AOL File Library: 2,801 to 2,900/aol-file-protocol-4400-2801-to-2900.zip/AOLDLs/TAWUG/TAWUG Disk No. 14 (SHK)/TAWUG.14/MTG.INSTRUCTION

AppleWorks Document | 1985-10-29 | 15KB | 277 lines

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                       MORTGAGE WAREHOUSE3
                       1172 Brownell St.  Suite H.
                       Clearwater, FL  33516>
                       Pete Fifer,  Licensed Mortgage Broker-
                       813-443-2798  Office5
                       813-786-0150  Answer Service
9This is a brief overview of the mortgage programs that I =
;have developed for my use in this field.  As this field is 5
3rapidly changing, I don't make any claim as to the 5
usefulness of these programs nor to their accuracy.
;1.0  Purpose:  Due to the increased use of Adjustable Rate 9
7Mortages (ARMs) in the United States and the resultant 8
6misuse of these mortgages by the lending industry the %
following points will be addressed:
     1.1  Understanding the ARM!
     1.2  Qualifying for a loan,
     1.3  Understanding and comparing ARMs
     1.4  Worstcase situations1
          1.4.1  Effective Cost or the real APR
2.0  Program Discussion.
:     2.1  These programs have been designed by myself and 7
5field tested with over 100 real estate people in the 6
4Pinellas County area of Florida.  They proved to be 7
5understandable and informative to the professional.  9
7Regular home buyers were field tested but did not seem 4
2to recognize the utility or financial information 5
3available through the use of these programs.  They :
8seemed to have tunnel vision and focused on only 2 or 3 7
5variables of an ARM.  ARM's have many variables that 7
5should be looked at in order to compare and evaluate
and then decide.
     2.2   Program name:  Qualifyer
;     This program determines whether a person qualifies to 5
3borrow a certain amount of mortgage at a specified :
8interest rate.  Being a spreadsheet program, any of the 6
4numbers may be changed to more accurately reflect a :
8specific transaction.  Primarily, I use it to determine 4
2the monthly payment for a given interest rate and 1
/purchase price.  The program figures out three 4
2different loan amounts for the respective loan to
values (95, 90, 80% LTV ).
7          2.2.1  Monthly payment is a function of loan 9
7amount and interest rate.  Top section:  Estimates for :
8taxes, insurance and mortgage insurance are provided by
the program.
=          Manual entries for flood insurance and maintenance -
(for a condo) are required when applicable.
4     Total payment is the total of P.I. T.I., flood
insurance and maintenance.
8          2.2.2  Income required to qualify.  This is a 2
0percentage divided into the appropriate monthly 8
6payment.  These ratios vary depending on the mortgage 9
7LTV and type (fixed rate or ARM).  The common ratio is 6
428% housing and 36% for housing plus long-term debt 8
6payments.  This number helps a person to determine if 1
he can afford the mortgage he is trying to get.
<          2.2.3  Estimated Closing Costs.  These are common 9
7costs associated with obtaining a mortgage loan.  They :
8may vary depending on the geographical area.  Different 6
4areas may have additional or different categories.  :
8This section also includes "points."  These are defined 8
6as 1% for origination.  For a construction loan there 9
7is an additional 1% or 1/2% construction fee depending 7
5on company prices.  Discount fee varies depending on
loan program selected.
8          2.2.4  Estimated Prepaids.  These are for the 9
escrow requirement.  Also included is interim interest.
=          2.2.5  Estimated Cash to Close.  This shows, after :
8adding and subtracting, the estimated cash required for 9
7each Loan to Value.  The loan applicant must have this 6
cash at the time of application, so it is important.
       /
     2.3   Program Name:     LFC 00 Programs.
     ?
=     This is an Appleworks database program.  The categories 8
6are designed so that one can compare and evaluate the 8
6various ARMs.  It is also helpful to catch the tricks 8
6that creep into these programs.  It is primarily used 7
5by me to select or arrange the various loan programs 8
6that Numerica offers depending on what I am trying to 5
3use or show.  It also can be used to compare other 9
7companies' programs with ours.  The catagory lables at 9
7the top of each column correspond pretty much with the /
first two Attachments and their explanations.
    ?
=     A discussion of the tricks used in the mortgage lending .
industry is maybe of interest at this point.
;          2.3.1  The first adjustment trick.   The initial 8
6introductory payment rate is always going to go up at :
8the first adjustment even if the index stays the same.  8
6In some cases this may exceed the so-called 2% annual 9
7cap.  This is not true if one starts out at index plus
margin.
