To many people, a mortgage is a simple loan that should be decided by the lowest price and closing costs. There is no real difference except price and rate. This is supported by the media and many in our profession. Just go with the lowest rate, APR and closing costs and you have made the right decision. All things being equal, this is good advice. But rarely are all things equal, especially in today's market place.

What is a Commodity?

Wikipedia "A commodity is something for which there is demand, but which is supplied without qualitative differentiation across a market. It is a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk. In other words, copper is copper. The price of copper is universal, and fluctuates daily based on global supply and demand. Stereos, on the other hand, have many levels of quality. And, the better a stereo is [perceived to be], the more it will cost...."

Does a Mortgage Meet this definition?

The majority of loans on today's market are purchased by Fannie Mae, Freddie Mac, the FHA, VA or guaranteed by the USDA. These have set contracts with consistent terms dictating the responsibilities of all parties involved. If the borrower meets the requirements set forth by the Investor's guidelines they qualify as a borrower. Same with their property.

Mortgage brokers, Mortgage Bankers and Depository Banks who sell their loans to these investors are all required to operate under these rules.

Once the loan is funded, it is a contract with concrete rules dictating the responsibilities of the borrower and Investor. At this point, your 30 year fixed rate loan is really no different then your neighbor's. You might have a different rate and servicer, but contractually, they are the same.

So Does This Make  A Mortgage a Commodity?

On the face of it, it would seem that yes, a mortgage is a commodity. BUT, I would argue that the act of getting a commodity is not a commodity.

This commodity, a lien against your home, is affected by many variables. Some of these you have control over but many you do not. Let's break things down some and see whether or not you should treat your mortgage as a commodity or as an important decision that requires the help of a professional.

Mortgages are provided through a variety of channels. There are retail banks like Wells Fargo and Bank of America, Mortgage Bankers who do not take deposits and only offer limited financial products, and Mortgage Brokers who offer loans from a variety of Banks and Wholesale lenders. There are some hybrids, but basically these three channels are your options.

This could also be broke down as Direct Lenders (those who sell directly to Fannie, Freddie or the FHA/VA), Corespondent Lenders (underwrite their own loans but get their money through a Direct Lender) or Mortgage Brokers (Offer a variety of loans available through Direct and Corespondent lenders). Of note, Retail banks and Mortgage Bankers often also broker loans through wholesale channels.

While these 3 all offer the same commodity, a loan sold to Fannie, Freddie or one of the Government backed programs, they all treat the process differently. They are have their strengths and weaknesses. Some have lower rates or lower closing costs. Some offer more personal service or no service. They might have a nice building that you can walk in to, or you might have to complete the entire transaction without ever meeting in person. Generally, these choices are good, and just a reflection of the individual business model. However, they also can lead to problems if you make the wrong choice. The best rate/closing cost could turn into something entirely different once you close.

More importantly, UNTIL A LOAN IS CLOSED, A MORTGAGE TRANSACTION IS A DYNAMIC AND FLUID TRANSACTION. It is subject to many forces outside or your control, and of the control of any of the 3 channels.

• Mortgage rates - Fluctuate daily and recently have had dramatic changes on a daily basis. While the rates that you see quoted via different lenders can be different, they are still reacting to market forces outside of their control. Recently, we have seen rates change 2-4 times a day. This means that yesterday's rate sheet is worthless.
  
• Credit Approval -The ability to get your loan financed at the rate quoted is still subject to your credit approval. This includes your credit score, information on your credit report, the verification of your income and assets and a myriad of other things that could crop up depending on the complexity of your life. i.e. BK, divorce, self employment, job changes... Unanswered questions can lead to a loan denial or at best, delays in getting your loan funded or a higher interest rate.
  
• Home Value -Your home also needs to meet the qualifications of the individual investor, be it Fannie, Freddie or the government programs. There could be property issues, or your home might not be worth as much as you or an individual lender thought. The lender who says "No Problem" might not be aware of local "problems". Your property might be in a marginal flood zone that can be overlooked, or their might be HOA litigation that needs to be resolved.
  
