Shades of predatory lending are emerging as marginal buyers, which many loan originators bypassed in the pandemic heyday,
have suddenly become trophy buyers.
By JEFF LAZERSON | firstname.lastname@example.org | MortgageGrader.com
Article originally posted in Orange County Register on January 19, 2023.
Talk about false positives. A recent spike in mortgage applications will not translate to a home sales rally. At least not anytime soon.
Before I explain, indulge me while I share a few factoids.
Purchase mortgage applications jumped nearly 25% on Thursday, Jan. 19 from the previous week, according to the Mortgage Bankers Association weekly survey.
It doesn’t matter that Freddie Mac mortgage rates continue to drop; they’re still high. Mortgage rates this week fell to 6.15%, a four-month low, but are far higher than a year ago when the rate was 3.56%. Payments on the traditional 30-year rate are $1,139 higher than last year’s mortgage check.
Sales — either closed or going under contract — continue to tank. Over the last six months I’ve personally had a plethora of pre-approved, largely first-time homebuyers tell me they are intent on sitting on the sidelines until the dust settles. Specifically, that dust includes home prices flattening out, the potential for more inflation and potential job cuts as the economy continues to soften. In case you missed it: Microsoft announced it was cutting 10,000 people from its payroll.
More factoids: Inland Empire sales plunged 45% in November while Los Angeles and Orange County home sales fell 44%, according to CoreLogic.
“The number of listings going under contract continues to fall month by month,” said Patrick Veling, CEO and president of Real Data Strategies in Brea.
December 2022 numbers are down 42.6% in Orange County at just 961 transactions (compared with November 2022) going into contract, according to Veling. San Bernardino County saw contract activity tumble 48.2% or just 986 homes. Riverside County saw contracts fall 43.6% with just 1,501, and Los Angeles County was down 46.9% or 2,302.
Hardworking and certainly financially desperate mortgage loan originators are pushing on this home purchase string, causing this week’s 25% purchase mortgage application increase. No doubt the catastrophic lack of business in 2022 made the Great Recession days feel comparably like a walk in the park. As a result, the industry is throwing a lot of mud against the wall, hoping some of it sticks.
What I’m seeing and hearing is plain and simple consumer abuse. This is today’s version of predatory lending. The big idea is to falsely qualify homebuyers and then bait and switch those borrowers into inferior mortgage loan programs. Inferior means heftier house payments, a bigger down payment and more closing costs or all of the above.
Marginal buyers, which many originators bypassed in the pandemic heyday flush with low rates and qualified house hunters, have suddenly become trophy buyers.
These homebuyers are being sweet-talked and provided with unsubstantiated pre-approval letters. Many originators so desperate for a paycheck or two are offering fictionally low-interest rates and their accompanying phantom affordable house payment breakdowns. In turn, first-time homebuyers are getting their hopes up. Yes, homeownership is a healthy and exciting dream come true for those who get to close on escrow. But today, it’s more like getting to the altar on your wedding day only to be jilted.
My advice for homebuyers on the hunt: Do not be naïve about your ability to qualify and what is a reasonable house payment. Every good mortgage loan originator will gladly back you up with a pre-approval and the internal rate sheets. It’s much like a math teacher asking you to back up test answers with actual calculations.
That said, you stand a better chance of finding what you want in this slow, low-inventory real estate climate. Chances are better buyers can find what they want instead of scrambling for their third choice in a bidding war.
So, how do you protect yourself from predatory mortgage loan originators?
First, be honest with yourself. Do you have reason to believe you are qualified to purchase? Or do you know deep down you have issues keeping you up at night like bad credit, too much debt and not enough money for a down payment?
Or maybe you truly have no idea if you can qualify or not.
If you generally get the same story from three different mortgage loan originators about your purchasing power, you are on the right track. Yes, that requires work on your part to shop around. If you are qualified, you typically end up with a better mortgage deal because you armed yourself with valuable, consistent information.
Remember, mortgage loan originators have no authority to grant a buyer credit. There is always a firewall between salespeople and credit grantors. Either a customized pre-approval letter in conjunction with a similarly dated computer-generated Fannie Mae or Freddie Mac pre-approval document can be issued for conventional mortgages, Federal Housing Authority or Veterans Affairs mortgages.
Most mortgages falling through the government mortgage cracks are the so-called non-QM or non-qualified mortgages. They’re easier to qualify for but more challenging to afford.
For mortgages falling outside of computer-generated boxes, you should require a detailed pre-approval letter signed by the lenders’ underwriter.
Check the licenses of both the mortgage loan originator and the mortgage lender with the NMLS or mortgage.nationwidelicensingsystem.org. You are looking for both valid and current licenses. In addition, check the California Department of Real Estate site dre.ca.gov and the California Department of Financial Protection and Innovation at dfpi.ca.gov.
Freddie Mac rate news: The 30-year fixed-rate averaged 6.15%, 18 basis points lower than last week. The 15-year fixed-rate averaged 5.28%, 24 basis points lower than last week.
The Mortgage Bankers Association reported a mind-blowing 27.9% mortgage application increase from last week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $1,139 less than this week’s payment of $4,424.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.125%, a 15-year conventional at 4.625%, a 30-year conventional at 5.5%, a 15-year conventional high balance at 4.875% ($726,201 to $1,089,300), a 30-year high balance conventional at 5.877% and a jumbo 30-year fixed at 5.625%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year jumbo fixed rate at 5.375% with 2 points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com. His website is www.mortgagegrader.com.
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Jeff Lazerson - Mortgage Columnist since 2011