TEAM EMPOWERMENT MORTGAGE CHATTER: May 5; News & Headlines; The 4 C’s of Mortgage Underwriting; REO Inventory Reaches All-Time High; Gallup Poll: Americans Say Buy Now; How To Reach a ‘Camouflage’ Buyer

“I do not think there is any other quality so essential to success of any kind as the quality of perseverance. It overcomes almost everything, even nature. “ – John D. Rockefeller


Freddie Mac’s employees may want a margarita tonight after reporting a $676 million quarterly profit, and indicated it would not seek additional funds from the US Treasury this quarter for the first time since it was taken over by the government nearly three years ago. But Freddie said that over the long term it was unlikely to earn more than the dividends owed to the Treasury on preferred stock issued as part of its bail-out and therefore expected to request additional funds in future periods. The CEO said, “Continued improvements on the employment front and in early-stage delinquencies were positive signs during the quarter, but we believe large inventories of unsold homes and a high number of distressed sales will continue to put downward pressure on home prices in many neighborhoods.”

Importantly for the industry, Freddie Mac also said that its requests to banks to repurchase faulty loans declined to $3.4 billion at the end of the first quarter, compared with $3.8bn at the end of the fourth quarter of 2010. More than 40% of loans owned by Freddie Mac were originated after 2009 and those loans have far higher equity and lower delinquency rates than those issued in 2006 and 2007.

A segment of the population looks forward to the Special Swimsuit Edition of Sports Illustrated, or Time Magazine’s Man of the Year Edition. Somehow, I don’t think that the FDIC’s answer will garner quite the attention, but it is useful to servicers nonetheless. “Supervisory Insights Special Foreclosure Edition” can be found at FDIC.

This is not good news, but it is not unexpected, for anyone following shadow inventory numbers. The report shows the FHA REO inventory was at 68,801 at the end of February, up 54.2% from February 2010! HUDREO

Yesterday the MBA reported what lock desks everywhere already knew, and that was that residential mortgage applications increased 4% from one week earlier. Refinancing apps picked up 6% and purchases were up .3%. With these lower rates refi’s are accounting for nearly 63% of apps, and ARM share is up to 6.7%.

And yesterday rates continued to drop, with the ADP private payroll employment numbers yesterday coming in weaker than expected (179k versus 200k) and the ISM Service coming in at their weakest levels since last August (“slumped” is the word one report used). The US continues to need to finance its deficit, which includes selling $72 billion next week ($32 billion 3-yr on the 10th, $24 billion in 10-yr’s on the 11th, and $16 billion in 30-yr’s on the 12th).

How about these rates this morning? The yield on the 10-yr this is below 3.20%, down to 3.17%. Jobless Claims this morning came out up 43,000 to 474,000 claims last week. Productivity numbers also showed an increase, which is helpful, but stocks and bonds are reacting to the Jobless Claims increase. Agency MBS prices are better by between .125-.250.


With Spring upon us, and new buyers out looking for houses, I thought today might be a good time to review the basics of what lenders look for as they decide to approve (or deny) mortgage applications. For at least 25 years, I have heard them called – The 4 C’s of Underwriting – Capacity, Credit, Cash, and Collateral. Guidelines and risk tolerances change, but the core criteria do not.


CAPACITY is the analysis of comparing a borrower’s income to their proposed debt. It considers the borrower’s ability to repay the mortgage. Lenders look at two calculations (we call ratios). The first is your Housing Ratio. It simply is the percentage of your proposed total mortgage payment (principal & interest, real estate taxes, homeowner’s insurance and, if applicable, flood insurance and mortgage insurance – like PMI or the FHA MIP) divided by your monthly, pre-tax income. A solid Housing Ratio (often called the front end ratio) would be 28% or less; although, many times loans are approved at a significantly higher number. That’s because your front end ratio is looked at in conjunction with your back end ratio. The back end ratio (referred to as your Debt Ratio) starts with that mortgage payment calculation from the Housing Ratio and adds to it your recurring debts that would show up on your credit report (auto loans, student loans, minimum credit card payments, etc.) without taking into consideration some other debts (phone bills, utility bills, cable TV). A good back ratio would be 40% or less. However, many loans are granted with higher debt ratios. Understand that every application is different. Income can be impacted by overtime, night differential, bonuses, job history, unreimbursed expenses, commission, as well as other factors. Similarly, how your debts are considered can vary. Consult an experienced loan officer to determine how the underwriter will calculate your numbers.


