Premier Mortgage Group

As anyone who has recently applied for a mortgage has discovered, credit reports are no longer evaluated by humans, and instead are numerically scored by computer software (the most common: “FICO” scores). Similar systems are used to underwrite all other consumer loans, though not as comprehensively as in the mortgage business, where the larger sums get special attention.

Using computers to do the work makes good sense: the native hard-headedness of the machines is more than offset by their supernatural capacity to recognize patterns in complex masses of data.

However, new technology has a way of… morphing… spreading.

I don’t mean to make anyone uneasy, but it’s time you knew that the cost and availability of your auto and home insurance policies are soon to be (or already are) determined in large part by your credit record.

Insurance companies are not studying your credit to see if you will make the premium payments on time. No, the companies — or rather, their computers — are studying your credit to see what kind of insurance risk you will be.

George Orwell or Aldous Huxley or Robert Heinlein would get some dark satisfaction from the following sentence: The worse your credit, the more likely you are to generate an insurance loss; the better your credit, the better the insurance risk you are.

Your credit record is an extraordinarily accurate predictor of the probability that your home will burn down, or that you will have a car accident — in fact, a better predictor of the chance you will have an automobile accident than is your driving record!

The best monograph in the public domain on this subject (“The Impact of Personal Credit History on Loss Performance in Personal Lines”, James Monaghan; the Casualty Actuarial Society www.casact.org/pubs/forum/00wforum) should be read in daylight. You will feel as though someone or something is not just looking over your shoulder, but looking into you… through you… measuring something in you that you don’t understand.

The correlation mathematics are as clear as can be: whether measured by “Amounts Past Due” (credit jargon for the total number of all late payments in your record), “Derogatory Public Records” (judgments, liens, bankruptcies, foreclosures), “Collection Records” (past or present accounts in collection), “Status of Trade Lines” (late payments outstanding), “Age of Oldest Trade Line” (your credit is judged better the longer you have had accounts open — don’t close idle accounts), “Non-Promotional Inquiry Count” (if you ask a lender to check your credit, it hurts; if a credit card company scans you before sending a promotional mailing to you, no harm done), “Leverage Ratio on Revolving Accounts” (balance outstanding at any moment versus credit limit — keep your balances below 50% of limit, even transient, intra-month balances!), or “Revolving Account Limits” (get your limits raised any time you can)… if you have poor credit by any ONE of these standards, you are a higher insurance risk.

This list of credit criteria, with slightly different weighting, is used to compute your FICO credit score. You can assume that your FICO score is a reasonable proxy for your attractiveness as an insurance risk: above 680 (into the 800′s), a good risk; below 620 (into the 400′s), a poor risk.

What, exactly, are the insurance machines measuring here? As Mr. Monaghan says near the end of his analysis, “An outstanding issue that will likely remain outstanding is causality.”

Causality. The credit vs. insurance risk correlation is clear and unambiguous, but nobody knows why. Monaghan recites the leading theories, but all fail rigorous tests of cause and effect. One might suspect that those with poor credit rely more on insurance, and are quicker to file claims, or are more likely to file fraudulent claims; but these hypotheses do not prove out. Some suggest that insurance risk may be the result of low income, or some differentiation by age, or residence (urban, rural, or suburban), but none of these correlate with insurance loss as well as predicted by credit rating. Only two groups present some evidence for cause of both poor credit and high insurance risk: those under stress, and those who are self-employed.

You may have been amused to discover that Amazon.com could quickly predict from your buying habits which books you would next like to buy. Perhaps you felt a little uneasy at the ability of “data-mining” software to identify nearly anything you want to buy or do.

Orwell, Huxley, Heinlein… under the scrutiny of sophisticated pattern-recognition, our credit and insurance ratings may be aspects of a larger quotient, some measure of relative caution in the way we live our lives, or competence at it, or responsibility for it, or… we may not be able to comprehend the cypher in us at all, no matter how transparent our behavior is to the machines.

You do have options: the data show that if you set out to improve your credit, and do so, you will have less chance of a car accident or burglary in the future.

Why, we don’t know. But you will, predictably.

Inhumanly.

If you are contemplating a home addition, small or large, renovation or full-scale pop-top, to a home you already own or are about to buy, there are two overriding financial objectives.

First, to navigate the maze of carts and horses littering the mortgage horizon. How do I finance an addition I haven’t yet built? I can’t build it without the money, but I can’t mortgage it until it’s built.

Second, try to accomplish the financing with the fewest possible trips through the mortgage turnstile. Up-front fees for construction loans are expensive, and even a garden-variety mortgage refinance costs a couple of grand.

Successful paths to these objectives are different for a home you already own as opposed to an addition project on a home you’re about to buy.

If it’s a home you own now, begin by asking your architect, builder, or brother-in-law to ballpark the cost of your idea. There is no other way to start: until you have an approximate cost, you can’t make sense of financing — or feasibility, or economics. Many a kitchen or master bedroom has died in the initial cost phase, and even more master bathrooms (“Honey, at a hundred grand, I’ll live with your shaving elbow in my ear”).

