The Government is Closed - Can I Still Buy a House?

Sam.

Good afternoon everyone. Welcome to this week's Mortgage Minute. My name is Art Alvarez with Mortgage Works where we have the answers and they're on the house. Coming to you from Palm Springs and the greater Coachella Valley area. Weather here is, you know, warm, toasty, a little bit, but definitely comfortable. Very high 80s, 90ish, plus a little bit of clouds. I think we've got a tropical storm off the tip of Baja, as I recall, coming kind of coming up northward here. So in any event, of course, as you like to know or you know, I like to talk about the fact we're in the baseball playoffs. So we'll be sure to be done with our show before the upcoming game. Dodgers, Phillies, Phillies managed to keep keep alive with a win. So we'll see what happens today. I do not think it's without within the or outside of the realm of possibility. The Phillies might still be around for a game five. So we'll see what happens today. That's got to mean another Phillies win today for them to move forward. All right, with that little sports report, we'll move on to the bond and mortgage market. As you know, the first thing we like to do is bring up our rate grid from our website where you can see our current mortgage rate indications, I call them indications because these are based on general parameters as to credit score and loan to value. And every individual's terms are going to vary depending on their situation. So keep that in mind. But these are pretty good indicators. And what you can see is rates continue to be very stable. We're hovering right around the 6% range, plus or minus on those conforming fixed rate loans and buy downs. FHA VA is right there still in the mid fives. The 15 year is very low right now and those equity loan rates by the way at the very bottom are remarkably good. So anybody looking to been on the fence about pulling out your equity, you really ought to take a look at that. If nothing else costs you nothing, you know, get in touch with me. I can put together a worksheet for you to give you all the details to help you, you know, evaluate if, if now might be a good time based on what the cost of financing currently is, which again is very attractive as equity loans go. So then we'll go on to the bond market, the 10 year bond yield chart that we'd like to pull up for the last five days runs from last Friday to today.

You can see how last week we ended last week on last Friday lower than we are now. And then early this week Yields definitely did start to trend up a bit getting into that mid 14, 415, 416, you know, almost a 420 range. Then we had that, you know, that Wednesday dip that Jeff likes to call. But then today, kind of a little bit of a trickle back up. So here, Here we are 4.13. What's it been now we're going on three weeks ago with the Fed rate cut where the 4 year, 10 year bond yield dropped briefly below 4 for like an hour and by the end of the day, 408, and here we are at 413 and we've been kind of jumping around in that range ever since. I think actually all that, if you kind of put it in plain language, all that's pretty good in terms of stability. I think that helps the market overall. I think people are getting more and more comfortable with rates are what they are. Start working on that home price because I think that's really where the issue is in terms of affordability or the primary issue at least. I think mortgage rates are really secondary when you consider what's affecting affordability the most. In any event, again, relatively stable on rates and on bond yields. And I think that is a pretty good thing. Now, what's going on in the markets this week to help shape where the bond yields are at and where mortgage rates are? Well, you know, when you got a government shutdown, there's not a whole lot to talk about. There's a light calendar week anyway for economic data points. But then when you have a government shutdown, what does that mean? Some of those data points aren't being released at all. As you know, we didn't get the employment numbers last Friday. That's the unemployment rate, the number of new jobs created, private and public. That wasn't released this week. We're running into the same issue and initial claims for unemployment was to be released this week. It has not, again, part of the federal shutdown effect that we are having on at least the markets in general, if not the mortgage market specifically. So as a consequence, what was interesting and looking at the US Economic calendar, which is, you know something, you can, you can Google it, pull it up, and when you look at it with the lack of other, you know, a light data calendar anyway, and then some of that data not released because of the government shutdown, the calendar was really pretty much full of what I call Fed speak. We had a multitude, I think by my count, eight governors as well as Chairman Powell, all scheduled to speak sometime this week. It's important to note Only because especially when you have this lack of other data, this government shutdown, then to that extent that data not being available, the market's going to start looking to react to something else. And that becomes looking at all of these interviews, speeches, whatever they they are lots of people in the Fed all talking this week to try to gauge what's their overall focus, where are they starting to trend to in terms of labor market inflation, is there chances of more rate cuts than currently predicted, that kind of thing. So that's really to the extent we're going to have effect on the market and mortgage rates. That's really what it's all about. And one of the other other little bits of data that did get released.