CREDIT is the statistical prediction of a borrower’s future payment likelihood. By reviewing the past factors (payment history, total debt compared to total available debt, the types of monies: revolving credit vs. installment debt outstanding) a credit score is assigned each borrower which reflects the anticipated repayment. The higher your score, the lower the risk to the lender which usually results in better loan terms for the borrower. Scores below 620 are difficult (though not impossible); scores from 620-660 are mediocre; those from 660-720 are considered good; and above 720 are very good. Your loan officer will look to run your credit early on to see what challenges may (or may not) present themselves.


CASH is a review of your asset picture after you close. There are really two components – cash in the deal and cash in reserves. Simply put, the bigger your down payment (the more of your own money at risk) the stronger the loan application. At the same time, the more money you have in reserve after closing the less likely you are to default. Two borrowers with the same profile as far as income ratios and credit scores have different risk levels if one has $50,000 in the bank after closing and the other has $50. There is logic here. The source of your assets will be examined. Is it savings? Was it a gift? Was it a one-time settlement/lottery victory/bonus? Discuss how much money you have and its origins with your loan officer.


COLLATERAL refers to the appraisal of your home. It considers many factors – sales of comparable homes, location of the home, size of the home, condition of the home, cost to rebuild the home, and even rental income options. Understand the lender does not want to foreclose (they aren’t in the real estate business), but they do need to have something to secure the loan against, in case of default. In today’s market, appraisers tend to be conservative in their evaluations. Appraisals are really the only one of the 4 C’s that can’t be determined ahead of time in most cases.

Now, each of the 4 C’s are important, but it’s really the combination of them that is key. Strong income ratios and a large down payment with strong reserves can offset some credit issues. Similarly, long and strong credit histories help higher ratios…and good credit and income can overcome lesser down payments. Talk openly and freely with your loan officer. They are on your side, advocating for you and looking to structure your file as favorably as possible.


The national inventory of REO properties rose in March to a record high of 2.2 million. Foreclosure starts also increased by 33 percent month-over-month, according to the March Mortgage Monitor report by Lending Processing Services Inc.

However, it’s not all doom and gloom for the housing market. The report revealed a significant increase in foreclosure sales, which is helping to chip away at the swelling inventories that are battering many markets.

Also, delinquencies continue to decline, which is a sign of fewer foreclosures brewing in the pipeline. Delinquencies fell more than 11 percent in March from February – the lowest level since 2008 and a nearly 20 percent year-over-year decline, according to Lender Processing Services Inc. The total U.S. loan delinquency rate, which is for loans 30 or more days past due (but not in foreclosure), is 7.78 percent.

States with the highest percentage of loans where home owners have fallen behind are Florida, Nevada, Mississippi, New Jersey, and Georgia.

On the other hand, states that boast the lowest percentage of delinquent loans are Montana, Wyoming, Alaska, South Dakota, and North Dakota.


With dropping home values in many markets mixed with interest rates at historical lows, homes are more affordable now than they’ve been in the last 35 years, reports

The average buyer nowadays can expect to spend about 17 percent of her monthly gross income on a mortgage, which compares to a 25 percent average since 1975, Zillow reports.

With affordability high, Americans seem to be getting the message about the value of home ownership. Nearly 70 percent of Americans say now is a good time to buy a home, according to a recent Gallup poll.

Men are about 16 percent more likely to say now is a good time to buy a home than women. And Americans living in the West are most favorable toward buying (75 percent), which compares to 64 percent of Americans who live in the South who say now is a good time to buy.

Americans with higher incomes also expressed more of an interest in home ownership, according to the Gallup poll. Americans who make $75,000 or more a year are 18 percent more likely to say that 2011 is a good time to buy a home than those making $30,000-$75,000.


More buyers today are trying to camouflage themselves and downplay their interest in real estate, often telling agents they’re “just looking,” observes Scott DiGregorio, sales manager at Primary Residential Mortgage in Fort Myers.

“The buyers have changed, the times have changed and the market has changed, yet real estate agents are taught to do things the way they did 35 years ago. It’s insane,” DiGregorio says.

The key today is to use your marketing to educate customers, not sell them. DiGregorio features reports on his Web site to download, hosts webinars, and uses drip campaigns to periodically send e-mail reports that he says addresses buyers’ main fears when it comes to buying a home.

“Do not try to sell in these e-mails,” says DiGregorio. “Do not try to close in these e-mails. Make sure you’re doing nothing but educating.”

Drip e-mail campaigns, social media, and other marketing strategies all can help agents build trust with customers, DiGregorio says.

But in building trust and educating the buyer about home ownership, DiGregorio says that may sometimes require agents to walkaway from prospects.

“I firmly believe some people shouldn’t buy a house right now,” DiGregorio says. “We have to be OK with that and we have to help people make that decision.”

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