Issue: #6

August, 2008

In This Issue

ZILLOW MORTGAGE'S MAJOR FLAWS

Jack Guttentag
Founder, Upfront Mortgage Broker's Association


Zillow, the popular real estate site, now has a complementary mortgage site. It is also complimentary (with an "i") because neither participating lenders nor borrowers pay for the service.

Prospective borrowers fill out a long questionnaire, similar to a mortgage application, except that the borrower's identity is not disclosed. The questionnaire is made available to all participating loan providers (LPs), who are defined as individual loan officers or brokers rather than firms. Any LP may submit price quotes along with information about themselves. Borrowers also have access to ratings other borrowers have given the LPs. The borrower's identity is revealed only when he contacts an LP, and only to that LP.

The anonymity of the process allowed me to kick the tires by submitting a loan request. I received quotes from six loan providers on my fictitious house purchase in Valley Forge, Pa.

This site has some features I really like. One is placing the initiative to select an LP in the borrower's hands. This is in sharp contrast to the modus operandi of lead-generation sites such as LendingTree or LowerMyBills, where three or four firms selected by the site pay for the right to contact the borrower.

Identifying LPs as individuals rather than firms is also a good idea. Realtors who refer home buyers to LPs have always used this approach because even the best firms may harbor incompetents or rogues.

Zillow has also done a good job in designing a uniform format that all LPs must use to quote prices. All quotes are comparable and are shown on one screen. Each quote shows the type of loan, interest rate, APR, total lender fees and monthly payment. The user can click on the quote of any one LP and get more detail, including critically important details about adjustable-rate mortgages.

Shopping anonymously should appeal to borrowers because it means that they can control the process, select who they want to deal with, and not be harassed by others. But anonymity comes at a price. No LP is going to invest any significant amount of time on anonymous borrowers, so they come up with a quick quote, include a prepackaged testimonial about how good they are and how much they would enjoy working with you, and leave it at that. They don't even bother keeping their quotes up to date.

For example, I signed on over the Memorial Day weekend. On Tuesday, I received quotes from six LPs. I didn't get to check until Thursday, however, and over those two days, market rates had jumped almost 0.25 percent. None of the six LPs had bothered to update their quotes. Maybe if rates had gone down instead of up, they would have, I don't know.

The major weakness of Zillow Mortgage from a borrower's perspective is that the price quotes don't necessarily mean anything, so using them as the basis for selecting an LP is hazardous. Further, Zillow is very unhelpful in indicating what the price quotes do and don't mean.

At best, a quoted price is the price the LP could deliver on the loan specified by the borrower, provided that a) the borrower can be approved for the loan, and b) given approval, the price can be locked immediately.

But the LP is guessing about approval. It is an educated guess, based on the information provided by the borrower, which is extensive. The LP can't confirm the information, however, and can't run it through an automated underwriting program because those programs require an identifiable borrower.

In a world where underwriting requirements have substantially tightened, this is a problem. It is not unique to Zillow, but I would expect Zillow to explain it to borrowers, and they don't.

The second assumption underlying a price quote is that the loan can be locked immediately, which of course it can't -- the borrower has to apply and be approved first. This means the LP can't be held to a quote, which creates a temptation to lowball the price in order to be the LP the borrower contacts.

Zillow does have some things to say to LPs about this issue. First, they warn LPs not to lowball because it will be reflected in poor ratings, which will hurt the LP in the long run. That's fine.

Unfortunately, Zillow also tell LPs "… we expect you to stand by your quote if the information provided by the borrower is accurate." That says that price quotes are locks, which is ridiculous. No LP can afford to lock a price quote in a volatile market with no commitment from the borrower. This is an impossible standard, and can only confuse borrowers.

Zillow should explain to borrowers the assumptions underlying price quotes, and impose a requirement on LPs that makes sense. I would have them quote prices for a minimum of three days, which would be highly educational for borrowers. Zillow can also suggest to borrowers that when they contact an LP, they ask the LP to keep quotes current until the price is locked.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

Loan Type Interest Rate APR
5/1 ARM 5.500% 5.721%
7/1 ARM 5.750% 5.901%
15-yr Fixed 5.750% 5.910%
30-yr Fixed 6.250% 6.378%

Rates are current as of 8-04-08, and are based upon a conforming loan amount, 740+ credit, full documentation, and a loan-to-value of 80% or less.

