Refi Syndrome -Pre-Qualification Atrophy

With diminishing refinance pipelines, the Loan Officer's need to really build purchaser relationship has increased.  We are so used to taking orders and plopping loans into automated underwriting, though, that we have missed the real opportunity that the first customer call presents:  a real pre-qualification is the ultimate customer closing tool.  

Is it possible that the qualification sheet is the ultimate customer closing
tool?  If you don't have a system, you are losing business, and you
don't even know why.  Request one

DU and LP - Our Financial Analysis Atrophy

Since 1996 the acceleration of the use of fast, automated underwriting has reduced the loan officer’s perceived need to manually pre-qualify and re-qualify potential borrowers.  The theoretical benefit of the electronic underwriting engines is that they take away the subjective nature of the loan evaluation and approval process resulting in a more consistent and fair decision process.  The benefit to the lender is that, in principle, loans approved in advance of processing have a lower cost because time and money are not invested in non-feasible transaction.  Unfortunately, the reliance on Automated Underwriting has had some predictable but unintended consequences:

Loan Officers Aren’t Pre-qualifying Borrowers

Pre-Qualifying is the process of analyzing what a borrower can afford before he or she enters into a purchase agreement.  Qualification is different – the borrower already has a property, and the loan officer determines if the borrower can afford the specific property.  Pre-Qualifying means the borrower hasn’t found a property yet and is relying on the loan officer for advice as to how much he or she can borrow.

What is overlooked in this process, whether Pre-Qualifying or simply Qualifying a borrower, is that the process is a part of the overall needs analysis for the customer.  It is through the qualification discussion that the loan officer can advance all of the options the customer has.  It is this contemporaneous, on the spot analysis that allows the loan officer to demonstrate competency and help guide the customer to a loan choice that really suits their needs.  It is also true that the more time the borrower spends on the phone with the loan officer, the better the loan officer’s chance of getting the loan. 

Pre-Qualification is the First Step in Needs Analysis

Proper Qualification of the borrower is tantamount to this process.  The first thing the borrower needs to understand is the difference between pre-qualification and pre-approval.  

A sales pitfall, that is not unique to loan officers, is the assumption that the borrower knows, or is familiar with, most of the information they will encounter as a borrower.  In fact, no one likes to admit that they are ignorant about something.  This is particularly true of borrowers who have experienced the loan process several times.  If you are a loan officer you know that it may take months or even years of constant exposure to the mortgage business to really understand the home financing options, and process.  As a result the loan officer should treat every application or pre-qualification interview as an opportunity to educate the customer.  This is true from the simplest detail, such as explaining decimal and fraction equivalency. 

In the situation of the pre-qualification the physical calculations should be revealed to the borrower in the way that the loan officer is actually walking through the math him or herself.