Once you know how much money you need, the review of financing options begins with examining the loan you already have. If you plan a small project, and your mortgage interest rate is close to the current market, the simplest way to proceed is to refinance your mortgage on a house-as-is basis, and extract enough cash to do the work.

However, if you refinanced a $200,000 mortgage down to 6.50% in 1998, and only need $50,000 for a project, do anything you can to protect an interest rate two points below current market: raise the new money by second mortgage, home equity line of credit, margin loan, 401K loan, liquidate an investment, or any combination of the above. There is good, “weighted-average rate” arithmetic to guide the new-money, preserve-old-rate decision.

If you’re planning a big project, say $200,000 in new cost, and your current mortgage is only $100,000 at 6.50%, the higher cost for a big second mortgage or line of credit will demolish the advantage of your current rate. When your project is done, you’ll have to refinance in one $300,000 clunk no matter where interest rates happen to be at the time.

But, how to get the money to do the construction to get to that refinance clunk? Unless you have the cash you’re going to need a construction loan. Construction money is expensive, usually floating at least one percent over prime, and costing at least a one-percent loan fee.

It’s an odd sequence of events, but generally, as soon as you know you’re going to need a construction loan and a refinance at the end of the project, go to a mortgage lender for guidance through the whole construction process, and then to a construction lender.

The reasons to see a mortgage lender before shopping for construction money: you need to know the ultimate refinance loan is feasible; the mortgage lender will need more financial information from you than the construction lender, and can forward such stuff to the construction lender; you can save a little money and a lot of hassle by using the mortgage lender’s appraiser for both the construction and permanent loans; and the mortgage lender will be current on the price versus quality trade-off among local construction lenders.

Construction loans are best found at banks, the source of any short term, high risk, high rate loan (construction loans are high risk because a semi-finished house is lousy collateral). Most mortgage lenders offer construction money, and most banks offer mortgage money (long term, low risk, low cost); however, the products are best bought “un-bundled”, as pitches for “one-stop” shopping are usually better salesmanship than finance. Construction and mortgage lending are two completely different worlds, even at the same institution.

Your conig adjustment at the end. Byt hen you will probably have refinanced anyway. The high caps allow the lender to make up for a big mistake in the first five years; in return, the lender gives you a cheaper first five than tight caps would allow.

Trade away the periodic cap for a low life cap. You can still find ARMs with a life cap in the elevens if you’ll shoot craps from year to year.

It is very desirable and very expensive to buy down the margin. Margin is a big deal because it’s a fixed cost in each adjustment. Breakeven for buydown tends to be three and a half years — when it’s allowed.

Keep your intentions clear about how long you will own the house, how long it may be until the next refinancing window, and what the Fed is up to. Don’t ever be tempted into an ARM at a bottom in rates, or frightened away at the best time- at a high in rates, or rising into one.

The mortgage industry used to care.

We cared about all sorts of things… your landlord, your rent, where you got your down payment, your old W-2s, how long you had been on your job, how many jobs, what kind of jobs….

We don’t care about a lot of that stuff any more. The brave new world of underwriting by artificial intelligence, neural network, and website has dispensed with many, many things that human bankers used to think had something to do with your willingness and ability to pay back a loan.

Bankers were (yes, past tense) human, and in their incarnation as underwriters susceptible to asking for documents, evidence, proof of this or that which ought to be important in a credit decision. Like, how reliable a rent-payer you were before you wanted a home loan, what your job title is, or the continuity of your career path. Many, many boxes to fill in.

Humans being human, those vested with the authority to approve or deny a loan too often found it comfortable to say, “Because it’s the rule” — and that line was far too often a thinly-veiled version of “Because I say so.”

A common exchange under the old system began with an exasperated client: “I have a quarter of a million dollars in my Merrill Lynch account, and you want me to prove that my down payment has come out of that account?” Yes; and I won’t accept a copy of a check drawn on your money market account — wire or certified check only. “Even though you can’t possibly lose any money on my loan?” Yes; it’s the rule.

Enter the computer-as-underwriter.

There is a set of rules inside the computer, for sure, but it’s a very, very different set. This new rule book is secret, as the inventors at Fannie and Freddie fear that mortgage bankers like me will try to figure out how to “game” the new system. We are, of course, gaming the be jabbers out of it, one file at a time all day long every day, learning more about what it wants, what it will do and won’t do.

The new rule book is a vast improvement: when the factors crucial to repayment are present — large down payment and good credit — the computer dismisses the trivial. The computer gets no enjoyment from inflicting a bureaucratic insult, and so doesn’t bother.

There are exceptions: the FHA now underwrites by computer along with everyone else, but the FHA is engaged in a Great Leap Backwards, intensifying its demands for irrelevant information; and the Veterans Administration continues to transform the wonderful, old “G.I. Loan” into an impenetrable morass no longer worth the trouble.