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KILLER MORTGAGE BROKER DECEPTION

Jack Guttentag (writing this week for Jared Martin)
Founder, Upfront Mortgage Broker's Association


This series of articles explains recent proposals by HUD to make the good faith estimate of fees and charges (GFE) more useful to borrowers. The first two articles explain how the revamped GFE would make it easier for borrowers to shop alternative loan providers (LPs), and would eliminate critical weaknesses of the current GFE that encourage opportunistic pricing. This article looks at proposed revisions in the GFE to make mortgage broker pricing more transparent.

Perhaps the most important proposed change in the GFE -- certainly the most controversial -- is the way it handles payments by lenders to mortgage brokers on higher-rate loans, referred to as yield spread premiums, or YSPs. It is alleged that YSPs are often excessive because they are embedded in the interest rate and borrowers are not always aware of them.

Consider the broker who receives wholesale price quotes on a $200,000 fixed-rate mortgage that includes the following possibilities: 6 percent at zero points; 5.75 percent at 2 points; and 6.25 percent at -1.5 points. On the last option, the lender pays 1.5 points, the YSP, to get the 6.25 percent rate.

At 6 percent, the wholesaler does not expect to receive any points, and will not pay any either. If the broker selects the 6 percent rate, he must tell the borrower what his fee is because the borrower will have to pay that fee out-of-pocket: "Charley, the price is 6 percent, zero points, and $3,000 for me."

It can and does happen this way, but most brokers find the 6.25 percent option with the 1.5 percent YSP more attractive. It allows the broker to say, "Charley, the price is 6.25 percent, with no points and no broker fee." The statement is not correct; there is a broker fee, but the borrower is not told what it is.

Why does it matter? Because in the 6 percent case, Charley might question whether $3,000 wasn't too much and whether $2,000 might not be more appropriate? In the 6.25 percent case, the broker avoids this question. The proof of the pudding is that in general, borrowers who pay brokers directly pay less than borrowers who pay through YSP.

Under recent proposals by the Federal Reserve Board, a lender would be prohibited from making a payment to a broker unless the borrower and broker had agreed in advance on the broker's total compensation. Before paying a YSP to a broker, the lender would have to check the agreement between the broker and the borrower, as well as the HUD-1 closing statement, to make sure that the total amount received by the broker did not exceed the amount agreed upon.

The Board's approach would work, but it is clumsy and places a nontrivial enforcement burden on the lender.

Under HUD's approach, any YSP must be included in the new GFE item, "Our Service Charge," which is total broker and lender fees exclusive of points. If the 6.25 percent rate with YSP was selected, Our Service Charge would include the $3,000 YSP and any other LP charges.

The next item on the form is "Your credit or charge for the specific interest rate chosen (points)." The GFE here shows whether the borrower is paying points or receiving them. In the case at hand, it would show the $3,000 as a credit for the 6.25 percent rate.

The third item on the GFE is "Your Adjusted Origination Charge," which consists of Our Service Charge plus any charge or less any credit for the rate selected. In the case at hand, the Our Service Charge of $3,000 less the $3,000 credit for the 6.25 percent rate leaves an adjusted origination charge of zero.

The borrower thus knows that the 6.25 percent rate generates a $3,000 credit to him, and he also knows that the credit is used to compensate the broker. Any inclination to negotiate the broker fee should be the same as in the 6 percent rate case, where the borrower knows he must pay the broker out of pocket.

This set of disclosure requirements will pose no problems for Upfront Mortgage Brokers (UMBs) and many other brokers who follow UMB principles. They practice full disclosure now. But the industry trade groups, which defend the ways in which most brokers operate, are moaning that the new GFE will mean the end of mortgage brokerage. Stuff and nonsense, it will merely mean the end of broker deception.

Copyright 2008 Jack Guttentag

WRITTEN HOME INSPECTION REPORT IS GOLD

Dian Hymer
Realtor, Author


A homeowner in Oakland, Calif., recently decided to put his older home on the market. At the recommendation of his real estate agents, he ordered presale inspection reports on the property. The home inspector noticed sloping in the floors and out-of-plumb door frames -- signs of settlement, which is not unusual for the area.

The seller informed the home inspector that an engineer had inspected the property when he initially purchased it. The seller, who was then a buyer, had been present at the time of the inspection, which is always a good idea.

The engineer found nothing unusual with the foundation, given its age. The settlement appeared to have occurred long ago and was not indicative of an ongoing problem. Based on this information, the buyer went ahead with the purchase.

Years later when this buyer, now a seller, searched for the engineer's report to include with his disclosures on the property, he couldn't find it. He then recalled that because he had been present at the inspection and was pleased with the results, he did not pay the extra fee to have the report put in writing.

This is a common occurrence in the home-buying business. Buyers are encouraged to have a property they are interested in thoroughly inspected before they go ahead with the purchase. The cost of having various inspections done can mount up.

