If a buyer needs a mortgage the contract make sure you contract contains a mortgage contingency clause.  This gives the buyer a certain amount of time (usually 30 -45 days) to submit an application and get an answer from his lender.  If the application is approved a mortgage commitment is issued, the contingency is satisfied and the buyer must purchase the house.  If at the end of the contingency period the lender has not made a decision (approval or denial), the buyer must ask the seller for more time to get the answer and the seller can decide to give more time or cancel the contract and refund the deposit.  When the mortgage application is denied the contingency allows the buyer to cancel the contract and receive a return of his contract deposit.

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In response to the current lending/foreclosure crisis lenders have seriously increased the amount of paperwork and qualifying requirements needed to get a new mortgage.  Today a lender make an informed decision on the qualifications free of the need to re engineer the American social contract.  Just like the pre-Bush days a borrower needs to show good credit, a reasonable down payment and the ability to afford your mortgage payment based on your income.  Let the wailing begin.  Didn’t groups like ACORN and politicians like Barney Frank declare that owning a home is a basic constitutional right even if you can’t afford it?  Lender’s refusing to lend based on sound underwriting practices, it almost seems un- American!  But what about all the defaulting homeowners and all the people who still want to be homeowners even though they can’t afford to, doesn’t the Government owe these people something?   I’ll leave fixing those problems to the next Obama bailout but for now lets hope that the new banking rules make sure that the mistakes of the 2000’s are not repeated again.  Hopefully a return to sound lending practices will prevent the large scale destruction caused by the wild lending practices of the past.
From 2002 until mid 2008 getting a mortgage to purchase a new home was relatively easy as government policies were crafted to helped more Americans to become homeowners.  Fannie Mae and Freddie Mac loosened underwriting guidelines and introduced new products with lower credit score, income and down payment requirements.  Unfortunately the new underwriting rules coupled with an increase in exotic variable rate products combined with a general weakening in home values lead to a perfect storm for many homeowners.  With lowered property values owners who used low down payment variable rate loans found themselves unable to take advantage of low interest rates as they did not have enough equity in their homes to allow them to refinance.  Unable to refinance and with the interest rate on their adjustable rate mortgages increasing from the low initial rates mortgage payments increased.  Unable to refinance and without equity many homeowners found themselves unable to afford their payments and unable to sell their homes.  The downward spiral began and the foreclosure crisis struck.  Banks found themselves with thousands of bad loans and lost billions of dollars and many stopped writing loans.  Without writing new loans the struggling real estate market came to a halt as potential buyers could not find a place to get their loans.  It came back to the federal government to realize that its goal of encouraging homeownership without regard to ability to pay was a misguided policy.  While money to lend was made available to banks it came with a general tightening of underwriting requirements.  Now your lender wants to make sure before you get a loan that

1) GOOD CREDIT – – no more crazy products which sought to qualify every deadbeat for a loan.  Once again your banker can say if your credit is bad you are not a good risk so maybe you should get approved for a mortgage.
2) INCOME THAT CAN BE VERIFIED – no more stated income products where the borrower just signed a paper saying how much he made.  Just like in the old days, your lender wants to see actual tax returns, pay stubs and confirm with your employer that you are gainfully employed and make enough money to pay the loan back.
3) A DOWN PAYMENT – no more borrowing the purchase price plus the closing costs.  The days of 106% mortgages and people getting into a house for NO MONEY DOWN  are over.
4) TOUGH APPRAISAL STANDARDS – the bank appraiser can’t do the mortgage broker any favors.  No more exceptions or using dissimilar comparable sales.  The new (old) rules make sure the appraiser uses the best up to date valuations and any questions lead to lower appraisals.
Hopefully with a return to sane underwriting rules lenders will feel secure that the loans will actually be repaid and in the event of a default a conservative appraisal will not expose a lender to thousands of dollars in losses. I can only hope that ACORN and Barney Frank leave mortgage lending to lenders and their social engineering skills are focused on less costly areas.

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1) Monica had a mortgage of $200,000.00 at 6.25%.  She was able to use a modification with her existing lender HSBC to reduce her interest rate and lower her payment by $140/month.  Her closing costs, (no mortgage tax on modification) to $2300.00 so by dividing the cost ($2300) by the monthly savings ($140) it shows that it will take her 16.5 months to recover her closing costs.  If Monica intends to be in the house for more than 17 months the refinance makes sense.
 
2) Lesley couldn’t do a modification and would have to pay mortgage tax again (1.8% on $200,000 = $3600.) so her closing cost was $5900.00.  Taking the closing cost ($5900) divided by the monthly savings ($140) it would take her 42 months to recover the closing costs.  Her plans were to remain in the home for a long period so the refinance made sense.

3) Sandra would be able to do a modification (like Monica) but her timeframe for remaining in the house was only 12 months.  After discussion she investigated an adjustable rate (ARM) but ultimately decided that since she intended to move that any monthly savings could not justify paying the closing costs.

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2) CEMA- Consolidation, Extension & Modification Agreement – this is a modification where the borrower increases his loan amount.  When a mortgage is taken out there is a NYS mortgage tax which is charged to the borrower.  The mortgage tax is at least 1.8% of the loan amount (can be higher if loan amount exceeds $500,000) and this tax is paid when the mortgage is recorded.  When refinancing if the original mortgage is cancelled and a whole new mortgage is recorded a mortgage tax on the entire amount of the new mortgage is paid.  To avoid paying the mortgage tax on the amount outstanding on the original mortgage the original mortgage is not cancelled but merely modified.  If new money is to be added to your existing loan the lender will have the borrower sign an additional mortgage for the amount of the extra.  The 2 mortgages (the original and the additional) will be combined into one mortgage by way of a CEMA and the loan terms modified.  This allows the borrower to avoid repaying the mortgage tax again on the amount left on the original mortgage while getting the benefit of new loan terms detailed by the modification agreement.

3) Assignment of Mortgage- if a borrower decides to refinance with a new lender it is still possible to save the mortgage tax paid on his current mortgage by doing an assignment of mortgage and then a modification.  An assignment of mortgage is when the original lender transfers the mortgage to the new lender.  The new lender now can add more money onto the original (by doing the CEMA process) or merely changed the existing loans terms by doing a modification.  To do an assignment the original lender and the new lender must agree to the process.  Ordinarily there are additional legal and processing fees incurred by the borrower with both lenders but an assignment would only be done when the mortgage tax savings exceeded the additional costs.  This process must be investigated prior to making your loan application with the new lender.  If an assignment cannot be done the mortgage tax on the new mortgage will be based on the full amount and your closing costs can be quite high.

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