If you have a large down payment, say 20% or more, and high credit scores, in or above the 680-720 range, here is a short list of the things we no longer care about:

* Your job title, job description, or line of work; where you worked before your current job, how long you worked there, or if you worked at all.

* Old W-2 forms: usually none; sometimes we don’t even need a current pay stub; we verify employment with a phone call, and take your word for your salary.

* If self-employed, or if total income includes a high percentage of incentive payments, one year’s tax return is sufficient… a big down payment, 30% or more, and we don’t even need that. (Exception, probably temporary: Jumbo “lenders” still want the whole tree-killing pile of 1040′s.)

* We no longer need proof that your down payment left the account where you have it; and the old 90-day account statement history is reduced to a single month.

* Your rent-payment history. We do not investigate your performance as a tenant at all.

* A residence history: we don’t care where you lived last month, or last year, or ever.

* The appraiser doesn’t need to go inside the house you’re going to buy: save $75. With 25% or more down, the appraiser doesn’t need to establish the value of the house, just drive by and report that there is a house: save $175.

* You no longer have to write us those dopey letters explaining why you made a late payment to Sears in August, 1995.

* We don’t need your divorce decree(s) unless you are obligated to make payments to an ex — and then only the page describing the payment.

Astounding. A machine — a calculating device — knows what too many human bankers never figured out.

If the deal is so strong that the bank can’t possibly lose money, why inflict bureaucracy on a good customer? Just say “yes,” ask how you can help, and ask how quickly the customer would like to close.

If artificial intelligence is capable of a breakthrough like this, it doesn’t bode well for the original model.

Back in the old days (when the Boomers were worried about turning 40), if you got a loan to buy a house, you sent the monthly payment to the people downtown who held your mortgage in their vault.

Not any more. While many consumers have detected the disembodied nature of modern “lenders”, very few have figured out that the people to whom they send their house payments don’t own the mortgage.

Since the 1980′s, after closing, your retail lender transfers your loan to a wholesaler (which may be a captive of the retailer, or vice versa, or independent). Then, at the wholesaler or at an investment bank (the next level up-Merrill, Goldman…) your loan will be transformed- glommed with thousands of others into a “mortgage-backed security”, then sliced and diced into zillions of easily traded pieces (“derivatives”), and sold all over the world.

There are exceptions- the occasional surviving S&L making special purpose adjustable rate loans; and the bank market for home equity lines of credit and second mortgages.

In the case of the most common mortgages — Fannie/Freddie 30- and 15-year, most ARMs, FHA, VA, — the loan and the payment are usually pre-disconnected, weeks before closing, when the interest rate is locked and the path from retail to Wall Street determined.

The outfit that sends you the coupon book is only a conduit for your money, forwarding it to the millions of holders of the zillions of pieces of loans. This forwarding is done for a fee- .25-.50% of the outstanding balance on your loan each year. It’s a small percentage, but real dough- on a $200,000 loan, maybe $5,000 during the loan’s six-year average life.

To earn that kind of money, the forwarders have duties beyond forwarding- make sure your taxes and insurance are paid, collect late payments, and foreclose on you if you quit paying altogether. The industry name for a collector/forwarder is loan “servicer”. They provide service all right, but only to the people who pay them- the holders of the zillions of pieces of loans. (By the way, mortgage servicers are indistinguishable from the servicers of student loans, which go into Sallie Maes, serviced — badly — by Unipac, et.al.)

A mortgage servicer’s idea of service to you includes hatfulls of mail offering bad insurance; weird deals where you pay them $300 to take your payments twice as often; and, above all else, no human beings to answer the telephone. Servicers are the HMOs of the financial world- if you stay on hold long enough, you’ll stop worrying about your problem, or forget why you called.

The servicer’s role in the who’s-doing-what-to-whom of modern mortgages can be downright insidious. For example, the worst credit problem to have on your record today is a late mortgage payment. One in the last year,and you’re dead at most A-quality lenders. Why? Your loan could be a pain to service.

Servicing economics drive the whole, non-Wall Street, consumer and wholesale end of the mortgage business.For example, mortgage retailers don’t make money by making loans; retailers make their living by selling servicing rights to wholesalers for lump sum fees.

The wholesalers are in the mortgage business solely to acquire servicing rights- as the loan screams through the whole saler on its way to Wall Street (together with any points and “origination fee”), the wholesaler scrapes off and retains the servicing right and future income.

The mortgage department at many banks exists only to help the mother bank acquire servicing a little cheaper than the bank could buy it from independent retailers. When a bank says “We don’t sell our loans”, they mean the servicing; the loan disappears into a zillion pieces along with all the rest.

Servicing has its own post-closing secondary market. If you think your loan got sold two years after you got it,it wasn’t the loan- the servicing right got sold to another servicer. The loan was long gone.