Many buyers stretch financially when they buy, so the temptation is great to skimp on inspection costs. However, if defects are discovered during inspections, you would need written confirmation if you hope to negotiate a concession from the seller.

There are pros and cons to foregoing written inspection reports. One is that it usually costs less. Also, buyers who make an offer in a place like Berkeley, Calif., where multiple offers are still fairly common, are forced to pre-inspect the property so that they can make an offer without including an inspection contingency.

In this case, the buyers might pay for a verbal inspection to keep costs down until they find out if their offer is accepted. If it is, it's a good idea to pay the extra amount for a written inspection report.

HOUSE HUNTING TIP: A benefit of having written reports on a property you're buying is that it documents the condition of the property at a point in time. Then when you sell five or 10 years later, you can make this information available to the buyers. This can clear up uncertainty about whether or not an issue is new or was there many years ago and has remain unchanged.

The presale home inspector in the above example recommended in his written report that an engineer look at the foundation. The seller ended up hiring an engineer to do a presale inspection because he had no written record of the report done at the time he purchased.

As a seller, it's usually in your best interest to order further inspections that are recommended, particularly ones that will be a concern to buyers. This way, you're in control of who does the inspecting. A buyer can always get a second opinion, but at least you have a report to back up your position if the buyers try to negotiate the price based on inspections.

THE CLOSING: There are times when it makes sense to get verbal opinions. However, if you're a seller and you're going to make presale inspection reports available to buyers, they should be written. This way, the opinions on the property's condition are coming directly from the inspectors and are not just hearsay from you. Note that seller disclosure laws vary from state to state.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

GFCI ELECTRICAL OUTLETS ARE LIFESAVERS

Paul Bianchina
Contractor, Author


Q: What is a GFCI electrical outlet? Are outlets of this type required in all homes, and if so, where? --Allen D.

A: GFCI stands for ground-fault circuit interrupter. A GFCI outlet reacts much more quickly to the presence of an electrical short circuit than a standard circuit breaker does, so they provide additional protection against the possibility of injury should an appliance, tool or other electrical device malfunction.

The electrical codes throughout the country require the use of GFCI outlets adjacent to any sink in the kitchen, bathroom, laundry room or similar area; for garages and exterior outlets; and in certain other specific areas such around whirlpool bathtubs. You can check with your local building department for a complete list of GFCI requirements.

GFCI outlets are easily recognizable by the "test" and "reset" buttons located on the face of the outlet, and they should be regularly tested in order to confirm that they are operating correctly. To perform the test, simply plug a circuit tester into the outlet and press the outlet's test button -- the light on the tester should go out. Press reset, and the light will come back on. You can also plug in an electrical device such as a radio or a lamp and test the outlet that way, but a plug-in circuit tester -- available inexpensively at any home center or electrical supply retailer -- will also confirm that the outlet is properly wired and grounded.

Q: I live in an old house that was built in 1907. I want the garage to have a patio door to be able to see and go out to the backyard garden. I need to cut part of the foundation to do this. Is it OK to cut the foundation? Is this safe? --Midori C.

A: A foundation consists of two parts. The footing, which is wider than it is high, is the lowest part of the foundation and is intended to distribute and transfer the weight of the building evenly over the ground. On top of that is the stem wall, which is higher than it is wide and is used to raise the structure above the surrounding grade. In most cases it is OK to cut into the foundation stem walls in order to install a new door, provided that the footing is not cut. You would want to use a licensed concrete-cutting contractor to do the work, and he or she can determine if there are any other circumstances at your particular home that would prevent them from making the cut.

Q: Can all types of paint be tinted? Also, how much do they usually charge to add the tint? --Jim

A: Virtually all paints and primers can be tinted at your local paint store, although there are some types of paint that are pre-colored at the factory and can't be tinted. When you select a color from a paint chip, the store will begin with the appropriate white tint base, and add tinting colors as needed to get to the right color. If you want a primer tinted to go with that paint color, they will typically tint it to about half the shade of the finished color.

If you have a specific color that you want to match, any good paint store will custom blend the paint to match whatever sample you bring in. And while home centers are fine for mixing a paint to match one of the color chips for the product lines they sell, I have found that it takes the experience and keen eye of the people in a paint store to do very accurate paint and stain color matches.

As to cost, if you are buying the paint from that store there should be no charge for tinting. If you bring in your own paint and want to have it tinted, or if you have a particularly difficult color match, the store may charge you a small hourly fee.

Remodeling and repair questions? E-mail Paul at paul2887@ykwc.net.