• Third Party Participants - There are many additional parties involved in a mortgage transaction that can help or hinder a loan. These include Title, Notaries, Inspectors, Appraisers, former landlords, employers, Creditors, Banks... While these are normal steps that we all have to deal with, they are participants behind the scene that most borrowers are unaware of. Also, they all need to be paid, which lead to those high loan costs that everyone likes to complain about.
  
• Government Intervention - We are seeing regular changes that affect your ability to get a loan. Some are in your best interest, others are misguided attempts to protect you. Regardless, they have a tendency to cost you money and extend the time it takes to close. Some have hindered your ability to get a loan period, or limited the choices available to you.
  

While this list isn't all inclusive, I believe it helps paint a picture of a process that can be more complicated and involved then you might be aware.

Conclusion

If we had a simple process where rates were the same no matter where you went, approval was based on a simple credit score pull like getting credit at Best Buy, and the lender used the County Tax records to dictate home values on a refinance and a purchase agreement on a purchase, then maybe I would agree that a mortgage is a commodity. You could then get your home loan at Wall Mart. But that is not the world we currently live in. I also believe that rates would be higher and fewer people would own homes.

So, in answer to my origional question "Is a mortgage a commodity?" My answer would be YES and NO.

Once it is completed yes, it definitely is a commodity. While you are in the process of looking for a lender and getting the loan done, it is anything but a commodity.

My Advice

Spend your time looking for a lender who you feel comfortable with. Discuss how rates will be calculated and how compensation will be structured. Get this in writing. Learn about his/her process for getting the loan funded and what to expect. Ask for referrals and contact them. Not just from clients, but also from Realtors, Appraisers, Title companies.

Once you find this person, stop looking for the "Best Deal". Commit to them and trust that you have made a good decision.

Oregon Instant Mortgage Rate Quote

In an effort to provide easier access to accurate Oregon mortgage rates for my clients and referral partners, I am using a new service that allows for an instant rate quote.

This quote engine does not replace my expert advice, but it does allow for you to see what today's best rates are based on specific programs and loan scenarios.

The Oregon Mortgage Rate Quote service will take your scenario and compare it against my different lenders guidelines and provide a quote based on who has the best rate. Keep in mind that since lenders have different guidelines and turn times, the lender that we actually choose to send the loan to might be different, but the rate quoted will be extremely close. While you will only see the lowest rate, your scenario will be saved so that I can compare it against all of my lenders in order to direct it to the lender who will serve you best.

So, give it a try.

Oregon home owners or home buyers: Use this Oregon Mortgage Rate Quote tool to easily see what rates are available to you for a variety of loan types.

Oregon Realtors: Use this Oregon Mortgage Rate Quote tool to get rates for your open house flyers or to assess a buyers ability to afford a home.

Feel free to contact me for a review of your Oregon mortgage scenario to confirm these rates and to get you or your clients a Good Faith Estimate.

 USDA Modifies Income Limits for Their USDA Guaranteed Rural Home Loan

I received an announcement today from the USDA indicating that the changes that we have been hearing about regarding the income qualification levels for the USDA Guaranteed Rural Home Loan are in deed fact. As of 4/20/2009, the USDA will change the income tiers. This will open up an already great program to even more Oregon and Washington borrowers, as well as the rest of the nation.

As an example, currently a single person would qualify based on significantly less income than a family of 4. Now, the two borrowers would qualify at the same income tier.

Here's the bulk of the email update:

Income Limit Modification
 
As a result of a direct final rule published in the Federal Register, income limits will change effective April 20, 2009.  The existing income limit structure will be revised for the Single Family Housing Guaranteed Loan Program (SFHGLP).  Instead of eligible adjusted income limits based on households ranging from 1-8 persons, a two tier income structuring consisting of a 1 - 4 member household and a 5 - 8 member household will replace the 1 - 8 person structure. The present add on limits for larger households will remain the same.
 
Look for the new limits to be posted to our eligibility website April 20, 2009 at http://eligibility.sc.egov.usda.gov/eligibility/.