Though terrible about phone calls, most servicers do a much better job now than at the end of the 1980′s, when tens of millions of loans from defunct S&Ls were dumped into the system. However, If you ever have trouble with your servicer, call the retailer where you got the original loan. Retailers speak servicing jive, and have a trick or two around the phone trees to humans.

The refinancing opportunity of a lifetime has gone by like a semi on a dirt road blasting past some poor fellow trying to change a tire. Why, the slipstream alone was enough to knock a car off a jack.

There’s a thing or two worth studying while the gravel settles.

Next to buying the house in the first place, getting a mortgage is the largest single financial decision to face most families. During the long search for a home, consumers can bone up on mortgages; however, no civilian can keep all the weird vocabulary and theory of mortgages in memory for long.

It’s not fair, but the decision to refinance often must be made fast, without a reasonable opportunity for study;and sometimes — in a V-shaped interest rate bottom — no time at all.

So, here follows a simple, five-step guide, designed to help you make the refinance decision under pressure.

Of course, it’s not simple at all, but the outline will help with the heart of the matter- do it?… or not. Clip this column, drop it into a folder labeled “Refinance”, and haul it out to take with you to your next refinance application. Any able banker can help you review the steps and concepts below, and then to reach a quick,confident decision.
1. Subtract the rate you can get with no points and no origination fee from the rate you have.

2. Multiply the resulting rate (1%, .75%, 1.5%…) times your current loan balance, and the result is your approximate annual interest savings in the first several years of your new loan.

3. Mortgage interest savings are deductible, so multiply the interest savings by .67 to convert them to after tax dollars (assumes 28% IRS plus 5% Colorado brackets).

4. Assume closing costs are 1600 non-deductible dollars, and divide the after-tax interest savings into 1600. If you get a result of “1.0″, you will recover closing costs in exactly one year. If you get a fractional answer, you will recover your closing costs in that fraction of a year. If you get a number larger than “1.0″, it will take you that number of years to recover costs, and you must consider how long you will live in the house, or how long it may be until the next refinancing opportunity.

5. If you got a result of “1.0″ or less, commit quickly to refinance. Do not ask Bill Clinton for further interpretation. Proceed. Do it. Do not wait for markets to improve further. Ever. Lock your rate now.

For most consumers, this abbreviated guide to pulling the trigger begs as many questions as it answers; and so,here follow the most important answers.

– Don’t evaluate a refinance based on changes in your monthly payment. If you have paid on a loan for a year, and refi back out to 30 years, re-amortization creates the illusion of saving money when the lower payment is really just stretched-out principal.

– Don’t ever ever ever pay an origination fee or discount point on a refi to “buy down” the rate. Such fees a redeductible, but over the remaining life of the loan, not in the year paid. Even when instantly deductible on a purchase loan, fee recapture takes five to six years; on refis, a decade.

– Refi closing costs are fixed costs changing with the reissue rates on title insurance and hardly at all with the loan amount or the price of the home. $1600 is a good Colorado guess, unless you try to fold costs into the interest rate.

– The most extreme form of cost-folding, the so-called “no cost” refi, is an excellent idea so long as you get one half percent of your loan amount in cost relief for each one eighth of a percent rise in the interest rate (repeat after me…). That equation is a crucial test, as the cost relief is often a diminishing return versus higher rate.

– Get an explanation, but do not worry about all the money flying around in interest pro-rations, skipped monthly payments, and re-built escrow accounts — a total due at settlement (add it to your loan!) often double the real cost of the refinance. Both your old loan servicer and your new one are heavily regulated and examined,and cannot keep or take money to which they are not entitled.

– Remember that mortgage rates move real time with the bond market, intra-day; and almost anything you hear or see in the news is out of date.

– Be careful shopping during a refi frenzy. Indecision, or trying to conduct a rate auction among lenders, or appearing reluctant to close if rates fall further will tend to drive away the best bankers and firms. “Best” in a refi frenzy means those who will give you a fair deal whether you press or not, and who will be sure to close you before your rate commitment expires.

Last, an apology on behalf of the mortgage industry. All firms — the industry itself — are limited by the number of files they can process in a given time frame; and at the rates prevailing in a four-day stretch in early October everyone in the US should have refinanced. At our firm, we could not even return calls from many past customers to tell them we couldn’t make room, and I’m sorry for that.

The unnecessary pain inflicted by computers is not the fault of the machines, but rather that of the eager wireheads who think computers are so neat that they should be used for everything. Enthusiastic nerds have struck again, and may the gods of silicon save your credit report.

Credit information has been “computerized” ever since the punch card and vacuum tube, and saving and sorting masses of data are ideal computer applications. However, near-infinite storage capacity has enlarged the opportunity for electronic black magic- the imaginary entry, and the intractable error.

Problems with cyber credit fall into two categories- old ones, and a brand new one known as “credit scoring.”