Was the Federal Open Market Committee minutes from their last meeting, the meeting just what, two and a half weeks ago when they lowered that fed funds rate a quarter percent. So the minutes to that meeting were released and it did bear out a few things. First of all, the Fed officials strongly are inclined to lower rates. Further, the argument is how much and how fast how much each cut and how fast will they start doing that. In fact, right now or at this meeting meeting, it came out there was a 10, 9 vote for two additional rate cuts for 2025. And those are pretty much agreed to be quarter percent cut. So by a slim margin, 10 to 9, the Fed participants voted that there should be at least two more cuts, basically the two last potential cuts of the year, October and I think December. So and those are expected to probably, probably be a quarter percent each time. So if you're on a heloc, if this bears out by the end of the year, your HELOC rate is going to be a half percent lower than it is now, which is a quarter percent lower than what it was a month ago. So you'll have that three quarters of a percent improvement on your existing HELOC from the last month's cut through the end of the year if this bears out. So that's good news for you. And if you're thinking about a heloc, that's a reason to start looking at these because that means these rates are getting better on that particular product. So check it out, we can give you some numbers for that. And so the last about the Fed minutes, the FOMC meeting minutes, was they're going to continue to have some concern and focus on the labor market. So that that's important to know because you know we have some soft labor market numbers come out once we are able to get data again that could help with bond yields and maybe get rates lower again, unfortunately, I hate to say it, in the mortgage business, sometimes you feel like you're in a place where you're rooting for, you know, bad economic news because it tends to be good for the bond yields and therefore for mortgage rates. But obvious we all know better. That's really not what we want to see happen. We want to have both, you know, we want to have those issues be addressed as they should be. At the same time, we'd like to see rates get lower. So with that, we're going to go ahead and bring Jeff on. We're going to do some, a little bit of a discussion primarily about. So with this government shutdown, what does that mean for the mortgage market and what does it mean if you're trying to get a mortgage right now, Art.

Is this like, is this like, you know, summer break and the teachers are out, they're off on vacations, there's really nothing going on because the government shut down. So, so you can't buy a home, you can't get a refinancing, things like that. Is that what that's going on?

Well, not exactly. That's why I want to talk about that. Because if you're to, you know, if you're to focus on the headlines, it can give you that feeling, right? I mean, shoot, I saw, I, I literally saw the headline grabbing probably 30 hours after the announced, after the deadline for the government to shut down was when I saw the very first article about those relying on, you know, government paycheck, struggling to make it. And it's like, well, wait a minute, this hasn't gone into effect long enough for them to have even missed a paycheck yet. So if this is all true, there's a, I think there's an underlying problem to this particular family situation. But anyway, so, yeah, that's why I wanted to talk about this a little bit.

Well, yeah, let's, well, let's talk about that. And you know, one of the things that I was wondering is, you know, when the government shuts downs, what effect does this have on the home mortgage market? Does it affect, hey, if rates are moving and things of that nature?

Yeah. Well, let me, It's a funny question to answer, actually, only given, you know, how long I've been around, you know, because, you know, again, you look at these headlines and I see some, and I've read a couple of articles about, you know, related to the mortgage industry and what does it mean and what kind of effect there's going to be. And it's interesting because even now in 2025, some of those comments, those opinions that are out there are almost like describing an industry from when I got first got in the business. Right?

Yeah.

Because I saw one where they talked about processing, I wrote it down. Processing delays. But. And it's specifically referred to the government insured or guaranteed loan products like fha, va, usda. So it perpetuates this perception that if you're getting an FHA va, USDA loan because those are federally guaranteed, insured, you know, whatever, however that's done and they differ from product to product. But given that the government's involved, this perpetuates the perception that that means it's going to take longer to get the loan and there's more hoops to jump through. And by and large a lot of that simply is not true anymore. Now I say I can relate to this because, you know, 40 plus years ago when I got in the business, many FHA loans as well as VA loans weren't underwritten and approved at the local lender level. Many lenders, like the company I started with out of college, a mortgage banking firm, oftentimes we had to submit the file, the loan file to FHA to be underwritten.

Oh wow.

To the Department of Veteran affairs, or the VA as we called it back then, to be underwritten. It wasn't, you know, as much in the lender's hands as it has been now for several decades actually. So the notion that this government shutdown has affected the processing of new applications, you know, people are just open escrow to purchase a home.

That'S really not happened. The front end of the process, the origination side of the business, which is what we're in directly, that's what we specialize in that, that initial customer contact.

You know, origination.

Step, that's where we're at. And in that part of this business, it really hasn't been affected at all. You know, part of these articles do talk about reduced staff. Well, again.

The lenders were delivering loans to, were trying to hire staff because business has gotten a little bit better. But that's a different issue. It's not because they cut people off, laid them off. They're on furlough because of the shutdown. Far be it. Many of these lenders are looking for a little bit more help to keep up with the current volume, which again is not setting records like it was a few years ago, but certainly has gotten better than what it was.

So in that situation, when you're talking about Hiring more people. So the decision process really isn't in the hands of the government. Is that already like, hey, there's this bulk of funding for FHA or VA or USDA loans that, that between you and your lender that's already going to get solved. It's not waiting for somebody that's on furlough to make a decision. Is that, is that fair to say?