Loan Officer Question	Description
Thank you for taking the time to speak with me.  Are you purchasing or refinancing?	We want to identify the transaction type before we proceed.  Generally, borrowers do not have to be pre-qualified to refinance. For refinances we will proceed to product selection questions shown below.
Have you found a property yet? Yes Sales Price? How much are you putting down? How many points is the seller paying?  Any closing cost contributions? What is the settlement date? No Do you understand that, if you do not have a property that you have a contract on, you can’t really lock into an interest rate?  This is still the best time to discuss financing options.	Yes - If the borrower has found a property, identify whether they have written an offer, received offer acceptance. No - If they have not found a property the borrower needs to understand that they will not be able to lock an interest rate in yet.
The first step in making sure we select the best product for your needs is to make sure you are able to afford the payments.  We call this pre-qualification.  Do you have a moment to do this now?  I really must insist on doing this because if there is a problem with obtaining financing I will be held accountable.	For purchases, we need to make sure the borrower can afford the property.  The borrower may “push back” at this point.  “I’m just trying to check interest rates” or, “I’m not ready to apply” are objections.  You must insist on this step being completed. If the borrower completely refuses to accede, then utilize “reverse pre-qualifying” in the step below
The first step in pre-qualifying is to determine 1.)    (If property is selected) if your income is sufficient to afford the monthly payments a.       Based upon your income your housing ratio is _____% b.      Now analyzing your debts your total debt ratio is _____% 2.)    (If property is not selected) how much loan you can afford.   a.       Based upon this analysis you can afford $____.   We also need to make sure that your debts do not substantially change the computation.  b.      Based upon this you qualify for $_____ Does this information meet your expectations?	1.)    If the borrower agrees, then you qualify him or her first to income, then total debts, sharing your results as you make the calculations.  Obviously, if you have exact information for real estate taxes you will use those. 2.)    Upon completion you can discuss the benefits of pre-qualification, and offer a pre-qualification letter.  a.       They use the letter to show the agent they are serious and suitable b.      You can tailor the letter to meet the terms of any offer they make. c.       The letter brands them to you 3.)    The calculations may reveal that the ratios are too high for standard guidelines (28/36) or that the borrower cannot qualify for as large a loan as they want.  This is EXACTLY what you WANT to reveal.
Satisfied - Now that you know that your qualification profile is in line with the financing you are seeking you should understand that the pre-qualification letter is limited.  Do you know what a Pre-Approval is?	Pre-Approval is an actual approval, where a pre-qualification is my opinion as a professional loan officer and does not include a review of your application documents by an underwriter.  The benefits of pre-approval are ·         Write cash offer – better chance of getting house ·         Faster closing – all that’s left is appraisal and title ·         Better Price – less uncertainty for seller ·         Financial Privacy – no seller disclosures ·         Less Hassles – negotiate your contract after   the loan paperwork
Dissatisfied - Since we have a shortfall with results of pre-qualification, you should know that we have several solutions for you to help you qualify for more.  Would you like to discuss these?	Choices: 1.)    We can utilize lower start rate or easier qualifying loans to try and make the ratios fit guidelines better 2.)    Our Automated Underwriting is much more flexible and aggressive than standard ratios allow.  If you apply with us, we can evaluate your case electronically.  This can mean you can afford what you want without having to change programs
I understand that you aren't ready to provide this information yet.  I still need to make sure you are suitable for the transaction you are proposing.  I can do this in a process we call Reverse Qualification. Do you mind if I do this now?  What is the sales price you are looking at?  What is the down payment?  Based on this information you should have income of  $_____ a year to afford this property.  Is this what you earn?  Is it more or less?	Often, a borrower will resist pre-qualification, or giving income and debt information thinking the loan officer is trying to trick him or her into revealing more information than they are ready to.  This does not mean that the borrower should   be allowed to avoid this segment.  The reverse qualification allows the loan officer to expose qualification problems without getting income figures initially. If the borrower has sufficient income, you can proceed.  However, if the borrower has more income than what is needed, the loan officer should demonstrate the maximum qualification first.  If the borrower has less income than needed, follow the instructions for Dissatisfied above.

Now that the Pre-Qualification Phase of the Needs Analysis is complete, the loan officer can proceed to determine program suitability. 

Discussion of Fixed Rate Options

One of the reasons we want to lay out the broadest panoply of loan programs is to educate the customer, of course, but also to guide the customer away from a pure rate discussion.  Interest rates are abstractions.  Borrowers ask what the interest rate is because they have been trained to do this by the media.  As loan officers we are conditioned to answer this question.  The problem is

On any given day someone else will probably have a lower rate and/or point quote – or another loan officer will lie about the actual rate they offer.

We are perpetuating the borrower’s belief that asking about the interest rate is the most appropriate question.  The borrower thinks if one rate is good a lower rate is better. 

By comparing many different products and features the borrower will see that there are more important aspects of the comparison than the rate. 

Loan Officer Questions	Description
Purchase - Do you currently own your home?  If yes, what kind of loan do you currently have?  What is your current payment? Are you going to sell your current home?	These are all situational questions designed to give you a sense of what the experience level of the borrower is.  Most borrowers have some familiarity with a fixed rate regularly amortized loan.
Are you familiar with the different types of fixed rate loan?  A fixed rate loan protects you against rates going up.  Obviously, a 30-year loan would give you the longest protection, but had you considered a shorter term?  Had you thought about a 25 year loan, 20, 15 Year.  The interest savings can be substantial	Walking the customer through the monthly payments for the various maturities, and then showing the customer the interest savings over the life of the loan can move the borrower away from 30 year loans
One of the features of the fixed rate loan is the ability to pre-pay the principal in part.  Do you understand how this works?
This is similar to the bi-weekly mortgage, where instead of making twelve monthly payments, you make 26 bi-weekly payments amounting to an extra payment a year.  Do you see how this works?
One of the features of a fixed rate loan is the ability to permanently discount the interest rate by paying points.  Have you considered paying points?  Are you going to be in this property at least _____ months?
If not, you should really consider an alternative to a long term fixed rate because you are paying for insurance you don’t need.  Have you heard of a balloon loan?
If you were looking at a shorter-term stay, have you thought about which Adjustable Rate Mortgage might best suit your needs? Do you understand how ARMs work?
If you were renting, and you are considering buying you may notice that the payment for the mortgage is significantly more than what you were paying in rent?  Had you looked at the tax benefits of your proposed purchase?