When you apply for a mortgage, your lender must hire a local credit bureau to interpret the electronic entrails spread under your social security number at all three giant databases- Equifax, TRW, and TransUnion. A week into your application, the local bureau calls- “We show a 90-day late payment on your ChargeMax, and you will have to explain it to your lender.”

Several thoughts come to your mind. I’ve never had an account with ChargeMax. For that matter, who the hell is ChargeMax? How do I explain a late payment on an account I’ve never had? I checked my TRW, and it was clean. How did it get on my record? How do I get it off?

Here is some blanket advice for dealing with mortgage lenders on credit issues. (You won’t like it, but don’t argue. Wrestling in the internet just makes it worse.)

Your credit history is not real, it is virtual- it is whatever the electrons happen to say at any given moment. Deal with it as it appears, not how it may “really” be.

If the local bureau can’t quickly remove an obvious

error, write an “explanation” to your lender. “I was out of town/married/car accident/surgery/forgot” are all acceptable. Workable, but risky- “This is a mistake, and you are all a pack of fools!”

Don’t bother to try to remove ChargeMax from your record. If the loan closes, you’ve won. Don’t let pride interfere with good sense- you can correspond with the big bureaus until doomsday as they happily cross-report the error (and new ones) back and forth to each other.

Don’t bother to “check your TRW.” If you want to check your history, order a full, three-bureau report including their versions of public records under your name (IRS horrors, remnants of a divorce, mis-identified lien…).

Don’t be misled by the easy time you had last month with Toyota Credit, or getting a new Visa. Houses are harder to repossess than cars.

Those were the old problems. The new one, “credit scoring,” is an attempt to reduce your entire credit history to a three-digit number. Higher than 670, you’re in; lower, and you’re out. The model for computing the score,charitably, has a ways to go in development.

Example- you get a bad mark in the scoring equation whenever a lender checks your credit (an “inquiry”) –whether you take the loan or not. Shop among five car dealers, or open four charge accounts when moving to anew town, and the equation assumes you will soon be overwhelmed in debt. An effort to check your credit may actually reduce your score by creating an “inquiry.”

More- you may fix the ChargeMax fantasy in 48 hours, but the low credit score you got because of the error can’t be repaired for four to six weeks.

Another- the bureaus don’t have to disclose your score to you, even if you ask, and you won’t know if there is a land mine in your file until you step on it. Further, since each bureau has a different version of your history, each has computed a different credit score.

A pack of fools, indeed. Fortunately, most mortgage lenders still use the old, subjective system, and if we arelucky, lawsuits will soon smother credit scoring in its crib.

Many consumers have learned that their credit records have been reduced to three-digit scores, and that these scores now determine the fate of most loan applications. The higher the score assigned to you by each of the three, giant repositories of credit information (Transunion, Experian, and Equifax), the low Credit scores, and how to manage your credit reporter your presumed risk of default.

These scores, known as “FICOs” (after Fair Issac, Co., which invented the scoring software), are well-intended efforts to simplify the old-style black art practiced by loan underwriters: reading each line in an entire, ten-year credit history, and then making a subjective go, no-go decision.

Like so many computerized developments in our bright, shiny New Economy, this credit-scoring development is still developing. The current situation described below is frustrating and a little frightening, but is a rapidly evolving — and hopefully passing — horror story. There may be substantial improvements as early as year-end.

Here’s the story. If you have a high set of credit scores, terrific; you’re home free. If you have low scores, at best you and your lender will have to operate within the confines of the old debt-to-income ratio straight jacket, and at worst… no loan. (High is 720 or more; good is 720-680, okay-you’ll-get-your-loan is 680-620, a strong maybe from 620-580, and under 580… stay on good terms with your landlord.)

At really worst — the scary part — even if your low scores are based on errors in your credit report, you still won’t get your loan.

When your mortgage lender runs your report, it hires a local credit bureau to contact all three of the repositories. In the old days, like 1999, if the report showed an erroneous entry, and you could prove to the local bureau that the entry was a mistake, the local bureau would delete the error on its report, and your loan would be underwritten without damage from the error.

Meanwhile, in the old days and in the new ones, the error lives on forever at the repositories.

Enter credit scores. Your credit is scored at the repository level, not at the local bureau; and you’ll be underwritten based on scores, not a local-bureau report with errors cleaned.

How might one go about correcting repository error, and changing one’s scores?

One would tear one’s hair out trying.

The first method, “quick-scoring”, is brand new in 2000 and is being tested by consumer trial-and-error right now. You present unambiguous evidence of error — a confession by the creditor filing the erroneous report — pay thirty bucks to the local bureau, and they will get you re-scored within three days, and within thirty days remove all trace of the error from all three repositories.

Pretty good, actually. Though, by the time you collect the unimpeachable evidence and get re-scored, the house you wanted is long gone. And, only two of the repositories allow quick-scoring, though surely Equifax will be forced to behave soon.