Yeah, I think, I think so. And see again, that, that underscores what I was trying to describe there about how the business is different now. Back 40 plus years ago, you know, FHA and VA would be more directly involved on the front end, the origination step, where they as agencies would be involved in performing the underwriting function. You know, that's an important function where you have to get past that, get your loan approved in order to fund your loan. See, today 99% of FHA VA loans do not go to the agencies for any kind of underwritten review or prior, prior approval, they call it before the lenders allowed to move forward and close the loan. That's no longer how it's done. And so that's why on the front end there's really been no effect at all. Now where it can, where it can affect mortgage lenders is on the back end.

I don't know if they still call it this now, but back, you know, when I first got in the business, especially for a lender who did originated a lot of government loans, again fha, va, usda, they would have their shipping and insuring department and this is where they're shipping the loan files to say FHA in order to get the FHA mortgage insurance certificate for the loan file. That's an important step so that when the lender, if they have a problem in the future and there's a foreclosure that has to occur, maybe because the borrower defaulted. That certificate is important because that means that loan's been certified by FHA and they can then submit their claim to HUD to get reimbursed for their loss from the foreclosure. So that's getting kind of technical there. But that's, that's a part of the business that could be affected by what's going on now. But even that part, I would say is not quite like it used to be. So, so from that overall then, about the only area in the mortgage that's kind of mortgage related are those buying a home that's in a flood zone area. You know, there are some problems with getting, you know, flood insurance through the National Flood Insurance program, of course, because it's a federal agency, so that's been an issue.

Thankfully, you know, right now we don't have any loans in process for properties in a flood zone, but other than that, it's pretty much business as usual. And so, you know, from that perspective, I don't think we really have anything to worry about, at least not yet. And then if I can add one more thing here in our local market here in Palm Springs, Coachella Valley, this was always an issue with the bia, the Bureau of Indian affairs, in the past. The BIA would end up being sucked into the government shutdowns that we've had in the past. Well, we lobbied hard on that here in the local association, Realtors association, but that didn't seem appropriate because after all, technically, the Bureau of Indian affairs, that they're, they're basically governed as a separate nation. Right, Right. So how is it that the federal, U.S. federal government is having an impact on what is supposed to be separate from that government? Well, of course, this year or this, this year's shutdown. Right. Is getting to be almost annually. Right. The BIA is staying open. So it's not affecting our transactions here that are involving Indian lease land that has to have BIA approval before we can close it. Those are not being impacted, which is very good news here because that was a problem, a very serious problem at times in the past.

Why do you, why do you think the, I mean, I have my feelings about this, but why do you think the media continue churn up these stories that really are irrelevant to the industry? And even as you say, these are, these are headlines that you've seen kind of regurgitated over and over that absolutely have no meaning in today's world. Why do you think they do this?

I, I, I'm at a loss, Jeff. I, I don't understand what the motivation would be. I mean, you know, at least if you're going to talk about the mortgage business in 2025, I mean, some of this that's being written, they ought to maybe go knock on a major, you know, residential residential mortgage lender. I mean, you know, Rocket Mortgage or somebody or, or a local broker like us. And we can show you, look, everything's pretty much normal, so it's not doom and gloom. Now, obviously you don't want this thing to drag out and it's, it is going to, you know, negatively affect a lot of people who are, you know, they're compensated and work for the federal government some fashion, and they could be, you Know, financially harmed by this. So we want to end it as quick as possible. But in the meantime, at least in our, you know, little portion of the economy, the mortgage industry, things are pretty much going as usual and there's really not been anything in the way of significant delays at all that we can see. So.

Well, if you look at, if, if you look at this whole shutdown thing, sometimes, you know, we say, you know, it's good for one one side, but it's bad for the other. And when it's bad for there, it could be good for. Are there any good and bads or, and cons for people thinking, hey, I'm a homeowner and I want to refinance my refinance or get a heloc, something that nature or somebody buying. Are there any positive or negatives during this because of the shutdown that you see?

Well, I do a couple things. First of all, if you own a home.

I mean, not, it's not government shut down directly, you know, in the case. But you know what, one of the things that happens is.