By embracing pre-qualification, you will spend more time talking with the customer about what's important to him:  HIM.  You have proved your value and this will make it more difficult for the borrower to continue shopping for the lowest rate.  

TRID - Process Management - From Scratch

GFE/HUD-1 Are NOT Extinct - merely deprecated

Of the many TRID change challenges, one curve ball that continues to confuse: GFE and HUD-1 still remain in use! TRID doesn't apply to all transaction - some retain the the GFE/HUD-1 process. Ensuring the correct disclosures at the right part of the process is an important component of compliance.

2010 GFE Process REMAINS IN PLACE

Your old GFE Process doesn't get deleted, it gets denigrated from a primary to a secondary process (depending on your business model). If your business focuses primarily on reverse mortgages, home equity lines of credit or mobile homes, your business continues as usual; the TRID process applies as secondary in the event you pick up a customer to which it applies. Also, business loans, farm loans, temporary financing, such as construction only loans, lot loans and conversions remain exempt.

Loan Estimate Process and Closing Disclosure Process

The procedures remain relatively unchanged. The major difference causing concern among the industry, revolves around the idea that any changes to the Closing Disclosure result in a 3 day closing delay. This will only happen if 

1. The APR (annual percentage rate) increases by more than 1/8 of a percent for fixed-rate loans or 1/4 of a percent for adjustable loans. A decrease in APR will not require a new 3-day review if it is based on changes to interest rate or other fees.
2. A prepayment penalty is added, making it expensive to refinance or sell.
3. The basic loan product changes, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments.

Theoretically, if we strip out all of the day-to-day processing time frames for documents, appraisals, title work and other time-consuming verification, a loan could still close within 7 Precise Regulatory days of application (because the customer must receive the initial disclosure at least 7 Precise Regulatory business days - in lieu of Actual Business Days - prior to closing.) 

Don't Forget the Home Loan Toolkit!!

The Home Loan Tool Kit replaces the "Settlement Costs Booklet" that we have been busy not giving to customers for the last 40 years. This is a foundational piece of the Know Before You Owe process. We have some problems with the information disseminated within the Tool Kit - specifically some mis-information with regard to locking in, but it generally represents a more customer friendly read and it references all of the other TRID material.

Your FREE Know Before You Owe Policy

Of course, remember we have been providing you with a FREE TRID policy since the beginning of the year. Now is the time to examine the easy way to manage your compliance policies and procedures with our Compliance VP Document Management System. 

The Audacity of ... CFPB's Misleading Marketing Tool

Instead of "Playing Lender" the CFPB Should Teach Consumers How to Rate Shop

Considering the number of blows the mortgage industry has patiently withstood at the hands of well-intentioned but misinformed regulators, it may seem surprising to some at the level of affront taken over the "Check interest rates for your situation" (the checker) on the Consumer Financial Protection Bureau (CFPB) webpage. All of the industry professional associations have launched attacks against the checker.

Much of the criticism of the tool surrounds the apparent opacity of the checker.  "It leads people to believe they would be eligible for a loan based on no other information." (Mortgage Broker)  Specifically, credit score only driven modeling doesn't account for many other features of a credit history that makes you ineligible for financing, such as recent bankruptcy, credit counseling, co-signed loans, insufficient trades and others.  In addition, missing are: 1.) APR, 2.) Mortgage Insurance Costs, 3.) Doesn't distinguish or provide Government loan options.

