Kristin Abouelata - Home Loans asked:


According to Wikipedia, the definition for a white elephant is “a valuable possession which the owner cannot dispose of, but whose cost (particularly of upkeep) exceeds its usefulness.”    Hmmm.  Sounds like some of the higher priced homes we hear may be sitting on the market a little bit longer than usual.  According to the Knoxville Area Association of Realtors (KAAR), the number of homes valued at $500K+ which sold in May 2008 was 34.  But there were 205 new listings.

 

Ok, so I have to give you a little bit of history about the origin of the phrase white elephant.  It really has nothing to do with mortgage lending, but it’s a cool information nugget to know.  Per Wikipedia (yes, again),  in the tales from the Buddhist scriptures, Buddha’s mother dreamt of a white elephant giving her a lotus flower on the eve of Buddha’s birth.  Thus, in Southeast Asia, it became a status symbol to own a white elephant (basically a requirement if you were some type of royalty).  However, due to being sacred and all, the owner couldn’t have the white elephant actually do any work or labor to offset its keep.  Ever wonder how much food an elephant can consume a day?  Think of the clean up after it eats!  You not only get to feed the beast constantly, but you also have nothing to show for it when you’re done.  You get the picture.

 

So, my analogy of there being a few white elephants in the real estate market right now is due in part to the jumbo rates not being so hot as of late.  Loans below $417,000 are sold into mortgage backed securities.  But jumbo loans are sold into private backed securities.  And unfortunately due to the debacle in the mortgage industry that occurred in markets such as Florida, Nevada and California (where a lot of loan sizes are above $417K), there’s not a great appetite for the jumbo loan.  It’s kind of like jumbo loans are liver and spinach on the menu.  A few people will buy that stuff, but it’s not as popular as the cheeseburger.

 

So what to do if you need a jumbo loan?  Make sure you work with a lender who knows their stuff and can present you with options.  Adjustable rate mortgages (ARM) may suit your needs as long as they are fixed for a decent amount of time and won’t paint you into a corner.  An ARM may buy you enough time to refinance at a later date when the market calms down.  You might also be able to wrangle a first and a second so the first loan fints under the conforming loan size umbrella and the second part of your financing is at a smaller loan amount with a higher interest rate.  Just be smart and make sure your lender is smart.  And if you’re selling your home, sit tight.  These homes are moving, however it might be at an elephant’s pace.  Don’t fret, though.  An elephant’s top speed can reach 25 mph.



Constance

Kristin Abouelata - Home Loans asked:


In the mid 1990’s, the mortgage industry saw the credit score and its predictive power to assess a borrower’s ability to repay a mortgage step into the limelight as one of the most indicative factors for loan approval. After conducting statistical test after statistical test, Fannie, Freddie and Ginnie, the 3 big lending institutions, mandated that the credit score should be used in conjunction with manual underwriting to assess loan approval. Not too long after, automated underwriting systems (AUS) were developed that expedited and streamlined the underwriting process even further for lenders. A loan officer today simply inputs a borrower’s key information into the preferred underwriting automatic engine, such as his/her credit score, income, amount being borrowed, cash reserves, employment and housing history, and the value of the property. A response is returned by the underwriting engine recommending approval or denial for the loan.

If your loan receives a denial from an AUS, the buck doesn’t necessarily stop there. Life happens to people, and oftentimes it’s going to take a real live person understanding the nuances of a file to make an underwriting decision. That’s when your lender may suggest submitting your file to underwriting for a manual review. After all, not everything in life can be automatic, right?

A perfect scenario for a manually underwritten file would be someone who has no credit scores. No credit scores? Yes, it is possible. I’ve had customers who, being old school and always having paid for everything in cash, had never established traditional credit lines that reported to credit reporting bureaus. In a case such as this one, I had to submit non-traditional lines of credit to underwriting, something a machine can’t assess. This means I had my customer bring in bills he had paid on time for the past year to create a credit history. Typical ones used are car insurance, utility bills, cell phone bills and cable bills. You can expect to have to provide 3-4 different trade lines if you haven’t established a traditional credit history and score.

“The most typical reason we see a file submitted to us for manual underwriting is for either no credit score or an error reported on a credit report,” reflects Patricia Haynes, onsite Government Underwriter at Mortgage Investors Group. “For instance a judgement that doesn’t really belong to the borrower. Maybe it’s really Dad’s judgement reflected on the son’s report because Junior and Dad have the same name. That’s when I can overwrite an AUS decision because I have the documentation to support my decision to do so in front of me.”

Another very common reason to submit a loan for a manual underwrite is when your customer’s credit score is below 620 and gets an AUS denial. If this is the case with your loan, be prepared to provide more than average documentation about your credit history, as well as written explanations as to why your credit score has suffered recently. Maybe two years ago you had a financial meltdown due to a medical illness, but in the last twelve months, you can prove you are back on your game and have been repaying debt. However, your credit scores haven’t exactly caught up with your actions. An underwriter is going to piece together the different aspects of your file and see if it makes sense. Your home lender should be able to review your file and guide you as to what documentation an underwriter will want from you to grant you loan approval.

Naturally, if your credit score is really low and you have very little explanation for your state of credit affairs other than you failed to pay your bills on time, don’t hold your breath for loan approval. An underwriter can see through smoke and mirrors. After looking at files as long as they have, they can basically sniff out a loan that has merit from the ones that are too risky.

So, even as our world gets more and more automated every day, it’s nice to know that you can’t replace genuine common sense, even in the mortgage industry. And it’s nice to know that you can plead your case for credit worthiness to a real live human being.



Zachary