In this kind of environment, especially if it drags on a little bit, consumer sentiment gets to be, you know, decline, starts declining, and we have any kind of, you know, little hint tinges of things are slowing down. People are kind of going into paralyzed motion and not spending money suddenly and so forth. You know, that could, if the market reads that, the bond market in particular, that could help bond yields dropped. You know, it's that bad news is good news thing. And so if you've been contemplating a refi and you think, well, it's a little better, but I want to get that extra eighth or quarter, you know, we may be on the verge of a period of time where you should just grab that because it's not, I'm not sure it's going to sustain itself because, you know, at some point the shutdown is going to be over and then the markets are going to start to focus on other data points, other factors, and this will be past history and everybody will forget about it. But at the moment, it could provide you an opportunity if you're looking at potentially doing a refi, take advantage of what is there. It's a little bit better than it was. And of course, if you're already on a heloc, you're enjoying this. The quarter we just had, the two more quarters that are projected with high, pretty high probabilities. Now that that's going to happen, that's three quarters of a percent in the last four months. So for HELOC borrower, you're happy about that and you've got, you know, the hope that it's going to get a little bit better with further cuts in 26 and 27. And then as well, if you've been thinking about a HELOC G might now may be the time to do it because you're going to grab it at a period where you're going to see almost immediate reductions in that rate from what you initially got. Why wouldn't you go ahead and time it and do it now and then see how far down you're going to ride? Because there's a belief that where the feds target fed funds, you know, four, four and a quarter, they want to get it down to around three. So you know, that's a percent, one and a quarter percent that could happen here in the, you know, pretty relatively short period of time. That might be worth taking a, taking a look at. Then if you're a buyer, see this kind of government shutdown headline, bad news can get people kind of depressed. And, and there could be people out there who are thinking, oh, I want to buy home. Oh, wait a minute. Government shut down. I don't think now's a good time to buy a home because I'm sure that that's, that's going to mean something bad for the economy or what have you and that I'm fearful. So I don't, I don't want to do it while, while in my, my way of thinking, do the 180 degree theory, that's what most people are thinking, go the other way. If you got a market that's starting to get jittery because of this shutdown on the buyer side, that could be, suddenly there's fewer buyers because they're hesitant. For those of you who feel like you're pretty, you know, secure in your, your situation, your family situation, your employment situation, your in income situation, you feel secure about that and you've been on the fence about buying and you're like to the point where you got to buy something maybe for very specific reasons. Gee whiz, get out there now. Because I think you're going to see less competition and less competition is going to help you negotiate a better offer in most cases.

Is that with that the less competition then that the seller is more open to negotiation as well because they're seeing less traffic.

Exactly. So that's the seller side of things. They're going to, you know, what better barometer, if you will, a buyer demand than sellers because they've Got their homes active on the market. They're most of them you're able to to view with the help of your, your agent as the buyer or prospective buyer. They do open houses all the time. So the sellers are very tuned in to what's going on with buyer psychology. And if these government shutdown situations, and this one in particular, and if it drags on, that could start to affect buyer psychology. So those brave enough and are secure enough in their economic situation to look past that, get out there and buy now because you're going to have more negotiating leverage on the seller side. They're going to end up probably helping that buyer find out. That's true because they're getting nervous that their homes have been lingering on the market longer days on markets have been going out a little bit. And so if they're seeing that lack of buyer demand, they're going to be more willing to be open to negotiation. Which of course that those combination of things that we're seeing right now. What do you think I'm going to bring up? Get advanced. Take advantage of getting a seller concession in dollars, not in price. Let us show you how to use it towards your financing. Buy down your rate permanently. Do a 3, 21 or a 21 temporary buy down, pay some or all your closing costs or a combination of all that. That's what buyers should be doing in this market with this kind of psychology going on. And there's some deals to be had out there and sellers pay attention to those offers because while it seems like a lot, it really isn't relatively speaking. If it's close to what your average sell price to list price is anyway, consider it strongly and you know, in most cases take advantage of it. Get your home sold. I think right now is a good environment for all that to occur.

One last question on that Art is is this having any impact on, on tightening of restrictions on loans? Like they're being a little bit more critical of loans and the rates are are not the rates but the, let's say the FICO scores. Things that nature are being looked at harder. Has any of this shutdown impacted that or is it pretty much business as usual?

Haven't seen much any of that. To the extent that there wouldn't be any impact, it would be more directly on a more of a loan level, what we call a loan level basis where an individual loan file might reflect borrowers who are employees of certain government agencies that would be easily, easily identified as being, you know, not open, shut down. So that could be a factor in Terms of closer look at the income situation for borrowers who are employed in those departments, those agencies that are going to be directly affected. Other than that, no, there's really not been any extra scrutiny, you know, and things, in certain things, there's no, there's no subjectivity about them anymore anyway, like credit history, your score is your score. So you know, if you're 779, you're 779. The underwriter doesn't look at that more, you know, strongly, or maybe not as strongly as they otherwise should rely upon it for, because that just isn't done anymore. It's your score is your score. And what's going to be frustrating is, you know, 780 is the minimum for the best pricing tier on a conforming conventional loan. Well, if you're at 779, one point, you miss that. Oh, so. And there's no exceptions, you can't say, well gee, I'm, I'm really 77, I'm really 779 and a half. But you can't see that because it always rounds down. No, no, I mean you could, you could beg and plead it just, you're 779, so your loan's going to be priced at that second tier pricing level because you missed it by one point. The, the response from a lender is going to be, well, go get your credit score higher and then come back.

