her qualifying income is only $3,000/month (after the required history of payments has been received and documented).

2.      Secondly, get the clients to begin support payments IMMEDIATELY if at all possible. You will see (in #3) that a pay history must be developed. So why would a husband, for example, want to  begin paying child support or – gasp – spousal support before final divorce or before/without some order from the court (vis a vis a final decree of divorce or other orders)? It’s really straight-forward – that husband wishes for his wife to refinance the mortgage in order to remove it from his liability, perhaps to roll in a buyout to him of an agreed amount or for her to be able to purchase a home nearby for their children’s wellbeing. These are personal reasons why it is in the best interest of all concerned.  But, how could a payer manage to begin “supporting” his/her own children and spouse when, many times, they are already doing this by making the mortgage payments and buying the groceries? Actually, it’s easier than one might think. If, for example, a husband will be paying child and/or spousal support to his wife and she will be refinancing the mortgage into her own name and liability, he can begin support payments to her and she can, in turn, make the current mortgage payments and buy the groceries with her new income. As the colloquialism goes, “it’s six one and half-dozen the other.” This is more than “gaming the system.” It’s creating a documented paper trail that shows the husband’s ability and willingness to make support payments – a real key in mortgage qualifying. Here’s a sub-tip: Make sure that the payer pays from their sole/separate bank account into the payee’s sole/separate bank account. Payments to or from joint accounts do not count.

3.      Thirdly, remember the 3/36 or 6/36 rule. The 3 and the 6 represent months. For FHA loans, a “pay history” of 3 months of support payments must be documented. For conventional (aka Fannie Mae or Freddie Mac) – generally preferred – the requirement is more stringent, 6 months. The borrower must have received 3 months (FHA) or 6 months (conventional) of support income in order for that amount to be considered “qualifying income.” But, that’s not all. The second number – the 36 – represents the number of months which the support income must continue after loan closing. Note that this is after loan closing, not after final divorce. This is critical because when an attorney thinks of “continuance” they are generally thinking of how long some provision may continue after its start date or final divorce. Mortgage guidelines apply to the date on which the loan closes. One more thing – 35 months will not suffice. It must be 36 or more months remaining in the support payment schedule. Yes – it’s that tight. There are some variations – none which are more lenient – to this rule. About one year ago, conventional financing guidelines changed from requiring 3 months to now requiring 6 months of pay history. The 3 year (or 36 months) rule has been standard for many years now and also guides other types of income. For example, for wage-earner borrowers, there is the same expectation for 3 or more years of employment. The standard Verification of Employment form has a box for “Probability of Continued Employment.” Most employers avoid answering that question for obvious reasons. But, if there is a definite end to employment (as in the case of a wage earner who is also under a contract with the employer) that is stated as earlier than 3 years after projected loan closing, the applicant’s income cannot be considered as “qualifying.”

4.      Fourthly, convert assets to an income stream when there is a potential need for the recipient to qualify (with support income) for a mortgage. In higher net worth divorces, there is often a transfer or division of financial assets to “equalize” the property settlement. While such an agreement may satisfy a logical agreement to split assets, it often leaves the recipient of such largesse without qualifying income and, therefore, without the ability to obtain their own financing. How many times has this happened? Two attorneys, two clients and a couple of ancillary personnel are seated around a large conference room. One attorney says, concerning opposing client, “Well, we’re giving her $300,000, the house is worth at least a $1,000,000 and the mortgage is only $100,000; any bank would be happy to have that loan.” Well, maybe so. But, after January 1, 2014 (see my blog on the CFPB’s new rules) it will be virtually illegal to make that loan without the client having their own, separate income from some other source. And even now, there would be no standard (FHA or conventional) mortgage available for that scenario. Why? No income. (Actually, $300,000 can possibly be considered as $833/month – 1/360^th of $300,000. But, that income wouldn’t service the taxes on such a property). But, by dividing $300,000 into, let’s say 46 months, the qualifying income could be about $6,520/month. Now, we something in the range of qualifying for a real mortgage.

5.      Never rely on what you’ve heard “on the street” or what an amateur advises. Always call to verify. Call me, have your client call me, have the other attorney call me – but call. Even though I am giving you these tips – even outlined as principles – no tip or principle is as important as involving a professional Divorce-Mortgage Specialist. And the earlier someone calls the better for everyone. Guidelines are in a constant state of flux. And all lenders “layer” their own guidelines on top of FHA/VA/Fannie/Freddie guidelines.

I’ve given some general guidelines which could be subject to change but have remained in their present form for quite a while. If you had to memorize only one of these tips – make it #5. Always call. I’ll work it out.

 

Noel can be reached at noel@themortgageinstitute.com or 817-454-4555.

