Wednesday, April 17, 2013

Mortgage Loan Doubletalk

As you may know from reading this blog for the past year, because mortgage rates are significantly lower today than they were when we bought this house, we've been trying to get a mortgage refinance loan. "Trying" is the operative word, because when a home has lost value, what started as 20% equity becomes far less. We put a 20% down payment on this house when we bought it, and we've been reducing the principal for nine years. Of course in the first years our mortgage payments mostly went to interest, not principal, but the loan amount did edge down by thousands of dollars. Not enough. In the recent catastrophic freefall of real estate, the value of our home declined by about 20%. Whoops.

Our original lender turned us down for a conventional refi that was advertised as a "no closing costs" loan, citing the loan-to-value issue after generously paying for a new professional appraisal. We proceeded to a HARP 2.0 loan, but found it very difficult to locate anyone in our area willing to do such a loan. Then we tried online, but looking for a loan online is like jumping into a shark tank without armor. We took the plunge anyway, and found a plausible enough credit union to broker the loan. Then we encountered massive delays from Fannie Mae, a nongovernmental agency that acts in a red-tape style that would make any federal bureaucrat proud. Delay, delay, delay. Some of the delay was caused by an incompetent loan processor, but most was caused by Fannie Mae over a paperwork issue that I've previously detailed. Finally, we cleared that hurdle, but then had to redo all our paperwork. This is not fun if you don't own a bulk scanner. Living out in the country as we do, we calculated that the gas cost of going to the nearest copy shop was far more than the aggravation cost of scanning and uploading forty-plus pages ourselves. Even though we had to do it several times.

But still there were delays. The lender wanted explanations in writing. The lender wanted new documents. The lender wanted documents redone. And the cost of the loan was so wrapped in obfuscatory language that we did not know the actual cost. Yes, the Good Faith Estimate is required by law, but is it required to be confusing? Why was the origination charge listed as $8,387, but a credit shown for $9,155? Why was the adjusted origination charge then a negative number? How was this company getting paid? Numbers like this created great uncertainty for us. And don't get me started on the Itemized Fee Worksheet. We're reasonably intelligent people, but these numbers never made any sense. Even with the company loan processor on the phone explaining them one by one.

Have you ever been to a doctor who says you have some complex medical condition, and then you've gone home and tried to explain it to a family member and been unable to? Because, basically, the doctor's explanation did not make sense to you? Well, these loan pages are like the doctor experience. They make sense at the time only as the mortgage professional cites them, because that person uses a convoluted system that does not correlate to how we ordinary people understand and conduct monetary transactions.

Frustrated by the endless delays and the confusion, we decided to check out an alternative, a direct mortgage lender that advertises heavily on television and online. By contrast with what we had experienced so far, their charges and process could not have been clearer. They offered to charge $1,500 as an origination fee, $500 of which we'd have to pay up front to them as earnest money, but which gets credited at the time of closing. And that's it. This might not be a universal fee for all the loan products they offer. I'm not claiming that I understood exactly what got credited at closing. I didn't. But it was a clear fee.

I talked to them again a couple days later and they explained that the $500 earnest money is either credited in full at closing or $250 of it is refunded to the customer at closing and the rest of it is credited. The customer's choice. One would think that learning this would have cleared everything up, but then this lender introduced a confusing new wrinkle. They offered to do our loan for only $250.


I thought I understood a clear fee amount. But now I see that if I had accepted their first offer, I would have overpaid $1,250 for this HARP 2.0 loan. Sure, they gave me some doubletalk about rates falling in the past two days, but I can check the rates online myself, and they fell .01 % the first day and .01% the second day. This is not a drop big enough to explain why the lender would suddenly be willing for forgo $1,250 on this loan. All it does is tell me that if I had agreed to the first offer, I would have been a sucker. I'm not trying to pillory the lender here, which is why I have updated this post to remove their name. But that second offer cut the land right out from under my feet.

So I'm back to comparing apples and oranges, and pondering what I am missing in all these figures. This latest lender's fees are refreshingly openly stated, but the way in which they make a profit sufficient to pay for the time of the three people who tried to sell me their loan is still unclear to me. It is equally unclear to me how my first lender and my second lender planned to make a profit. I feel as if I have wandered into a car dealership, where the sticker price is not the real price, and the dealer price is not the real price, and so on and so on, ad infinitum. I'm trying very hard to grasp where these financial companies make their profit. According to what I've found from SF Gate online, here are the possibilities:

1. Yield Spread Premium. The lender buys the money at a rate cheaper than it lends it out, thus potentially making a profit of hundreds or thousands of dollars, depending on the size of the loan. This seems most likely.

2. Mortgage Backed Securities. The lender bundles many types of loans together, some high-risk and some low-risk, and sells them as investments, at a profit. Maybe.

3. Loan Servicing. Separate from selling the loan to Fannie Mae or Freddy Mac, the lender either retains or sells the right to service the loan, which is a profitable business because the dollar amounts involved in home mortgages are so large. The loan servicer gets to keep all the late fees, after all.

4. Discount points. The loan customer buys the right to a lower rate by paying points when closing on the mortgage. None are listed on any of the loans we've been offered, but this is a clear cost to the borrower.

5. Loan Closing Fees. These include junk fees and overpriced fees such as charging $75 for a closing day credit check that only costs the lender $25, and also title fees and attorney's fees and others that can add up to a lot of money. These fees ordinarily are paid by the borrower. But if a lender has said there are no closing costs on a loan, obviously this is not where the profit lies.

Undoubtedly, as a customer's circumstances vary, so will loan offers. Some loans might cost many thousands more. At first, $1,500 was a clear, precise number, until it became $250. It wasn't huge numbers and then subtracting other huge numbers and then adding in more fees and yet subtracting some of them, too. But then it was another version of the same. I am disappointed.  

This stuff makes my head spin, and we're not done yet.


Avril Copperfield said...

It's unfortunate that your home refinancing wasn't favorable. We recently got ours refinanced and were lucky enough to end up with approximately $200 in savings every month. That's money we intend to spend on home improvement that could possibly give the home a higher value when we get it appraised. As for the lender issues, this is why it's important to find a lending company that works with you. Mortgages are tricky, so you can't afford to opt for a company that makes you do more work and causes you delays. Thanks for sharing your experience, Lily!

Hopeful Lily said...

Fannie Mae caused the most delay, as it turned out. The infamous SURF system, as I have detailed in another post.

We did end up with a substantial reduction in our monthly payment, which was the whole point of the exercise. But what a battle!

Amee said...

This is cool!