So, well, two shout outs before we move on. One is if you're a buyer or a seller or refinance, this is a good time to still take advantage. It hasn't had much of an impact, but there are some pros for each side of the aisle that could help you. The second part is I would love for someone to reach out to Art that's in the media and say, and ask some of these questions so Art can kind of, I'm going to say, debunk some of the, some of the long standing myths or things that used to be true. And instead of investigating and finding out are they accurate today, they just kind of regurgitate and put a new date on it. We think that's the fact. I'd love for them to reach out to Art and say, hey, what's really happening in the mortgage industry? I don't know anybody that has more of a depth of knowledge and on top of this stuff as you do. So I just, I just hope somebody out there will say, hey, you know what, the Sark guy, he's, he's on top of it. Mortgage minute. Let me Let me reach out to him and see what's going on. So the second one I want to talk about is a type of loan, and I was fortunate. I was in a group this past week, and you talked about something called a piggyback loan. What are they and what problem do they solve?

Art? Yeah, it's an interesting question because this is a product. It kind of reminds me of the buy downs, right, the temporary buy downs that we've talked about forever. You know, piggyback loans are in the similar category in the sense they've been around for decades. But as is always the case, you know, the mortgage market, real estate market changes over time. The, the popular, you know, loan options and feds change over time and so forth. And, you know, the problems to be solved financially can change. The piggyback loan is one that involves your. They're primarily used for a purchase, not not for a refund. And the idea is, with a piggyback loan is that you've made basically a conscious, strategic decision that after applying whatever amount you have available for down payment funds, that you're going to take the remaining portion of the financing and you're going to split it up into two loans. That's where the term piggyback comes from is because of course, mortgage loans go in, you know, priority recording order. So you have a first trust deed, right, A first mortgage. We call it generically a first mortgage because we're actually in a trust deed state in California. But, you know, first mortgage, if you have a second loan that's a junior lien or a second mortgage, you can have a third lien, third mortgage, and so on. So the idea is with a piggyback, you're going to take your total amount of financing you need, split it up between two loans rather than having one and a portion of that's going to be your first mortgage and a portion that's going to be your second mortgage. So that's why, you know, piggyback one loan, piggybacks on the other. Okay, so then the question is, well, why was this even created?

And way, way back when I would say the basic reason or the primary reason piggybacks were considered, and this was in part a marketing effort.

By second mortgage lenders, your equity loan lenders, who were trying to drum up business like, hey, you know, we want to make more loans, and gee whiz, the problem with that is when the mortgage market developed where people could buy and finance a home with a loan at, you know, higher and higher loan to values, then they could get A single loan with three and a half percent down, you know, FHA conventional loan with 5% down and get a 95% loan, so forth. So.

The, the second mortgage lenders figured out that they needed to promote an alternative to one of the sort of evil outcomes of putting less than 20% down and getting a single loan. And that is mortgage insurance.

So the idea was, and again, mortgage insurance can confuse people. A PMI is private mortgage insurance. That's insurance that is put onto conventional conforming loans, that is loans that are not insured or guaranteed by the government. Then you have mutual or you have mortgage insurance. FHA's version is called mutual mortgage insurance and that is insurance on a federally insured mortgage, again through fha. So two different types of mortgage insurance. PMI is private, meaning not fha, not va, private, conventional. That's what it's for. So the idea was if you put 5% down conventional or 10% down, and particularly if you had lower credit score, your PMI cost, private mortgage insurance cost could get quite expensive. And so PMI kind of got a bad rap. And the focus was to try to how do we get around this PMI cost? So here comes the equity loan industry. Hey, we have an idea.

Buy your home. Yeah, go ahead and still put 5% down, but split up your financing between a first at 80% where there's no PMI required, and then we'll provide a second mortgage for 15% of the price and then you put down your 5%.

Ergo, no PMI cost. There's no PMI coverage required because the first mortgage is at 80% and second mortgage, because they tended to be, they're in junior lien position anyway. They tended to be at higher combined loan to value. Given the nature of the type of lending they do. They don't have mortgage insurance on those loans. It's basically built into the rate. That's why a second mortgage rate is always higher than a first mortgage rate. In part for that reason it's junior in priority and it is typically going to be at a higher combined loan to value when added to the first. So that was the initial.

Discovery of a new financing tool predominantly used to get rid of or avoid mortgage insurance by splitting up your financing between two loans. So, and that worked for quite a long time. But in recent years, you know, PMI has gotten, I think, better in terms of managing their risk. I think PMI overall is, I would call, I would call it less expensive than it was, at least relatively speaking, when you consider higher, you know, median loan Prices and purchase, prices of homes and so forth. And so the whole piggyback to get rid of or avoid PMI kind of fizzled away and just hasn't been a major part of the market. Now all that said, where I think a piggyback is, has got great application particularly in some markets like ours here in the Coachella Valley. Give you a real life example. We just started this deal last week. Family in Seattle, they've decided they're moving to Palm Spring. Their home they think is worth a million dollars. They're looking at a home in Palm Springs for about a million two million and a quarter.

