MORTGAGE INDUSTRY ENTERS PERIOD OF OVER-UNDERWRITING

by Andrew D. Schwartz, CPA

Sir Isaac Newton was definitely a man ahead of his time.  One could even say he accurately predicted today's mortgage market by stating, "To every action there is always opposed an equal reaction".

Just a few years back, getting a mortgage was ridiculously easy.  No income verification loans providing 100% financing somehow became the norm.

Today, the mortgage market has reacted to those carefree days, and obtaining a mortgage has become much more of a challenge.  For starters, Bank of America discontinued their successful Doctor Loan Program back in March.  No longer would B of A provide mortgages allowing doctors to borrow up to 100% of the cost of a home at a competitive interest rate with no Private Mortgage Insurance (PMI).

Over-Underwriting

Based on my recent experiences working with clients trying to obtain a mortgage, lenders have replaced under-underwriting from a few years back with a new paradigm of over-underwriting.  In other word, mortgage underwriting has now become significantly more rigorous.  Let's look at a few examples of today's over-underwriting.

One of my clients who has a seven figure investment portfolio was trying to obtain a $600k mortgage.  This client doesn't have much other debt, and earns a good salary from a business he owns.  Well, I ended up speaking with three different employees of the mortgage company's underwriting department at least a half dozen times trying to help my client obtain his mortgage.  I even got calls over the weekend from the underwriting team.  Finally, I spoke to a manager to clarify one final question on my client's 2008 tax return, and was told that my client would have been denied his mortgage if I hadn't been able to clarify that one number on his tax return - even though this client could have liquidated a portion of his investment portfolio and paid cash for the home.

Around the same time, I was also helping another client who was trying to obtain a mortgage for a primary residence.  This client is two married MDs who both earn a good living.  One has a private practice, however, so the underwriters asked me to prepare a Profit and Loss Statement that included his collections and professional expenses for the prior year as well as for the first five months of 2009.  Preparing this report is fairly standard and is no big deal, so my office promptly prepared and forwarded the Profit and Loss Statement to the underwriters.  Well, a few weeks later, we were asked to update the report to reflect his collections and expenses for the first SIX months of the year.  Now really, how much could things change in one month for an established psychiatrist?  That's what I call over-underwriting!

Plan Ahead

After commenting about my recent experiences with the new mortgage underwriting standards to my #1 mortgage resource Bob Cahill , Senior Mortgage Loan Officer at Bank of America licensed in all fifty states (Click to e-mail Bob), he explained to me, "People who deserve a mortgage are still getting a loan.  Yes, the documentation process is more challenging.  So let your clients know that they need to plan ahead!"

Bob points out that mortgages are still available to people who aren't able to come up with a down payment of 20% on their own.  "In addition to FHA/VA and special local bond programs, these options include Conforming loans (up to $417k) to 95% and the temporary stimulus Super Conforming loans to 90% (see below for loan size limits).  However, in the current declining housing market, these limits might be reduced by 5% to 90% and 85% respectively.  Jumbos or Non-Conforming mortgages now require a 20% down payment."

"Gifts are a common solution for down payment.  However, 5% of the down payment must come from the borrower's funds if the total down payment is less than 20%.   Since sourcing of funds to cover a down payment, closing costs and reserves only requires a 60 day history, planning ahead and depositing large gifts or other assets into your bank account at least 60 days prior to applying for a loan can greatly simplify and ease your qualification as these assets would now be considered your assets and not a gift."

When asked how one's credit score impacts the loan underwriting process, Bob explains, "People with a credit score of 660 who have enough money for a 20% down payment are still able to get a Conforming mortgage, however at a higher interest rate.  A Super Conforming loan requires a 700 credit score unless you have 25% to put down which then would lower the score requirement also to 660.  FHA may offer a better option and offer a lower interest rate and monthly cost if your credit score comes in below 680.  FHA allows credit scores as low as 600 with smaller rate penalties provided recent credit history is good enough to qualify."  

Even so, taking steps to increase your credit score will definitely save you a lot of money over the life of the mortgage.  "Expect your mortgage interest rate to be based on your credit score unless you’re using FHA/VA or special first time buyer bond programs.  Your interest rate for a conventional loan will be up to one-half of a percent better if your credit score comes in at 740 instead of 680."