The 3% Rule – Part Two

As a follow up to the article about the 3% rule

(http://divorce-mortgage.blogspot.com/2013/07/the-we-didnt-think-this-one-through-rule.html), we have received a clarification. The CFPB has recently announced that Loan Officer Compensation (LO Comp) will not count against the 3% limitation for bankers but it will count against the limit for brokers. This is the proverbial “nail in the coffin” for the broker industry. No one is expected to attend the funeral. Since we do not have parallel universes, consumers will not miss the broker because there will be no measuring stick. Two bits of information might be helpful (in understanding our current plight) while it does nothing to truly help any consumer. First of all, according to the preeminent researcher for the banking and broker industry – Tom LaMalfa – independent mortgage brokers provided lower rates and fees for consumers than their mammoth competition, the big banks. Secondly, according to J. D. Power & Associates, consumers were more satisfied with brokers than they were with the big banks. One reason was because brokers provided alternatives and choices. They were, in effect, one-stop shops. You could stick with a good broker for life. Well, for life until Chris Dudd and Barney Freak killed ‘em. To be honest, brokers were under attack from George Bush’s HUD Secretary, Mel Martinez who, interestingly enough, had been head of the Texas Savings and Mortgage Lending Department under W.

Nevertheless, brokers will no longer exist after January 1^st, 2014. Oh yes, to be considerate of time lines, the CFPB moved the date of the announced changes from January 14^th to January 1^st because changing the books in the middle of the month would be unhelpful. So glad they’re watching out for us.

Oh! You want to know why brokers cannot exist under the new 3% rule, eh? I suppose I should explain. With a 3% cap on closing costs, lower loan amounts will be subject to higher rates and, many times, loan denials because there simply is not enough room in the 3% cap to include all of the costs of doing a loan; and the rate will have to be raised in order to recoup costs through the higher yields that higher rates bring in the secondary market.  For brokers, their compensation – anywhere from .750 to 2.00% generally – the 3% cap becomes a 1% - 2.250% cap because we have the broker has to subtract his/her compensation from the 3% and make all costs fit under that amount. This is simply impossible for loan amounts lower than about $350,000. In theory, brokers who service high dollar markets – loan amounts of not less than $300,000 or so – can still operate. The problem is that so few of them will be able to operate that the lenders/banks who received loans from them will no longer keep a broker line (called “wholesale”) open for the few remaining brokers. In fact, major banks like Wells Fargo and Bank of America shut down their broker lines a few years ago.

Why whine and complain and moan about the loss of the broker industry? Politically, it’s important because it demonstrates that our government cares less about what is truly good for the consumer and more about the lobbyists (like the big banks) who wrote the rules and monopolized the lending industry. Practically, it’s important because fewer people can obtain mortgages and fewer still will be able to shop for good service. Very soon, the borrowing public will have a choice between about 3-5 major banks. You know, those banks that cannot be allowed to get “too big to fail.” Personally, I have minimized the impact upon me because for almost 4 years now, I have been a “banker” and needed “broker” outlets only occasionally. So, the rule affects me and my colleagues only minimally. (A few of our loans are brokered because we have broker agreements as opposed to “correspondent” agreements with certain lenders who, from time to time, are able to do loans that our “correspondent” lenders cannot or will not do). The consumer will be more hurt than we will be.

Within our industry, here’s the buzz...I mean, the spin. “Let’s quit complaining about the regulatory changes, the loss of income or the increased work load because of compliance. The good news is that masses of people have exited the industry which leaves only the strong standing. If you’ve made it this far, guess what – consumers out there don’t have as many options. Your competition has vanished!”

What a perverted way to make a living.  

Personally, I’ve never been bothered by competition. It’s never occurred to me that I should be in the enviable position of the monopolist. Competition is good for the consumer and ultimately good for the industry. Competition encourages excellence, efficiency and lower costs. But, I’m naïve. And my government is astute to its own devices and designs. So, the consumer suffers without knowing that the difficulties need not be so difficult.

Repeal Dodd-Frank. Return this country to constitutional government. Eradicate monopolies and uneven regulations which are designed to enrich political allies and impoverish political “nobodies.”

The "We Didn't Think This One Through" Rule

New rules from the *CFPB will dramatically affect the ability of all borrowers to obtain mortgages. This post will analyze and expose the devastating effects of a second rule – the 3% rule.

The “We-Didn’t-Think-This-One-Through-Just-Ask-Texas-Mortgage-Originators” 3% Rule

The bureau’s general guideline reads

No excess upfront points and fees: A Qualified Mortgage limits points and fees including those used to compensate loan originators, such as loan officers and brokers. When lenders tack on excessive points and fees to the origination costs, consumers end up paying a lot more than planned.

The last post began with “Richard Cordray of the CFPB declares ‘All American borrowers are stupid and we have to save them.’" Of course, he didn’t say it exactly that way but the proposed rules effectively say it. [That's him on the right. Don't be fooled - I'm sure no head of a bureau created by Dodd-Frank could possibly be a political activist. Ignore the Barack Obama poster in front of him.]

One of those rules that will allegedly protect consumers is the 3% Rule.