The USDA Guaranteed Rural Home Loan is only available for purchases of homes in Rural areas, and many small towns located near larger cities.

As an example, in Oregon, Sherwood, Newberg, and Canby qualify, but Grants Pass, Medford and McMinnville do not.

Call or email me if you have questions regarding this great program, or just visit my website to learn more about this home or to view a few USDA qualified homes.

Larry Morris
www.PDX-Mortgage.com

 Sherwood OR Homes Qualify for 100% Financing Under USDA Program

It is becoming harder and harder for a home-buyer to purchase a home, yet there are still many affordable homes if you have a down payment or the advantage of a program that helps you qualify for more home.

Through a litle used federal government loan program, the USDA Guaranteed Rural Home Loan, we are able to offer financing up to 102% of the appraised price on the purchase of a new home in Sherwood, OR. This allows for the purchase price, seller contributed closing costs and the cost of the one time mortgage insurance.
 

Eligible Persons

• Have an adequate, documentable and dependable income.
• Must be a U.S. citizen or be legally admitted to the United States for permanent residence.
• An adjusted annual household income that does not exceed the published limits for Washington county . Call me for information on the income limits. Income includes the total gross income of the applicant, co-applicant, and any other adult in the household. It excludes certain expenses and adjustments. The larger the family, the more income is acceptable
• A credit history that indicates a reasonable willingness to meet obligations as they become due.
• Demonstrate repayment ability.
   

How to Apply

Click on the following link. Oregon Rural Loans

Homes that Qualify

• Guaranteed loans can be made on either new or existing homes.
• Plumbing, heating, water, waste disposal, and electricity must be certified as adequate and the dwelling must be free from termites and dry rot.
• No restrictions exist on the size or design of the dwelling financed, but must be considered modest.
• Must be a residence, not a farm.
• Dwellings with in-ground swimming pools, are prohibited.
• Homes must be located in rural areas. Rural areas include open country and places with a population of 10,000 or less and, under certain conditions, towns and cities with less than 20,000 population. Call me for a list of additional eligible areas..

Larry Morris is a Certified Mortgage Planning Specialist with American Nationwide Mortgage. in Newberg, Oregon. He can be reached at larry@PDX-Mortgage.net. His website is www.PDX-Mortgage.com. This material is copy protected 2008 by Larry Morris, Mortgage News that Matters. All Rights Reserved His opinions do not necessarily represent the views of Morgan Financial, Inc.

Licensed in: OR, WA.

Jack and Betty own a duplex that is completely paid off. At 79, Jack is still driving truck but is seeing a downturn in his income due to the economy. Last year they made over $90,000 between driving, a couple of pensions and SSR. They haven't rented out the 2nd unit in the duplex for a few years as there isn't enough room in the driveway for more then 2 cars. Parking on the street disappeared when the city widened their street.

Jack's concern was to be able to pave over the yard and create more parking, and for Betty to have access to cash should she need it if Jack were away from town on a trip. Betty was concerned about the ability to pay their bills with Jacks reduction in work. They both wanted to access cash as they need it, rather then tap all of the equity at one time. They also would like to be able to leave some money to a niece and her husband.

We looked at taking out a traditional Equity Line of Credit. While it would have been the least expensive option up front, it would have required them to make a monthly payment. At that point, the rent from the other side of the duplex would have covered the new mortgage debt with a few hundred dollars left over.

After talking with Jack and Betty, my solution was to use a HECM 175 Reverse Mortgage with a cash draw in an amount sufficient to make the needed repairs to their property and give nice cushion for the remainder of the year. This also left them with a sizable line of credit that will continue to grow as their property appreciates

This loan is setup so that if they use their equity wisely, and if the home appreciates at 5% per year, their equity will never be exhausted. In fact, if they live to age 100, there will still be roughly $357,000 in equity after paying off the loan balance.

While Jack and Betty didn't "need" a Reverse Mortgage, they have found that it has allowed them to do some things that need to be done without selling their home or making drastic cuts to their living. It also is giving them the peace of mind in knowing that they have unlocked the equity in their home should they need it.