The quick-scorer’s clean-up at the repository level may be the best benefit of the new approach. Stories told by hundreds of clients lead me to believe that direct consumer correspondence with the repositories is a waste of time: they don’t have to respond in accordance with existing statute until (1) you have ordered a consumer report directly from them and (2) sent certified mail. It takes time for the additional report, and the published addresses for the repositories are post office boxes which won’t accept certified mail. I believe these POBs are connected directly to chutes leading to local landfills.

It is productive to have a creditor confess its error directly to the repositories, which clearly open and respond to mail from creditors. However, even a creditor confession can take a month to clear an error — bye-bye new house. (Nightmare scenario: the original creditor is out of business, but before it went banko, it sold an imaginary defaulted account under your social security number to a collection agent which will try to collect until doomsday. No original creditor to confess… a permanent error.)

How much will your scores improve after an error is removed, whether by quick-score or confession?

We don’t know. The scoring formula are secret. However, if you have only one or two isolated errors in an otherwise clean report, they should not peril a home purchase, even if uncorrected. If you have lots of authentic derogatory entries, removing a stray error won’t help your scores. If the error is a collection account showing as unpaid which was paid… correcting that “error” won’t help at all — a collection is a collection, paid or not.

The correction that helps, and sometimes a lot, is correcting a recent error: the more recent a derogatory report, the more damage it does to your scores.

Given the irresponsible behavior by the repositories, prudent, continuous monitoring of one’s own credit record is impossible. Consumers can find their FICO scores only by asking a lender to run a report — though I can’t imagine Congress will allow the repositories to maintain secrecy much longer. The only reason the repositories won’t disclose scores to consumers now is to prevent calls from all of us

– trying find out who screwed up our credit scores.

One action item (besides writing to your Congressperson): at the slightest sign of a creditor confused about a payment, let alone a threat to make a negative report or to refer your account to a collection agency — REACT!

Don’t hang up on ‘em, don’t throw the letter away, don’t let an error or an argument make it to your electronic record. Once embedded there… it’s too late.

The following advice prevents horror stories.

One requirement for mortgage approval demands more precision than any other, and is also more surprising to borrowers than any other-

WE MUST PROVE WHERE YOUR CLOSING MONEY HAS BEEN IN THE LAST 90 DAYS, AND TRACK IT ALL THE WAY TO THE CLOSING TABLE. Any large deposit, transfer, or new account opened in the 90 days before loan application will be challenged.

The purpose of this strange and insulting exercise is to demonstrate that you have not secretly borrowed your down payment — an incredible proposition to most borrowers, but all too common. The only way to prove that your money is really your money (!) is to prove that it has been in your accounts for 90 days.

GIFTS-

Gifts from family (only) are allowed (some wrinkles- check with us). All lenders require an original gift letter signed by the donor stating (1) the donor’s relationship to the recipient, (2) the amount, (3) that it is an irrevocable gift, and (4) the donor’s address.

“As your Dad, I’m delighted to give you $13,000 to help you buy a house, and you don’t need to pay the money back.” That one sentence, plus an address, is an acceptable gift letter because it includes all four components (wealso have form letters).

Necessary documents for gifts-

1. The ORIGINAL gift letter, and

2. The money (this is the crazy part….)

– NEVER (please) use a PERSONAL CHECK to move gift money. If you do, we must find the canceled check at the donor’s bank, and your closing may be delayed for several years. (Exception- FHA and VA, where they a real ways OK.)

– DO ask the donor for a certified check made payable to the title insurance company handling the closing, or to you. DON’T DEPOSIT the check! Send us a copy, and just bring the check to the closing.

– OR (inferior, but workable) wire the gift funds to your bank or to the title company, and send us copies of both the sending and receiving wire receipts.We will spend any amount of time necessary on the front end to rehearse a gift plan with you and your donor.

CONSOLIDATING OR TRANSFERRING MONEY, OR LIQUIDATING INVESTMENTS, OR BORROWING YOUR DOWN PAYMENT-

In the ninety days prior to buying a house, try not to transfer money from institution-to-institution (internal transfers, say savings-to-checking are rarely a problem). If you have done so before being warned, please begin to assemble a paper trail to recreate the transfers.

In that same 90-day interval, save all bank, mutual fund, brokerage (whatever) statements (all pages) for accounts which will be used for down payment and closing funds. While not always true, you should assume all lenders will require three monthly or two quarterly statements for all such accounts.

Once you are under contract to buy (preferably before), we will spend any amount of time with you to develop a plan to get your closing funds to the closing table. This money must be presented at closing by certified (also”guaranteed” and “cashier’s”) check, or sent by wire.

Liquidation of stocks, bonds, mutual funds, or money market accounts, or bank-to-bank transfers are opportunities for disaster. We must have (1) evidence of sale of the asset (a trade confirmation), and (2) proof of funds transfer.

Other than for earnest money, DON’T MOVE MONEY WITH PERSONAL OR MONEY MARKET CHECKS (please). If you do, we have to have a copy of the canceled check, and finding it may delay your closing for several years.