The 3% Rule is a cap on closing costs. It requires that closing costs cannot exceed 3% of the loan amount. (There is some variance for loan amount less than $100,000). Also, the bureau has only vaguely specified what fees might be exempt from this accounting. It has, however, signaled that the loan officer compensation will be counted against this fee cap. While a CFPB bulletin in January 2013 stated that

The Bureau has decided not to finalize the proposal [something about LO compensation] at this time, however, because of concerns that it would have created consumer confusion and other negative outcomes. The Bureau has decided instead to issue a complete exemption to the prohibition on upfront points and fees pursuant to its exemption authority under section 1403 while it scrutinizes several crucial issues relating to the proposal’s design, operation, and possible effects in a mortgage market undergoing regulatory overhaul.

A **bulletin released in April of this year indicates the full implementation to include Loan Officer Compensation in the 3% limitation on closing costs.

 

To those outside the industry, this may appear confusing at worst and falsely helpful at best. Let me give you 5 facts that will help clarify:

1.    Costs are not the same as prices. The many costs that comprise “closing costs” are insensitive to government regulations. Appraisers, for example, do not lower their fees because some agency requires that the total fees not exceed a certain amount. Neither do the gas stations (from which they purchase the fuel to power their vehicles) lower the price of their product as the appraisers travel to the properties to perform their inspections. While prices are capped by government, costs cannot be so easily controlled.

2. Loan Officer Compensation is not the same as the origination fee, the processing fee or other fees listed as going to the lender.

3. Loan Officers are most frequently paid not only from any “origination fee” but from the yield paid by the investor-lender which funds the loan. Think about those things that are almost a thing-of-the-past, the “no closing cost” loan. With no closing costs, including no origination fee, how do you think anyone was paid. They were paid by the investor who purchased the loan which was made at a higher than “par rate” which paid a specific percentage of the loan amount.

4. These yields can go as high as 7%-8% but are often “eaten up” in other costs. (More on that later; but, they are called LLPA’s Loan Level Pricing Adjustments . . . another way for Fannie and Freddie to collect fees).

5. Loan officers typically make .7% - 2% as a commission on their loans per their contract with their employing lender. Many economic factors affect this commission structure, not the least of which is the market in which the loan officer works. That is, the loan officer who serves a market of mostly $80,000 mortgages and makes 2% on her loans will work just as hard and diligently as the loan officer who serves a market of mostly $400,000 mortgages making only .7% on his loans, yet she will net less real dollar for the same number of loans closed as her counterpart in the higher dollar market.

 

The CFPB’s proposed rules – specifically the 3% Rule - regarding the “ability to repay” are unnecessary and harmful to the economy and the lending industry but mostly to consumers. Here’s why, point by point.

Price controls never work to the benefit of consumers. The proposed 3% limit on closing costs cannot fare any better than any other price controls. And because the proposal also includes restrictions upon the wages of the mortgage professionals, it’s quite possibly unconstitutional, not to mention insane. But whether it’s insane, illegal or just pure nonsense, one thing is inescapable – it’s still harmful to the consumer. Wage and price controls have never inured to the benefit of the consumers. They always – without exception – produce shortages (a lack of available credit) and diminished quality (a lack of service and ultimately a lack of access to credit). In the case of mortgages, the shortage is simply running out of dollars (allowed by law) available to pay the fixed costs.

A fixed percentage unfairly discriminates against borrowers with lower loan amounts. By placing limits on closing costs AS A PERCENTAGE OF A LOAN AMOUNT, the CFPB effectively denies the “do-ability” of loan amounts below certain thresholds. This should be obvious. But, obvious it is not. So, let me illustrate. Nearly all closing “costs” are fixed. If they are not fixed they are certainly not subject to percentages. For example, the costs to have attorneys draw up the loan documents is about $350. Doc prep attorneys charge this amount whether the loan amount is $100,000 or $500,000. That means that – AS A PERCENTAGE OF THE LOAN AMOUNT – doc prep fees range (in this illustration) from .35% to .07%. In the latter case, there doesn’t seem to be a problem. But, in the former we only have 2.65% left to go and we are just getting started with one of the minimal fees. Underwriting and related fees typically range from $900 to $1600. Again, for an average set of underwriting costs of $1250, that’s 1.25% for a loan amount of $100,000 but only .25% of the $500,000 loan amount. It should take an Einstein to see that fixed loan costs quickly amount to more than 3% of loan amounts of $100,000 or so.