The CFPB has defended the site against industry complaints, saying a customer who is aware that interest rates are different from lender to lender is 50% more likely to shop, and the page remains active.  Perhaps the CFPB feels the protest shows they have struck a nerve - exactly what they wanted. Sadly, though, this agency has taken a page out of online marketers' playbook, and walks a fine line between information and deception to create engagement. The checker goes down the same "bait and switch" path that many online lead generation sites engage in.  The message a lender would take from the regulator's site:"It's okay to provide misleading rate options if enough remains unknown so you can be sufficiently vague."

The Checker reveals another clear misunderstanding of the business rule the Bureau has set into place. It ignores a fact of life for mortgage lenders and brokers alike; under the Anti-Steering Rules, you cannot change your pricing based on any feature of the loan.  The customer CAN'T negotiate with a lender because the lender CAN'T change the price. Period. The CFPB sets up the consumer to believe that they CAN negotiate the price. One can see the frustration the consumer will experience when, after providing all the information the lender has required to issue a price quote, a rate negotiation results in no price improvement and will wonder "what was all that about?"

Another flaw in the CFPB's mandate that customers shop; many lenders require a hard credit pull to quote rates. The impact of a single inquiry may not have a deleterious effect on your score, but two or three in succession may drop your score enough to negatively impact your rate.   

Deceptive and (Honestly?) Useless

I myself have been through this Unfair, Deceptive and Abusive Act and Practice several times after seeing a great rate on a marketing website. Ultimately, there was always a reason that the advertised rate was unavailable to me.  Self-employment, length of employment, asset sufficiency or sourcing, the property's characteristics or other impediment get pulled from a panoply of potential barriers. I'm in the industry - these are legitimate barriers - but they don't excuse holding out a rate that may not be available to the public. The checker's functionality does LESS than the lead generation sites.   

The site acts as if rates exist at some place in time.  The reality is that rates are very fluid and change from moment to moment.  Intraday rate changes are common.  If, as a consumer, you shop rates over the course of a few days, you may select a higher rate that seems good because rates have decreased over that time.  Conversely, you may miss an opportunity to lock in if interest rates rise while you shop. The MOST common error consumers make when shopping is to compare lenders when they are not in a position to lock in - because they do not yet have a signed sales agreement.  The CFPB should provide real instruction on rate shopping, such as what we have provided below.

A Homebuyer's Guide to Rate Shopping

Purchasing a home is probably one of the largest financial decisions you will ever make. You want to make informed choices, but the mortgage process is complex, and it’s hard to even know the right questions to ask.  Financial alternatives exist and you have choices for where you can go to get financing to buy a home. But before you even know how and where to shop for a mortgage, you should know the right time WHEN to shop.

I shopped for a pre-approval so, I should stick with that lender for my mortgage. 

False	True
Once you have talked to one lender, you have to use that lender for your loan.	You can talk to as many lenders as you like about pre-approval and pre-qualification.  You can also apply with different lenders or lock in with different lenders.  By working with a few lenders, you can negotiate more effectively. NOTE:  The CFPB regulates compensation, so lenders and brokers are no longer able to "negotiate" on pricing as in the past. Most companies offer a fixed price.

Be careful how many times you have your credit report pulled by a lender or broker.  For the purposes of a pre-qualification, most lenders or brokers will take the credit report you can get for yourself from the credit bureaus (like annualcreditreport.com).  This is cheaper, too.  The lender will want what is called a Three Bureau Merge (Tri-Merge) with all three repositories.

Whether face-to-face or online, you should talk with a few lenders and ask for recommendations to find the best fit for your situation. While the interest rate is a big factor, it is not the only factor. Consider the different types of loan options available; get a written estimate of closing costs and fees. Find out their policies for locking in interest rates. 

When to shop for a mortgage

Wrong	Right
You just started shopping for a home and you are looking in a neighborhood.  You figure your price range is $200,000 to $225,000.	You have a sales contract, signed (or about to be signed) by the seller, which details a sales price, your down payment, the closing date and any costs that the seller will pay for you. You may have been through the pre- approval process

You have been told that you need to shop around for a mortgage. So you do, calling lenders asking for rate quotes and comparing offers.  More than likely, you are finding that you have more questions than answers. If you find yourself in this position, it’s because you didn’t do some of the earlier steps, like getting pre-approved or pre-qualified. More importantly though, is the timing right when it comes to the bigger picture? 