Instead, while collecting closing funds at a bank or credit union-

- Ask your broker/mutual fund to send you THEIR check, and give us a copy of the check and your deposit receipt. These firms will NOT issue certified checks acceptable at closing.

– Or, wire funds to your bank, or directly to the title company, and give us copies of the sending AND receiving wire receipts

As you may have guessed, it’s a good idea to accomplish these transfers a couple of weeks before closing. If you intend to sell any physical property to raise closing funds (cars, jewelry, art, gold coins, boats….), it can work, but check with us early in the process.

Inheritances- if you are named in the will, the money is your money. However, if the inheritance came to you through a named parent or relative, it’s a gift requiring the gift paper trail on page one.

Disbursements or bonuses from a company you own are rarely acceptable unless they show on a prior year tax return. Lenders’ fig leaf of concern here- worry that a borrower will strip too much working capital from a firm.

Joint accounts with people not a party to your loan will require acknowledgment from the joint account holder that the money is really your money. If the joint partner is not family, we’ll need a good explanation of the arrangement signed by you and the joint holder. “Cash,” in the sense of folding greenbacks, will not be approved by any lender for closing use, if for no other reason than no title company will accept cash at closing. Cash should be deposited in a bank at least 90 days before signing a purchase contract.

If you intend to BORROW to raise and portion of down payment or closing funds-

1. Unsecured loans — personal, credit card advance, line of credit, even from family — are not acceptable. 2. The following secured loans are acceptable, but you must qualify for the monthly payment in your underwriting ratios (we, know, we know… even though it’s your money)-

–Bridge loans secured by other real estate.

–Loans from financial institutions secured by an asset with a demonstrated value and title (car, boat…).

–401k or other loans secured by retirement accounts.

–Insurance policy loans.

–Family or other private party (seller?) second mortgages, if documented by note and deed of trust, and not in excess of loan-to-value guideline (usually total loans cannot exceed 90% of purchase price).

3. These loans are acceptable, and do NOT count in ratios (Please do not ask why. We don’t know.)-

–Margin loans.

4. Loans to you from a business you own ought to work, but don’t.

5. “Equity advances” from corporate buyouts are very tricky. Okay if the relo company takes responsibility for the house; troublesome if the advance looks like a loan you might have to pay back if the house doesn’t sell.

IN ALL CASES OF BORROWED CLOSING FUNDS, WE MUST HAVE A COPY OF THE NOTE SHOWING REPAYMENT TERMS, AND A FUNDS TRANSFER PAPER TRAIL (as above).

The operations of the financial world change over time along with everything else, but many labels for financial practices are “sticky” — still in use, but with long-lost descriptive relevance.

Mortgage lending, tied inextricably to real estate and Middle English (deed, fee simple, encroachment, foreclose), is especially vulnerable to obsolete terminology. Dated terms are confusing to consumers, and handy tools for marketers seeking not-so-fair advantage.

In the mortgage world the most misleading single term is the oldest: “lender”. Today, that antique usage is about as relevant to mortgage consumers as “slide rule” is to senior high school math students.

A mortgage lender is an institution which loans money in exchange for a promise of re-payment, the promise secured by a claim on real estate. A true lender sets the terms of its loan, retains the promissory note until paid, and then releases its claim on the real estate.

In the case of large “first” mortgages, there may be fewer true lenders of mortgage money today than slide rules still in use.

The last of the old mortgage lenders were the Savings and Loan Associations, which could not survive in the modern world of de-regulated interest rates, and disappeared (painfully) fifteen years ago. No modern financial institution can afford the risk of holding long term mortgage notes in its vault; effectively all mortgages are instantly re-sold in the general direction of the global financial markets.

When a consumer “locks in” the rate on a mortgage loan a month before closing, that loan is committed for inclusion in a mortgage-backed security which in turn is committed for sale to a Wall Street firm at a price established upon lock-in, and to be assembled and delivered a few weeks after closing. No institution in that chain is a lender interested in holding the promissory note any longer than a few days.

The terms of modern mortgage loans — underwriting requirements, payment structure, and approximate interest rates — are determined by the eligibility requirements and hour-by-hour market values of mortgage-backed securities.

The only substantial exceptions in the mortgage world: second mortgages and lines of credit, which are the shorter term, higher risk, higher rate loans granted by banks and credit unions in traditional real estate lending behavior, and a few kinds of adjustable-rate first mortgage loans.

Yet today, many mortgage market analysts and market surveyors persist in the notion of the old-style lender, aided by advertisers. HSH Associates claims to survey “2,000 lenders” each week, while E-loan purports to offer loans from “Over seventy lenders.” Many commentators advise consumers to pick mortgage lenders over “brokers”, though the distinction is meaningless. And, heaven knows, many sources of mortgage credit try to sell consumers on the advantage of their particular institutional setup, or size, large or small.

We need some new terms… good, basic terms which are consistent with the rest of the world of commerce.