There are many fixed costs in loans. A percentage limitation does not allow enough flexibility to cover such costs. Other fixed costs include flood certifications, tax certifications, tax service fees, appraisals (having risen over 150% in costs since the advent of HVCC and Dodd-Frank), appraisal reviews, title/escrow fees, title insurance (varying from state to state although 3% works the same mathematically across the entire universe not to mention across state boundaries), courier fees. These fees represent individuals or firms who actually perform work on a loan file. Increasingly they represent people or firms who perform work that is required by government regulation. For example, the HVCC (Home Value Code of Conduct) rule (now under Dodd-Frank) created the need for appraisal management companies which, oddly enough, cannot perform their tasks for free or out of the goodness of their hearts. Real people working real hours in need of paying their own mortgages and putting food on their own table have to perform these tasks. How are these fees to be paid when an arbitrarily fixed percentage is mandated by a bureaucracy sitting in Washington, D.C. and does not allow for such costs; and such a fixed percentage especially is harmful when, because of inflation and government regulations, these costs actually rise sometimes when home prices are flat or actually declining.

Texas has proved that this fixed percentage does not work to the benefit of borrowers. Texas already has this rule (since about 1998) for equity loans. Because costs cannot exceed 3% of the loan amount and because THOSE COSTS DO NOT MAGICALLY GO AWAY JUST BECAUSE LEGISLATORS IN AUSTIN DECLARED THEY WERE UNLAWFUL, they still have to be paid. How are they paid? Those who know anything about lending understand that the lender must charge a higher interest rate to recoup the fixed costs in a loan. The higher the rate - the higher the yield. And since lenders cannot lose money by making loans, they must find a way to pay for these fees.

This 3% rule will mean higher interest rates for borrowers with lower loan amounts who already pay higher rates because of rate adjustments for low loan amounts. How does that benefit the consumer?  They pay a higher rate because a legislator (or in this case, a CFPB staffer) decided that an arbitrarily-contrived percentage was just enough, above which consumers should not pay without being “harmed.”

Even higher rates will not alleviate the shortage that this rule will produce. But, the problem is not solved by simply charging a higher interest rate. Yields which certain rates produce are not unlimited. That is, there is a point at which a higher rate not only does not pay more dollars but actually pays less. In other words, there is a ceiling limit beyond which a rate will pay no more dollars. What then does a lender do? How then will this conundrum be resolved? For years now, lenders have published loan amounts below which they will not lend. The reason is quite clear for anyone who cares to know the economics of lending and borrowing. Those minimal loan amounts will necessarily be instituted; if not by the actual lending company, by the originator.

How The Inclusion of Loan Officer Compensation Affects The Actual Price and Cost of a Mortgage

To make matters worse, loan officer compensation must be included in the 3% limitation. Besides the purely insane, Marxist nature of such a proposal, let us examine the practical effect of such a measure. As I have already demonstrated, the fixed costs can hardly be contained within the 3% limit on $100,000 loans in many cases. So, where now will loan officer compensation fit in such a scheme? It will fit ONLY IN LARGER LOAN AMOUNTS. That is also to say that the law of diminishing returns means that loan originators cannot afford to do loans below certain thresholds. It is not because they do not want to or because they would be unwilling to make a little less on one loan than another. The fact is, they would have to work for free – at certain loan amount thresholds, the originator would make $0 or, worse, pay a lender for the privilege of doing a loan for a customer.

Such a rule will produce the same moral hazard that all price controls produce – it will give rise to a black market whereby loan originators will perform task for favored individuals in exchange for money or favors that are completely off the grid. The indignation that politicians, government officials or CFPB staffers may express does nothing to produce access to credit for consumers.

The wiser and saner route for equal access to credit, good and fair prices and a robust housing market is really straightforward – do not institute the wage and price control measures currently ordered in the 3% closing costs limitations and its corollary limitation on loan officer compensation.

 

*The CFPB is the Consumer Finance Protection Bureau created by Dodd-Frank [Wall Street Reform and Consumer Protection Act] (2010) to regulate America’s finance industry. It has unquestioned authority, writes its own rules and can levy sizeable enough fines to put a medium sized mortgage company out of business.

**The CFPB bulletins and publications are poorly dated but the URL address above indicates that the publication is most likely from January of 2013. But the readiness guide dated 7/8/2013 (http://files.consumerfinance.gov/f/201307_cfpb_mortgage-implementation-readiness-guide.pdf) has listed the following web-based publication which lays out guidelines for caps on points and fees which are to include Loan Officer Compensation. As you can tell, it is dated in April of this year. http://files.consumerfinance.gov/f/201304_cfpb_compliance-guide_atr-qm-rule.pdf

New CFPB Rules: #1 - The 43% Rule . . . er, um, Scratch That - It's the 57% Rule

Richard Cordray of the CFPB declares "All American borrowers are stupid and we have to save them."

 

 

Well, he didn't use those exact words . . .

 

The CFPB is the Consumer Finance Protection Bureau created by Dodd-Frank [Wall Street Reform and Consumer Protection Act] (2010) to regulate America’s finance industry. It has unquestioned authority, writes its own rules and can levy sizeable enough fines to put a medium sized mortgage company out of business.