While this isn't sophisticated mortgage planning, it is solving a real life problem for real clients.

Call me if you would like to see if a Reverse Mortgage is right for you. 1-888-660-2842.

Also, visit my Reverse Mortgage blog at www.OregonReverseMortgageNews.com

 How Oregon Mortgage Rates are Calculated

There is a lot of discussion about Yield Spread (YSP) or Rebate. Is it a rip-off or is it in the client's best interest? The bottom line is that it is a part of how our price sheets are constructed and how we price loans. Mortgage Brokers do it and so do banks. One is just more transparent then the other. Whether it is right or wrong depends more on the situation and the client/lender relationship.

Before we can  answer that question, I think it helpful to understand the technical aspects of a rate sheet and how a rate is calculated.

First, let's define the components of a rate.

Par - the break-even point where lender is willing to sell a loan. Expressed as "0".

Discount - The cost associated with buying an interest rate down. Usually expressed as a "-" number and is a % of the loan amount. Discount is usually paid by the borrower.

Yield Spread (YSP) or Rebate - The cost associated with buying an interest rate up. Usually expressed as a "+" number and is a % of the loan amount. YSP is paid to the mortgage broker.

Adjustments - fees that are added to or subtracted from the price or rate. These take into account different characteristics of the unique borrower or property. These are generally "risk" based.

Price - The cost associated with determining the final interest rate. This takes all adjustments into consideration and is then added or subtracted to the Discount/YSP columns in order to arrive at a final rate.

As you read on, please keep your opinions in check. This isn't an exercise to determine whether of not YSP is right or wrong. It's an exercise to show how rates are calculated. In another post, I'll elaborate on how YSP can be used for a client's best interest. But remember. There rates are wholesale. Mortgage brokers have costs associated with doing business. Some of these costs are passed through to the client via a slightly higher interest rate.

Here's an example of what a rate sheet looks like. Keep in mind that this is just one product on a very crowded rate sheet.

Base Rate Sheet

This is a 30 year Fixed Rate loan . There are 4 columns. On the far left is the Note   Rate. This is the interest rate that a borrower would pay. The next 3 columns are the number of days that a rate would be locked, or guaranteed, at. For this discussion, we're going to assume that the rate will be locked for 12 days and all pricing of the loan will use that assumption.

Base Interest Rates:

5.25% could be purchased by the borrower for 3.375 points, or 3.375% of the loan amount.

5.875% would be Par.

7.125% would provide the mortgage broker with a YSP of 3.5% of the loan amount

Adjustments

Here's a couple quick down and dirty pricing examples.

A) Mr. Smith wants to purchase a $200,000 home. He has a 700 credit score and will bring 20% down. This would result in a loan of $160,000.

In Mr. Smith's situation, there are no adjustments to the pricing of the loan, so a Par rate would be 5.875%

If he wanted to buy the rate down to 5.6255% it would cost him $2000 to do so or 1.25% of the loan amount

If the lender wanted to receive 1 point in YSP, he would charge an Interest Rate of 6.125%. This would result in a commission of $1800, or 1.125% of the loan amount.

B) Mr. Smith wants to refinance his current mortgage and pull $20,000 in cash out to pay off some debt. He still a 700 credit score and his current mortgage is $140,000. With the addition of $20,000, he's still at 80% Loan to Value.

There is a cost of .5% in order for Mr. Smith to access the cash in his home.

Par for Mr. Smith would now be 6%. This would pay .125% in YSP, but would be the closest to PAr. If Mr. Smith still wanted the 5.875% rate, there would be a cost of .625%, or $1000, in order for him to get it.

Why does it cost more?

 There is slightly more risk associated with the loan when someone pulls cash out of there property.

C ) The Jones want to purchase a home. They have 20% cash down payment and a 600 Credit score.

Due to the risk associated with their poor credit, their is a 1% cost in order to do the loan. This is added to the price to come up with a new "Par" rate of 6.125%. This would pay a YSP of .125%.

So, in each of these three situations we started with the same mortgage product and lender and a base rate of 5.875%. But the final rates varied based on risk. THe mortgage Broker basicall got paid the same.