Bob's final piece of advice to people thinking about purchasing or refinancing a home, "Reach out to a Loan Officer earlier.  Someone who knows the mortgage market can help you do some table setting to get yourself in a much better position in the eyes of a potential lender."

Mortgage Options

How much of a mortgage can you afford to carry?  During the hey day of overly generous lending from earlier this decade, you could obtain a Conforming mortgage that would bring your total monthly costs to as high as 65% of your monthly income. That means on a salary of $600k per year, you could allocate $3,250 per month towards your total debt inclusive of housing costs.  Even if real estate taxes and other total debt ran at $1,000 per month, you would have been able to qualify for a mortgage of as high as $400k.  Jumbo or Non-Conforming debt to income ratios have also been curtailed from the highs of 50%.

Now, lenders are capping the loans they write so your monthly housing costs are more in line with where they probably should have been all along.  Currently, for a Conforming loan, while total debt ratios shouldn’t exceed 36%, of your gross income, they might go as high as 45% with strong compensating factors such as high credit score, strong down payment and good reserves.  Jumbo or Non-Conforming loan total debt ratios are now limited to 45% of your income.  However, Bob expects that these limits may be reduced further if Jumbo defaults continue to escalate.  While these changes reduce the amount you can borrow by as much as 40%,  they should protect you and the lenders over the long haul.

When getting a mortgage, Bob explained that the first issue to understand is the type of mortgage you will get is a function of the amount of money you are borrowing, as follows:

• Conforming Mortgage - $417k or less

• Stimulus Super Conforming - Established as part of the Housing and Economic Recovery Act of 2008.  For loans in excess of the conforming mortgage, up to a higher limit based on your county. For example, the limit is $523,750 for Suffolk County (Boston) MA and $729,750 for NYC.  Check out the FHA's site for a listing of these loan limits by county.

• Jumbo Mortgages - If you are looking to borrow more than the Stimulus Super Conforming limit for your county, you'll go with a Jumbo.  Expect to put down 20%, however.

Bob also gave me a brief description of the loan options available these days for home purchases as well as for refinancing:

• Conventional mortgage - 20% down gets you a traditional mortgage or 20% equity gets you a traditional refinancing.

• FHA Program - If you don't have the 20%, consider one of these mortgages sponsored by the Federal Housing Administration.  You only need to have 3.5% to put down for a purchase or in equity for a refinancing.  The loan size is limited to the Stimulus Super Conforming, and these loans can be tough for condos.  And while there is no income limitation to the borrower, expect to pay PMI.

• Bond Programs - These are state specific programs.  While the required down payment or home equity might be as low as just 3%, there is generally an income limitation to be able to participate in your state's program.

• Make Homes Affordable (MHA) Loans - Refinancing option available through FNMA or Freddie Mac for homes with a loan to value between 80% and 105%.  No PMI for homeowners not currently paying PMI.  Find out more at www.makinghomeaffordable.gov.

Patient Attention

Sir Isaac Newton once said, "If I have ever made any valuable discoveries, it has been owing more to patient attention, than to any other talent."  My realization that the mortgage industry now seems to be over-underwriting is also the result of nothing more scientific than patient attention to recent interactions with my clients' lenders.

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SEPTEMBER 23RD DEADLINE TO FILE FBAR (FOREIGN BANK ACCOUNT REPORT) AND AVOID POTENTIALLY HUGE PENALTIES

As you have probably read, UBS is in the process of handing over to the US Government information on foreign investment accounts for close to five thousand individuals.  It appears that the IRS is using this event to prompt taxpayers to voluntarily pay income taxes on previously unreported investment earnings within their foreign accounts.

To avoid being hit with substantial penalties, you have through September 23rd to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, and to amend your income tax returns back to 2003 to report income earned on any undisclosed foreign accounts.

For more information, check out Voluntary Disclosure - Questions and Answers available at www.irs.gov. 

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2008 & 2009 TAX FACTS

• For 2008, the standard deduction for a single individual is $5,450 and for a married couple is $10,900 and increasing to $5,700 and $11,400 respectively in 2009. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2008, the personal exemption is $3,500 increasing to $3,650 in 2009. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $106,800 for 2009, up from $102,000 for 2008.
  
• The standard mileage rate is $.55 per business mile as of January 1, 2009, down from $.585 per mile as of December 31, 2008.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2009.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $5,000 for 2009.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2010 to make your 2009 IRA contributions. 

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