The CFPB’s new rules will dramatically change mortgages beginning January 2014. The lynchpin of Dodd-Frank’s answer to the mortgage crisis is called the “Ability to Repay.” By adhering to a set of prescribed guidelines, the CFPB has created a “qualified mortgage” or QM. This QM is supposed to help lenders escape government scorn and reprimand (which can be very expensive for the offending lenders). But, to the casual reader, the new QM seems to also avoid legal peril - borrowers that come back and charge them with indigence; that is, failing to verify that the borrower could repay the loan.

According the proposed rules (and keep in mind that the CFPB proposes rules to itself and decides whether or not to accept its own proposals), the CFPB has effectively created the model mortgage. Deviate from it and a lender’s borrower can sue them to “forgive” the entire loan. The only things that are unclear as of March 2013 are the exceptions. For example, one theoretical exception is if the loan qualifies to be sold to Fannie Mae or Freddie Mac. In other words, if the Fannie/Freddie automated underwriting engines approve a loan (and an underwriter verifies that the loan file meets the specified conditions of this automated approval), then the loan is presumed to be a Qualified Mortgage. What we do not know is to what extent Fannie’s and Freddie’s guidelines will conform to the new QM rules. Inasmuch as there is only a “temporary” time period in which Fannie/Freddie approved loans transcend this rule, it’s virtually guaranteed that the first feature which the mortgage giants are likely to adopt is the 43% rule; or, as I like to call it . . .

The “Moron-Borrower” 43% Rule

To be fair, allow me to quote from the CFPB bulletin.

Cap on how much income can go toward debt: Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This cap on debt ensures consumers are only getting what they can likely afford. Before the crisis, many consumers took on mortgages that raised their debt levels so high that it was nearly impossible for them to repay the loan considering all their financial obligations. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards such as that they are eligible for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) will be considered Qualified Mortgages.

Before you decide whether 43% is too cold, too hot or juuuuuust right, consider

-       The old fashioned total debt ratio was 36% (27% housing obligation ratio; 36% total debt including housing ratio)

-       In the past 10 or more years, Fannie’s and Freddie’s automated underwriting systems routinely approved debt ratios of up to 60% and I’ve seen even higher than that.

-       Currently, Fannie, Freddie and HUD (for FHA, which used Fannie/Freddie underwriting engine) are approving debt ratios as high as 55%.

-       Foreclosure rates have dropped dramatically in the past three years; from their high point in 2010, they are now lower than at any time since the crisis began in early 2007. While there are many factors that contribute to this, tightened underwriting standards are being given some of the credit. This is a somewhat dubious claim since it is rarely newly financed homes that go into foreclosure. A longer timeline is necessary to measure the effect of underwriting standards on foreclosure rates. But, we cannot deny that there is some cause and effect. Clearly, the underwriting giants have taken maximum debt ratios into account when setting the parameters of loan approvals. This means, then, that debt ratios of higher than 43% pose no hard-and-fast negative factor to Fannie/Freddie/FHA.

-       43% total debt ratio leaves fewer dollars left over as “disposable” income for a lower income earner than for a higher income earner. For the income earner making $2,000/month, $1,140 is “left over” after 43% goes to debt. For the person making $10,000 per month, $5,700 is “left over.” And this is after taking into account the Jaguar payments. One can only pay so much for a pound of chicken. Which bring me to . . .

 

More importantly, it’s really not the 43% rule; rather, it’s the 57% rule. Consider the following excerpt from the proposed rules. Under Types of Qualified Mortgages: Qualified Mortgages with rebuttable presumption, the borrower has recourse if “the creditor did not consider their living expenses after their mortgage and other debts.” [emphasis mine] This means that the lender no longer just considers the now-famous “debt to income ratio” but the remaining income both as a dollar amount and a percentage of total income.

If you thought borrowers were frustrated with increased demands for more and more documentation, wait until we tell them there is an upfront charge of $750 for an independent CPA’s audit of the last two years of their personal finances; that is, enough information to underwrite the remaining 57% of gross income.

To truly take this rule into account and in order to prevent lawsuits, lenders will need to know what households spend on cable TV, groceries, restaurants, church and charitable contributions (some people give 10% and more of their gross income to “charities”), school fees/tuitions/supplies, gymnastics or cheer activities (have you seen the thousands of families whose lives nearly center around their child’s cheerleading or gymnastics?), clothing, work or union dues/expenses, vacations, sports, gambling excesses . . . the list is inexhaustible. And higher income earners have a whole range of other “high-dollar” activities. In order to keep a child in the equestrian sport or advanced “go-kart” racing, parents could easily spend $10,000/month or more.

And underwriters can only measure the past as a way to predict the future. So, what and how your clients are spending right now may well affect their loan approvals next year.

 

It is my view that the greatest fault of this rule is the “moral hazard.” It removes the responsibility for financial decision-making from the borrower and places it, nearly, solely upon the lender. This is not to say that the lender should not set its own standards. It is to say that folks with good credit are often qualified to borrow more money than they have good sense to borrow. And, one of the major reasons they are a (credit, income and asset) qualified borrower is because they have exercised that good sense. It is likely that this sort of consumer will continue to exercise good sense. But, economic moral hazards are about incentives. And the CFPB’s rule introduces the wrong sort of incentive – that of placing nearly all of the responsibility for spending too much or too little on goods and services with the creditor, and virtually none of it on the borrower.