Do you have a contract to purchase a home?  If yes, then you should shop for a mortgage.  If you don’t have a contract, the information that the lender gives you is not accurate. Without a sales contract, you don’t have the correct loan amount and settlement date you must have to meet the requirements of your legally binding sales contract. If you don’t have a contract, the lender cannot guarantee your interest rate, which is known as locking in.

After you find the home then you can lock-in your rate

False	True
A lock-in can be given at any time.  Once a lender has your loan application, you are locked in.  The lock-in is only for the points because the rate continues to float until closing.	A lock-in of your rate includes a guarantee of the interest rate, loan type, loan amount, and any points you must pay. These expire on a specific date, so in order to get the terms of the lock-in, you must close before the expiration of the guarantee.

Lenders are often accused of “bait and switch” tactics; offering one rate at the beginning then giving another one at the end. The reality is that many things can change the interest rate lock-in, like pricing adjustments for your credit, the type of property you are buying, and how much you are putting  in your down payment. It is likely that in order to lock-in your rate accurately, you will have to provide your social security number, along with the information from your contract. 

What loan terms are you shopping for?

Wrong	Right
I’m shopping for a mortgage.  What’s your best rate?	I’m looking for your interest rate quote for a 30-year fixed rate loan with a loan amount of $145,000, a down payment of 10%, closing in 45 days, with no points.

Here’s an example. If you go to a Ford dealer and say, “I want the best price you have on a car”, the salesman will take you all the way to the beginning of your decision-making process and start to ask you about what kind of car you want. You should already have this information. To accurately shop, give the lender the most specific request you can.

When should I call to check interest rates?

Wrong	Right
I can call any time, day or night, and compare rate quotes over the course of a week or two.	I need to check rates between a few lenders I’m considering between 11:00 am and 4:00 pm.

Rates change ALL THE TIME. Even over the course of the day sometimes. Most lenders publish their rates sometime after the bond markets open and when the direction of rates is clear.  That’s usually around 10:00 AM Eastern Time. While some lenders hold their pricing overnight, there is no guarantee that a quote you receive at 11:00 AM will be valid after 5:00 PM.  Wrap up your shopping by 4:00 of the same day so that you can compare and call the lender with the best price before the close of business. 

Am I dealing with a broker or a lender?

Broker	Lender
·         Cannot guarantee a rate or approve a loan directly – Get a copy of confirmation of lock or approval from investor. ·         Can shop multiple investors for the best rate. ·         May have special products	·         Can lock a rate directly ·         Can approve loans directly ·         Cannot shop on your behalf ·         Limited selection of products

Banks, savings banks, and credit unions usually make loans from their own funds, so they CAN commit to giving you a loan at a specific interest rate.  Mortgage lenders have the ability to approve and fund loans using money generated from selling loans into the secondary market. Brokers arrange financing by surveying many lenders in a specific marketplace and finding the most competitive programs, flexible guidelines, and reliable service, but CANNOT fund or approve loans.

You can begin your search online, but also ask your friends, family, and co-workers for referrals as well. Your real estate agent can also recommend at least three local lenders who have a track record of being honest and reliable.

Other Rate Checker Articles

Ken Harney's Article

Shocker - Home Buyers Don't Understand Mortgages, but think they do

An article appearing in the Housing Wire cites an Ipsos Consulting Study based on a Zillow quiz, showing Home Buyers really don't understand the business.

As loan originators, we assume that our borrowers understand what we are telling them. But while they may hear us, they don't understand. This can cause a loan officer to lose a transaction, because the borrower doesn't have the comfort level to make a purchasing decision. Always confirm the borrower understands by asking them to explain what they know. Overlooking this step, particularly when the borrower represents him or herself as experienced, can cause you lost business.

For mortgage lenders, originators and even real estate agents, it is important to have a tool that can quickly educate borrowers on the ins and outs of mortgages AS THE INFORMATION APPLIES TO THEM. Too long, and they won't read it. Too detailed, and they won't read it. But if it's useful, they will read it, keep it and pass it on to their friends.

To answer this need we have put together an educational marketing tool for individuals and companies to custom label with the company name, individual name and logo. This can be distributed to all of your potential new customers as a way to represent yourself as an industry expert.

It includes a tear out pre-application kit, so that when the customer is ready to apply, they have all the tools to submit a complete application.

Your own personalized guide to distribute to consumers, referral sources and business partners.

Visit www.quick-start.net