The place you go to get your mortgage, whether self-described bank, mortgage bank, broker, or website is a “retailer,” pure and simple.

The bundler of mortgages into large blocks headed toward global financial markets, the securitizer, is a separate operator whether contained in the same corporation as the retailer or independent, and should be called the “wholesaler”.

While awkward, the industry term “servicer” accurately describes the outfit to which we send our monthly payments post-closing. The servicer may be a part of the same corporation as the retailer or wholesaler, but it is not a lender and does not own the loan: it is a contractor-for-fee forwarding the monthly payment to the holder of the mortgage-backed security.

Retail is retail: you can no more get a better price for a pair of Nikes by contacting Nike wholesale headquarters in Washington than you can get a better mortgage deal from Chase Correspondent Lending in Florida. They may answer the phone, but they won’t give you a wholesale price.

It is commonplace for a small, independent mortgage retailer selling loans through a wholesaler to deliver better prices and services than the wholesaler’s own retail arm in the same town.

Loans from websites are cheap right now (though not arranged and closed with great skill), but those cheap prices are “loss-leaders” — market-building concessions — not some electronic breakthrough. E-loan’s back office looks like the typical one at a “brick” retailer, and costs as much.

Most consumers begin to get the correct idea after making a dozen phone calls and visiting a few websites, but ancient terminology, bad advice, and slippery marketing conspire to make consumer shopping much harder than it needs to be.

While mortgage products are uniform, the prices do vary from retailer to retailer, and there is great value to consumers in shopping among different levels of retailer skill, reliability, knowledge, and communication.

The particular corporate shell surrounding the mortgage retailer isn’t worth a nickel.

A given piece of real estate has a different worth to different people at different times.

One of those times is when you are trying to buy a house, and one of those people is the loan underwriter.

Real property is tough to value because all parcels are unique. By definition, all real estate is What appraisers are really doing its own separate spot on the planet, and no two parcels can have the same legal description. You can’t look up the value of a lot like a share of IBM, all of which are exactly the same.

Another unique aspect of real estate is its immobility. Unlike art, or gold, or bonds, you cannot move a piece of real property to a healthier market to get a better price.

Real estate value changes with the interests of the beholder. Future development value of land can be rather more in cash than as existing prairie or alfalfa patch. Liquidation value is lower than long term value (What can I get for this place if I have a year to sell it? Six months? A week? An hour?). A seven bedroom house has more value to a family with six kids than to a retired couple.

Lenders have their own green eye shade view of value. Though I would not dream of justifying the pessimistic foolishness often applied to people trying to buy homes in Boulder County, some explanation may help.

Lenders think collateral- if I have to foreclose, will I get my money back?

That’s all. No other agenda. But the number of different ways to torture buyers is matched only by the variation in the character of property.

In Boulder County, the leading arguments involve in town versus in the country, and land parcel size versus house size.

Properties in towns have the easiest time. There are lots of similar houses in towns, and lots of buyers. Similarity means more accurate analysis, more buyers means a faster post-foreclosure sale.

Mountain properties get the worst treatment. The houses are heterogeneous, and the supply of buyers much smaller. Does that mean they are “worth” less? No way- sellers demand good prices, and buyers will pay them,but some lenders will not loan at all in the mountains for fear it will take too long to get the money back if they have to foreclose.

It is large parcels near town where reasonable underwriting judgment turns to lunacy. “We’re only going to loan70% of that sales price because the lot’s too big.”

Say again? This 30-acre site is risky to loan on? The wife and I have been looking for a big lot for ten years, and you are telling us it’s not worth what we’re paying? Do these idiots know about growth control? Don’t they know there are only 14 sites like this on the whole of Davidson Mesa?

Conversations like this make local lenders wish they did something else for a living.

The worst part of the collateral exercise is that the buyer and seller are not out of the woods when the appraiser is done. Low appraisals are relatively rare. The moment of truth is at the very end when the underwriter decides whether or not she “likes” the appraisal.

Heard all over the county these days are the following- “I need another log home comparable on more than 20acres.” “I don’t think the hot tub really adds $5,000 in value; cut the loan amount.” “Can’t get mortgage insurance if it’s more than ten acres.” “You have to use two bedroom comparables; that basement room isn’t a bedroom because the window is too far up from the floor. Besides, there’s no closet.”

“If it has two kitchens it’s an illegal duplex; take one out.” “I won’t loan on the landscaping; half my equity disappears if they don’t water the lawn.”

And, in numbers increasing every day, “We’re nervous because your market is so hot.”

Wait. I thought you wanted to be sure the place would re-sell if you had to foreclose. We needed guard dogs to keep the buyers under control the day this place went on the market. Doesn’t your underwriter know we had six offers over list price, and two backups?

The last two markets to be as hot as Boulder County is now were Texas and New England, where lenders lost a buck or two. While pointing at those two examples, every underwriter in the country is told “don’t loan at the top.”