Both employed, very high wage earners. Income not an issue. They have money available for the down payment for the purchase loan without having to wait for the proceeds from the sale of their current home. And their current home has lots of equity, million dollar home with about a $250,000 mortgage. So they are able to buy the purchase home non contingent. They don't have to sell their current home to close on the purchase side. I pre qualified them that way. They negotiated a purchase to do that. So they opened escrow buying this home for a million 240. They're putting 300,000 down. Actually 340,000 down and.

Or 25% down. And then we're going to take the remaining.

Financing amount 940.

And we're splitting it into a first mortgage for 210,000 and a HELOC second mortgage for 730,000. Oh, and that's not by accident. The estimated sale proceeds they got from their realtor for their home in Seattle which is now also in escrow, 730,000. So the idea here, here is we're going to close their per and these are going to end up closing like within a day or two of each other. I can't say, well let's not do the HELOC because you're about to close your, your house anyway. You'll get your 7:30. That's just more down payment. Why get the HELOC? Well two reasons why we're not doing that. First of all their offer was accepted based on non contingency of selling their current home. So they are not allowed to wait for the home to sell to close the sale a day or two later. They got to be prepared to close on their close of escrow day which is sooner than their sale close of escrow day. So, so they have to close. So the idea was set up the HELOC for the same amount of their proceeds. We close the purchase with Two loans. And then a day or two later, or turns out if it's a week later, they close on their sale, take their sale proceeds, pay off the heloc. Oh, now they're left with what they wanted long term anyway, which is they wanted a smaller loan, net net of once they get their current home sold and the proceeds applied toward the purchase house. Originally we were just going to do a loan for 940. And I pointed out to them, look, you can apply 730,000 of proceeds toward this 940 loan, but your payment's still going to be based on the 940 loan amount.

It doesn't reset.

So you're going to be a 210 balance paying this huge 940 payment. This is a way to address that problem. Now it's true, some lenders, more bank oriented credit unions, I think, I think there is a process where you can apply to maybe get them to recast it, but they actually like the idea of doing it this way anyway, in part because that 730 HELOC, once it's paid off, it's going to sit there unused but open. So if they need to tap into some quick funds for any other reason, they got nearly three quarters of a million dollars sitting there waiting, ready, ready to use the credit card they give with it, give you with it, or the checkbook.

So at a really good rate.

Yeah, it's a prime plus a quarter.

Wow.

Seven and a half years by the end of the year, what we talked about earlier, they could be at 7.

That's really great art. That's. What a good idea.

And then when it's paid off, there's no interest occurring because it's a zero balance and yet the, they can access it anytime.

Wow. So just because they pay it off, it doesn't mean it closes it out. It just zeros the balance and it's there for how long?

How long do they have an access for that?

Then this particular one has a five year draw period. So for five years it's sitting there, no interest occurring unless they have a balance. If no balance, then they wait and just use it when they need money.

Wow, what a great idea. What a great idea. Art. That's, that's brilliant. So that's called a piggyback loan.

Yeah, it's a big, I love that.

Well, let's get into this last piece, which is, which is now loan registration and initial disclosure, including le. Why all the confusion? First of all, what, what is this you're talking about?

Yeah, I wanted to Touch on it quick because I, I deal with this probably more than anything else on the loan process, including a new customer, actually a past customer. We're doing a new loan for them on a refi actually. And he was getting confused about the initial disclosures. First of all, to cover the issue very quickly, first of all, as I mentioned before on this show, when I encounter a new customer or even a past customer, we're going to start a new transaction with I very first thing up front, top of mind, you're going to see numbers. First, you're going to get a workshop worksheet from me based on parameters you either that you either give me or based on the ones I had on you from before. Only subject to getting an idea what your current credit score is is now. And we usually start off with just relying on what the borrower tells us, letting them know it's subject to change if they're wrong. So then I can give them specific numbers even before we start the process. So then they've already got written numbers. It's on a closing cost, one shirt, one sheet piece of paper worksheet different than an le, which I'll mention here in just a second what that is. But so we move forward. We're going to register your file with a lender and when we do that, there is a regulatory requirement that the borrower must receive initial disclosures, including an official le, which stands for loan Estimate. That was a form created by the cfpb back in 2010. So it's a regulatory requirement that the borrower receive that package within three business days from the date of registration with the lender. So when we finish that registration, they're going to get an email.

From the lender we registered their file with with the initial disclosures and they're provided instructions to open the disclosures and sign them. Basically e sign them all. It's in most cases a very simple process and I would say majority of borrowers, not a great majority, the majority of borrowers seem to handle that process fine and can get it done with no problems. But we do have.