That’s why I call it the “Moron-Borrower” rule. The all-superintending state assumes that all borrowers are morons and completely indigent, ill-motivated ones at that. Moreover, the rules assumes that it is the state's role to save American borrowers from themselves.

Divorcing/divorced borrowers will be especially affected. To date, those little extra elements in a decree that order spouses to pay certain fees, tuitions, health insurance premiums and innumerable other expenses have not been counted in a borrower’s debt ratio calculation. Only child support and alimony or spousal support payments (and sometimes loan repayment to ex-spouses) have been counted in debt ratios (either as income or as debt). I expect that lenders will be required to either count those heretofore excluded obligations in the debt ratio (maximum 43%) or will have to consider them in the remaining 57% calculation.

So, remember that it is really not the 43% rule. It’s the 57% rule.

A bit of a rabbit trail here but still relevant. Income (one half of the debt-to-income ratio) is likely to be scrutinized more severely – especially support income. Up until this past October, both conventional and FHA loans typically required a “pay history” of only 3 months in order for child or spousal support to be considered “qualifying” income. (That, and the other requirement that such income continue for 3 years after loan closing were the 2 factors that produced “qualifying” income). Conventional loans now require a pay history of 6 months and, in theory, may require up to 12 - 24 months of such history. FHA guidelines still allow for a 3-month pay history but I expect that to change as underwriting guidelines are evolving into a monolithic, government-sanctioned tablet from Mt. Sinai.

Well, let me ask you. When the feds (CFPB) really look at the fact that the demographic that is most likely to default on their mortgage debt is the newly-divorced mother, how do you think they will rule on the matter?

It is more important now than ever that those who are even considering divorce immediately begin my pre-divorce strategy that will allow both parties to qualify for their next mortgage; whether it is for refinancing or purchasing. Else, they will be waiting for a minimum of 3 months longer for their financing – not good for many clients who have to purchase immediately after final divorce using support income to qualify.

Please give me your comments and follow-up questions. I enjoy hearing from you and will take the time to respond thoughtfully and responsibly. noel@themortgageinstitute.com or 817-454-4555.

Noel Cookman

NEW MORTGAGE RULES FROM THE CFPB

NEW RULES FROM DODD-FRANK'S CONSUMER FINANCE PROTECTION BUREAU ABOUT TO DEVASTATE AMERICA AND USHER IN A NEW DARK AGE

Okay, that’s a bit dramatic. But, it’s not totally untrue. (How’s that for word-smithing!)

 

The CFPB is the Consumer Finance Protection Bureau created by Dodd-Frank [Wall Street Reform and Consumer Protection Act] (2010).

 

The CFPB’s new rules will dramatically change mortgages beginning January 2014. The lynchpin of Dodd-Frank’s answer to the mortgage crisis is called the “Ability to Repay.” By adhering to a set of prescribed guidelines, the CFPB has created a “qualified mortgage” or QM. This QM is supposed to help lenders escape government scorn and reprimand (which can be very expensive for the offending lenders). But, to the casual reader, the new QM seems to also avoid legal peril - borrowers that come back and charge them with indigence; that is, failing to verify that the borrower could repay the loan.

The CFPB is actually creating a new and unprecedented legal recourse for borrowers to pursue action against the lenders who advanced funds for their home purchase. To be clear, a borrower will be able to sue their lender and demand forgiveness for the loan based upon the claim that the (plaintiff) borrower could not repay the loan. In other words, the borrower doesn’t have any obligation to keep their commitment – it is the lender which must suffer loss should the borrower incur expenses which he may consider more expedient than his house payment. “Perish the thought,” you say? Responsible citizens have always limited their purchases and debts to what fit in after they made their house payment. Too bad for the lender whose borrower decides to upgrade their XBOX, mobile phone account, cable access, vehicles and vacations . . . and cannot seem to make the house payment. The lender should have known that their borrower could not “afford” the house.

A “safe harbor” is allegedly created by the lender who adheres to the standards of QMs. But, the actual safety of this “safe harbor” is really unclear as only in the rarest of circumstances does the lender not retain what is called “rebuttable presumption.”

“Rebuttable presumption” seems to mean, in the context of the CFPB’s rule, that the lender gets a presumption that they have satisfied the rule (verifying the borrower’s “ability to repay”); but, hold on here - the borrower never gives up their right to rebut that presumption. In other words, if a borrower does not make his house payment for any reason, he can now blame the lender for lending him money he could not repay.

Yes, it is counterintuitive. Yes, it is incredulous. Yes, it is insane. Yes, it is the product of regulation-happy politicians and bureaucrats whose IQ is somewhere south of a door-knob.