A) - 5.875 %  - Purchase with Good Credit
B) - 6 % - Cash Out Refi with Good Credit
C) - 6.125 % - Purchase with Poor Credit

Hopefully this helps you to understand how rates are calculated. Again, this isn't looking at the ethics of YSP or Points, but how Mortgage Brokers all across the nation calculate rates.

Look for a future segment on how we structure rates in order to best serve our clients.

Many Oregonians could be hit by a big surprise next Tax season. It's the Alternative Minimum Tax (AMT), which was originally designed to hit only the ultra-wealthy. Well guess what. You're probably considered "Ultra-wealthy".

The AMT  is trapping an alarming amount of the middle class, especially those who own homes and live in states with high income tax rates. This includes Oregon. And it's getting worse. Pretty soon, over half those with incomes between $75k-100k could be victimized by the AMT.

So what is AMT, and what do we need to watch out for?

The AMT was first enacted nearly 40 years ago to ensure that wealthy taxpayers pay at least some federal income tax versus sheltering their entire income with big write-offs. This strategy worked at the time, but AMT has never been indexed for inflation, resulting in more middle-income taxpayers owing the additional tax.

All of us go through the AMT test each year. Our income is matched up with the tax brackets it falls into and the tax owed is calculated. But we also go through a second calculation: the AMT calculation. Many deductions are eliminated and the tax brackets are reduced. The tax owed under AMT is then compared to the tax owed under the bracket calculation. Then we pay the higher two taxes.

More individuals will pay the higher AMT tax since it does not allow deductions such as certain interest on some home loans, property taxes, state and local income taxes, standard deductions, or personal exemptions for children and dependents that are normally deductible under the regular tax brackets. As stated earlier, certain interest on some home loans will be wiped out under the AMT.

There are two types of home loans that can be eligible for tax deductibility.

First, there is Acquisition Debt, which allows interest to be deductible on a loan used to acquire or improve your primary or second home, with a loan limit of $1 million dollars. The good news about Acquisition Debt is that it remains deductible, even if you are subject to AMT. This makes Acquisition Debt very valuable. But once you pay off or reduce the balance of your Acquisition Debt, it is gone and only the interest on the remaining portion is deductible. So taking out a new loan at a higher amount will not give you that precious Acquisition Debt back.

The next best thing to Acquisition Debt is Home Equity Debt. Home Equity Debt has a limit of $100,000, which can be used over and above the Acquisition Debt Balance. And Home Equity Debt is flexible in that you can pay it down and pull it back out, which is not allowable for Acquisition Debt. But Home Equity Debt is eliminated under AMT. And with so many people being trapped by the AMT and also having loan amounts higher than what was used to acquire the property, the lost deduction is significant.

Congress usually passes an AMT "Patch" to help adjust for the increased amount of tax payers who become subject to AMT each year. This year is no different. The Democrats are trying to get HR3996 passed but the Republicans are against it. The Republicans state that the bill is flawed and includes other tax increases and would rather see a solution rather then an annual patch. Here are a couple of links for "both sides of the story" provided by OregonLive, the online voice of the Oregonian.

Democrat

Republican

I urge you to write you politicians and encourage them to come up with a separate AMT solution that is not tied to other "fixes". Just a simple AMT Cost of Living adjustment to protect the middle class.

How to find your:

House Representative

Senator


It's always good to check with a tax professional about your own personal scenario, and learn how this impacts you. If you need a referral to a tax pro, I'd be more than happy to make a suggestion, just give me a call!

Larry Morris is a Certified Planning Mortgage Specialist with American Nationwide Mortgage in Newberg, Oregon. He specializes in relocations and Sherwood, Oregon neighborhoods and Yamhill County. He is a Board Member of the Sherwood Chamber of Commerce. He can be reached at larry@PDX-Mortgage.com . His website is www.PDX-Mortgage.com . This material is copy protected 2007 by Larry Morris, Mortgage News that Matters. All Rights Reserved His opinions do not necessarily represent the views of American Nationwide Mortgage.

Licensed in: OR, WA,