More than a few, but not a majority who struggle with the process for various reasons. And one of the big parts of the process that really gets people kind of wound up is the LE document itself. It's typically about three to five pages out of what is generally going to be a hundred page disclosure package. It's a lot of paper. All on the screen is what you're looking at because you're encouraged to do it online. You can have the package, you know, snail mailed to you and you can sign it all manually. But we really discourage people from that unless they really, really want to, you know, take that approach. Anyway, so here's the problem and it's something I've kind of groaned about in the industry for years.

This three day rule. Because when this LE goes out, it's a loan estimate, so it has specific figures. Now it's going to have your loan amount, it's going to, you're going to be able to determine what your down payment is from the form. It'll have a rate on it, but it's going to have an itemization of all closing costs. Now what do I mean by all closing costs? You know, appraisal fee, escrow fee, voe fee.

Notary fee, the escrow or settlement fee, the lender's title policy fee, the recording service fee, blah blah, blah, blah, blah. Most of which by the way are being charged by the escrow and title companies, not us, the lender or the mortgage broker. So those are all on this form. And again, it's going out within three days. It has to be signed to move forward with additional steps in the loan process, underwriting and ordering the appraisal. So the fundamental problem is usually when, at that date of registration and even within that first 24 to 48 hours, we often don't know who the escrow company is or who the title company is or what their fees are. And yet me as the originator have to send a file to the lender to be registered with all fees estimated. Even though all of the fees I'm estimating are not mine, they're not mortgage works. In fact, that's one point. I'll digress. Everyone watching and listening, we don't charge fees on our mortgage originations ever. We never have in 28 years, we never will. So we have no junk fees at all. So with that put in place there. So here's the problem. So how do you get around that from a regulatory standpoint? Because each fee, depending on what type of fee it is, there's a regulatory tolerance limit as to how far off you can be off some like the origination fee, the lender's underwriting fee. No tolerance. You cannot, it has to be exactly what is quoted. Now with other fees there can be a 10% tolerance and with other fees there's no tolerance because it's understood they can change. Like your homeowner's insurance premium that we're estimating up front and a few other things like that. So what that means is the lender had these lenders, we all had to come up with a different way to solve the problem. Well, the way the lenders do this is, and I'll use one in particular, they call it their smart fees. So when we register the file we'll say, it'll say do you want to use smart fees? We say yes. What that does is it populates this loan estimate with basically fees from a predetermined pre designed template of fees based on certain, you know, loan amount levels and purchase price or home value levels. Basically just a pre made, you know, set of fees. Again, this particular lender calls it smart fees. And they also just populate the LE with the name of an escrow entitled company that 99% of the time is not the one that's going to be handling your transaction. That's important though because by doing that escrow and title fees are allowed to change based on shopping around. They're considered a fee that you can shop around for even though almost no one ever does that. But because it's allowed to shop around, there is no fee tolerance as long as the actual provider is not the same company named in your le. Okay, so you're off the hook there because almost always we meet that test. Who's actually going to be chosen by the realtors in the transaction is not the one pre populated in the LE by the lender's smart fee schedule. Right. And then the same thing with all the rest of the fees. So here's the problem. They overpopulate the LE with more fees than are actually going to be charged. Like how about this owner's title policy On a refi there is no, that's a, that's a, that's a fee charge on a purchase, not a refi or a transfer tax. $2,000. Again that's on a purchase, not on a refi. So I had a refi LE go out as part of one of these disclosures with those kind of fees on there and other fees that were inflated way high. But understand that that is on purpose. It's to avoid under disclosure where fees can't or fees penalties can be severe. So what you all have to understand whether you're getting a loan from us or any other lender, mortgage broker, what have you, don't panic when you see that LE with your initial disclosures, it's a good faith effort to try to guesstimate the fees that you will be charged. And that guesstimate is being provided primarily by people like us. The Mortgage loan originator, who is put in the position of having to give you a relatively accurate estimate. Well, having a clue who's going to provide these services and what they're going to charge, because we get that information later.

Wow.

That's why I always say it does. First of all, it's a loan estimate. It doesn't commit you to anything. So signing it doesn't mean you're stuck with those numbers, you see? Not at all. So that's why it feels weird to say, and I have to tell people all the time, ignore what you're looking at and just sign the documents. Why? Because that starts that next period of time that allows the next step in the process, getting your loan underwritten, getting your loan, your appraisal ordered, and moving along in the process. So it's important, get on. Get on it right away, sign it all. Don't get mucked up in the LE numbers, Go back to your loan originator, have some more discussion. We will do that for you and show you what's right, what's not right. And your own loan originator, if it's somebody else, should be able to do the same. Don't get worked up on this. Keep the process moving, sign away. You'll be safe. After all, most of those disclosures are designed to protect the borrower anyway, so you always have to keep that in the back of your mind. These are generally for your protection, not to, you know, trick you. That's not what they're about, Art.