 

In case you think I’m the door-knob here, please read directly from the CFPB bulletin.

 

Types of Qualified Mortgages:

 Qualified Mortgages with rebuttable presumption: These are higher-priced loans typically for consumers with insufficient or weak credit history. If the loan goes south, the consumer can rebut the presumption that the creditor properly took into account their ability to repay the loan. They would have to prove the creditor did not consider their living expenses after their mortgage and other debts. This does not affect the rights of a consumer to challenge a lender for violating any other federal consumer protection laws.

 Qualified Mortgages with safe harbor: These are lower-priced loans that are typically made to borrowers who pose fewer risks. If the loan goes south, the lender will be considered to have legally satisfied the ability-to-repay requirements. But consumers can still legally challenge their lender under this rule if they believe that the loan does not meet the definition of a Qualified Mortgage. This does not affect the rights of a consumer to challenge a lender for violating any other federal consumer protection laws.

There really is no “safe harbor.” At the end of the day, there really is no sure way that a lender can satisfy the presumption that they have created a “qualified mortgage.”

Speaking of the new pope, enough of my pontificating, for now anyway. Let’s talk about the rules. And here they are (see if you can guess where I inserted my own moniker for each rule). Otherwise, I have copied and pasted these rules directly from the CFPB bulletin.

Features of Qualified Mortgages:

The “We-Didn’t-Think-This-One-Through-Just-Ask-Texas-Mortgage-Originators” 3% Rule

No excess upfront points and fees: A Qualified Mortgage limits points and fees including those used to compensate loan originators, such as loan officers and brokers. When lenders tack on excessive points and fees to the origination costs, consumers end up paying a lot more than planned.

 

The “Let’s-Kill-The-Fly-On-Grandpa’s-Head-With-a-Sledge-Hammer” Rule

No toxic loan features: Qualified Mortgages can’t have the loan features that were associated with risky mortgages in the lead up to the crisis. Certain loans cannot be Qualified Mortgages:

O No interest-only loans, which are when a consumer only pays the interest for a specified amount of time so the principal does not decrease with payments;

O No loans where the principal amount increases, such as a negative-amortization loan; and

O No loans where the term is longer than 30 years.

The “Moron-Borrower” 43% Rule

Cap on how much income can go toward debt: Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This cap on debt ensures consumers are only getting what they can likely afford. Before the crisis, many consumers took on mortgages that raised their debt levels so high that it was nearly impossible for them to repay the loan considering all their financial obligations. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards such as that they are eligible for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) will be considered Qualified Mortgages.

 

The “We-Assume-That-Borrowers-Are-Stupid-If-Not-Totally-Irresponsible” Rule

No loans with a balloon payment except those made by smaller creditors in rural or underserved areas: The law generally prohibits loans with balloon payments from being Qualified Mortgages. Balloon-payment loans require a larger-than-usual payment at the end of the loan term. A small creditor operating in rural or underserved areas is…

 

In the next few articles I will examine each rule and its major impact upon borrowers and especially upon divorcing borrowers. I will also deal with the significant and major flaw in Dodd-Frank, why it should be repealed and – SURPRISE - how the newly created CFPB could actually become a profoundly helpful agency of government regulations.

 

 

New Mortgage Guidelines Squeeze Divorcing Borrowers

Perhaps the headline title doesn’t sound urgent enough. So, how about this?

 Fewer Divorced Borrowers Qualify for Home Loans

 or

Good Luck Getting A Mortgage If You’re Divorced

Highlights – ALERT – URGENT ALERT!

 

-       No more 3 months of “pay history” for child or spousal support to qualify for a mortgage

-       6 months minimum and sometimes up to 24 months now required

 

First, a definition of terms. When getting a mortgage, one must think in terms of qualifying income, not merely income.

To illustrate by hyperbole (and a touch of sarcasm), income one receives from robbing convenience stores does not count as qualifying income unless it’s reported for the past 2 years on the thief’s tax returns. “Income from Theft” reports on line 1b under Part I of Schedule C - “Gross receipts or sales not entered on line 1a (see instructions).” Remember to deduct the “split” with your get-away driver on line 11 under Part II (you should issue him/her a 1099 at the end of the year); and fees to your lawyer can be deducted on line 17 under Part II.

The point is, your qualifying income is your “Net Profit/Loss” as reported on line 31 of Schedule C and averaged over the past two years. So you see, you may have had income of $100,000 from your crime spree last year (2011); but the $50,000 you gave to your driver and the $50,000 legal fees to your attorney make your qualifying income a big fat $0. But, you say, I didn’t get caught in 2010 (the previous year) and had no legal fees and I drove my own car so of the $100,000 I “earned” from robbing convenience stores I had no expenses deducted, shouldn’t my average income for two years be . . . let’s do some math here . . . $100,00 + $0 = $100,000 divided by 2 years = $50,000?