This is a wild. It's a wild situation. You have to deal with every loan that you originate, whether it's a purchase or it's a. It's a heloc. I'm curious, do you get the opportunity to disclose the disclosures? Because it sounds like they come from the lender, not you.

Well, right. They do. Yes. And yes, we do have the option. And see, this is where I'll admit, you know, we're probably a little bit of guilty of what, as you probably can surmise from what I describe, it's really kind of a nutty process. Right. It's kind of like, why is three days so magical? Why don't we make it five days? That way we can be assured of getting to find out who the escrow provider is and get their actual fees. So we can populate the actual fees at the beginning rather than something that's way off and then we have to fix it later. Yeah, but I'll, I'll, you know, plead guilty that when these lenders we used to early on with this process, that's what we had to do. And it was very laborious. You had to go through. And we're still stuck with having to guesstimate because again, we don't know who the escrow and title company are in most cases or even if we have do know what they are. And even if we've requested their fees, it can take them two or three days to get, get them to us. So we have to put something in there to keep the process moving. So, you know, we still feel the burden. And so frankly, when lenders started seeing the problem with that, the manual input of all these individual fees, and particularly coming from a position of fear because if you're off by $2, you're going to get, you know, $1,000 penalty because you exceeded the 10% tolerance, you know, whatever. I'm exaggerating of course, but the point is that was very inefficient. So they, they, I think it was a good thing that they came up with these templates, these smart fees as one lender calls it, because it's a, it's an easier way to get the process going. So we always, you know, if they offer a template, we're going to choose it. And so where I spend my effort is to alert my customer of what everything I just described. So they know when they get the package. Yeah, it says $3,000, you know, transfer fee on my refinance loan. Well, ARC said to ignore it, so I'm just going to sign and that's what we do. I, I, I, I just feel like that, you know, and frankly, it's better anyway. It gives me more opportunity to interact with my, with my client to reassure them about the process. So I think it's a healthy thing. I'd rather, you know, reach out and explain this nutty, this little.

And, and we should do a video on it, by the way, Jeff. So, yeah, it's just, it's just an inefficient process, but it's one that, as long as you understand the bigger picture, nothing to worry about. Let's just keep it, keep the process moving.

So, so you said, you said not quite half of the people who get these disclosures will still like have a problem because it'd be confused because let's face it, as you said, they could get beginning 100 page document and it's electronic and all of a sudden now these everything's overpopulated. Even though you told them they might have forgotten because now there's a bit of overwhelm how many of those people are you dealing with that you have to go back and basically talk them off the ledge?

Well, I mean, if I was to put a number to it, I would say it's somewhere between a quarter and a third of our customers. We have to go over that part of the process. Well, there's one I just described. It's real live, just a couple of days ago, and this is a past customer of mine. I mean, I arranged this previous loan, and I think it was 20, 22 or something, or 21, but it was the same thing, you know, when he first reached out, said he wanted to refi. We discussed the. What he wanted to achieve. So I put it together, a worksheet and sent it to him. And with my worksheets, I am, you know, despite, you know, me playing the victim that I'm having to disclose fees from for people I don't know who are going to handle the deal. On a refi, we do as a mortgage broker, we have the ability to choose the provider.

Okay.

Not on a purchase. On purchase, it's all about the realtors and the seller and all that. On a refi, we get to choose. In most cases, that's good because then I know.

Who I'm likely to place that refi with, and I have a pretty good idea of their fees because I do business with them on a regular basis. So that's how I started with with him. Gave him a worksheet. He looked at it, he was fine. Good to go. Let's proceed. So then he gets the disclosure package, and. And of course, I get an email from him. Why did the closing cost suddenly go from $7,000 to $15,000?

So I, you know, copied the page of the LE resent my worksheet, and on the LE, I marked it all up to where. This doesn't apply. This doesn't apply. This doesn't apply. This is overstated. Sent it back to him, and then it was like, oh, okay, I remember now, you know. Yeah, so he was fine. But, yeah, we have to do that quite often.

And. And, you know, for us on the outside, we just think there's no drama in your world.

Yeah, I wish there's no drama. I'd still have hair.

Oh, my gosh. Well, Art, this has been a great conversation today. The good news is, and I'm gonna bring it back up on the. On the screen here real quick, is. Is Art. Art is still open. He's still doing his thing. He's making loans, helping people get in their homes get their refinances done. I guess you're probably still doing reverse mortgages for people as well, right?

Correct. We got a couple going right now. Yep.

So. So make sure to reach out to Art. And, Art, thank you. I really appreciate it. I'm going to turn it back over to you.

All right. Thanks, Jeff.

Again, thank you, everyone, for watching and listening to this week's Mortgage minute. My name is Art Alvarez with Mortgage Works, where we have the answers. And they're on on the House. Looking forward to some playoff baseball later today and over the weekend. So we'll see what happens there. In the meantime, have a good weekend. And we'll see you next week on another edition of the Mortgage Minute. So long. Take care.