Not really. Underwriters see a pattern (forgetting for a moment your criminality) – it’s called “declining income” and, again, you draw a big fat zero.

Think QUALIFYING income. It’s a big deal!

And these are but a few of the many guidelines for qualifying income.

Now, what of the divorcing or divorced borrower; specifically for the borrower who is trying to get approved for a mortgage and using child support or some type of spousal support to qualify. What are the rules? What makes that income qualifying income?

Until October 20^th of this year, the basic requirements were simple and straightforward. We called it the 3/36 guideline.

“3” - the borrower must have received the support for 3 months (it’s called a “pay history”) and

“36” - the underwriter has to assure its continuance for at least 36 months (easy enough to verify in a divorce decree since it specifies exactly how long support will continue). By the way, 35 months will not do – not a month less than 36 months after closing (not merely after final divorce).

Interestingly, we routinely helped divorcing borrowers develop a 3-month pay history relatively quickly. For instance, here we are at the end of November. I get a call and the applicant-client needs to qualify for a mortgage that must close at the end of December. How can we develop a 3-month history in 30 days? Very simply, the client is to receive the first support payment before the end of November for November’s support, then again on December 10^th (or thereabouts) for December’s support and for the third time on December 15^th for an early January support – *Merry Christmas! Really in about 18 days, we have created a legitimate 3-month history of support payments. Other guidelines apply. For example, it’s important which account pays the support and which account deposits it. (See me for those guidelines).

This is now a thing of the past. No longer does a 3-month pay history work. Lenders now require a minimum of 6 months of support payments received and can require as much as 24 months. Following the most aggressive pay history strategy (preceding paragraph), it will now take a minimum of about 4 months to develop this 6-month pay history. Just follow the calendar in the above example and you will see that at the end of March, the borrower might receive an early April payment to complete the 6 month history.

 

1^st payment               November 28

2^nd payment              December 1
3^rd payment               January 1
4^th payment               February 1
5^th payment               March 1
6^th payment               March 15^th for April’s payment

*This does not always work but we have closed many transactions qualifying on this pattern of support income. In other words, it can work.

Winning Strategies for Family Law Attorneys and Divorcing Clients

In light of these momentous guideline changes, I am recommending the following strategies for divorcing mortgage applicants:

1.    Speak with me as early as possible. No more of this “here’s Noel’s card, he can help so you should call him” stuff. Clients need to hear something more like “Let’s get Noel on the phone right now” or “Go into my conference room after our appointment and dial up Noel immediately – you have to speak with him NOW.” Of course this is a shameless attempt to increase my business. But, it’s really a lot more than that. If your clients do not get started immediately, they may well lose the ability to obtain any mortgage financing or their spouses may be unable to qualify for financing thereby leaving them at risk.

2.    Unless you see reasons why not, both parties should immediately open their own checking accounts. At the very least, the recipient should open his/her own sole/separate bank account. This is critical for verifying that the applicant has indeed received the funds for himself or herself.

3.    The potential borrower and recipient of support payments should begin receiving support payments, albeit informally, immediately. (Document according to my customized and specific instructions).

4.    Potential borrower and recipient of support payments should begin paying the mortgage from his/her own account. If wife is going to be awarded the house and must refinance its mortgage and husband has been paying the mortgage, the two parties should arrange between the two of them for husband to pay wife support payments and wife should then pay the mortgage.

a.    This flow of funds (previous two paragraphs) accomplishes at least two very important qualifying features in a mortgage loan.

                                          i.    First, it establishes support payments paid and received.

                                        ii.    Secondly, the potential borrower begins to develop proof that she is making payments and thus, demonstrating that she has “the ability to afford the house payments.” I didn’t mention it but one of the new guidelines allows reduced documentation of support (from as much as 24 months down to only 6 months) only if the borrower demonstrates their ability to make the payments.

5.    The amount of support should equal or exceed the minimum expectations of support. Child support is fairly straightforward in terms of minimal amounts, as I understand it. Spousal support, negotiable as it may be, is another matter. In all cases, the borrower qualifies – there’s that word again – on the lower of the decree’s ordered amount or the actual pay history amount. The decree may order $2,500/month but if payments have only been $2,000/month then only the $2,000 can be used to calculate debt/income ratios, not the $2,500. Conversely, if payments have been $2,500 and only $2,000 is ordered, then the borrower qualifies on the $2,000. But, ‘tis better to develop a pay history that is inflated above the final amount awarded than to develop a pay history that is less than the final amount awarded.

 

DO NOT TRY THIS AT HOME

LET ME DEVELOP THE APPROVAL AND OUTLINE A PRECISE STRATEGY FOR A DIVORCING BORROWER TO QUALIFY FOR THEIR OWN MORTGAGE

 

The next boom to fall . . . support income measured as a too small of a percentage against total income may no longer be qualifying. Stay tuned.

 

Noel Cookman can be reached at 817-454-4555 or by email at Noel@TheMortgageInstitute.com.