;          2.3.2  The life cap trick.  Some programs have a 9
7life of the loan cap defined as index plus margin plus 4
25% life cap.  A loan with this trick could have a 7
5maximum rate of 16% even though the initial starting
rate started at 8%.
8          2.3.3  The negative amortization trick.  Some 7
5loans may start with an initial payment rate that is 6
4fixed for a period of time (usually 3 or 5 years).  9
7During the period that the payment is fixed the actual :
8interest rate may fluctuate (higher) and cause the loan 4
2to start accumulating deferred interest.  This is
negative amortization.
=          2.3.4  The point trick.  Many loans are advertised 9
7with low points.  Then when the borrower gets into the 7
5office the loan officer adds on an origination fee.  0
.This is usually 1% of the loan, so that is an 8
6additional 'point'.  Most borrowers are aware of this %
game and will ask for total points.
=          2.3.5  The lock in trick.  Most interest rates can :
8be 'locked in' (or guaranteed to stay the same for that 8
6borrower) for only a short period of time.  Typically 8
630 days or 45 days.  Some go 15 days, some as long as 8
660 days.  Since most loan applications take 4-6 weeks 7
5to process it is a simple matter to get halfway thru 7
5the processing sequence and somehow mysteriously the 7
5rates have changed, usually to a higher rate.  Since 9
7the borrower has a deadline on when he has to close he :
8can't very well go elsewhere, can he?  I don't know how :
8to solve this one because it seems to be a problem that 8
6exists throughout the industry, especially when rates 9
7are moving.  I guess it illustrates how greedy lenders 9
7are, because they won't commit funds if they can get a 8
6better rate elsewhere and they have to wait until the 5
3last moment to decide.  Again, I don't know how to 9
7solve this one except to go where the company seems to ,
be trying to get you the best rate he can.
     2.4   Program Name:  Estimate APR
;     This is probably the key program to someone who knows :
8his finance.  It shows what the worst case could be for 4
2a given loan program.  Input of parameters varies :
8depending on the loan program.  It also has an internal 8
6rate of return feature that I feel is the only way to 8
6compare ARMs, financially speaking.  The borrower may 2
0have other considerations for going with a more 6
4expensive loan program (such as not enough cash for 5
3higher points) but at least he now has a number to 7
5compare with.  If it included a tax feature it would
probably be more accurate.
;          2.4.1  Initial input consists of the loan amount 8
6and points (discount plus originations).  Usually the !
term is 360 months or 30 years.
>          2.4.2  Index rate, margin, accrual rate, monthly
             rate.
     8
6     Originally, when I first started working on this 4
2program I wanted to minimize the required input.  5
3However, I found that it became too complex for my 7
5understanding of the spreadsheet program.  The index 5
3and margin (which is fixed for the duration of the 6
4loan) were supposed to be added together to get the 7
5accrual rate.  The Accrual Rate is used to calculate :
8the interest due on the loan.  In actual practice it is 5
3easier to manually input the  Accrual Rates.  This 8
6forces one to ascertain what exactly the loan program 9
7selected for comparison can do over a period of time.  4
2The Accrual Rate is then divided by 12 to get the
Monthly Rate.
<          2.4.3  Payment Rate, Monthly Rate.  In a negative 7
5amortizing ARM the Payment Rate is a lower rate than 8
6the Accrual Rate.  If the Payment Rate is the same as 4
2the Accrual Rate the loan does amortize with each 9
7payment.  So here we go again, additional complexity.  6
4Depending on the type ARM, the program can copy the 6
4Accrual Rate (for a regular ARM, if there is such a :
8thing) or one can manually input the Payment Rate.  The 0
program then divides by 12 for a Monthly Rate.
<          2.4.4  Factor.  The Factor determines the monthly 8
6payment.  It is decreased by 12 months for subsequent 9
7years.  This is necessary because each subsequent year 7
5reduces the loan term by 12 months.  The calculation 9
7is:  (D47/(1-((1+D47)^(-B38)))).  B38 is reduced by 12
for each subsequent year.
6          2.4.5  In the file: Worstcase  I have three 1
/different worstcase scenarios.  These were the :
8predecessors to the program Estimate APR.  The first is 6
4an amortizing ARM with the Accrual Rate and Payment 7
5Rate increasing 1% per year.  The program only shows 7
5six years of the loan, but could be easily extended. 6
4The worst case scenario number two shows a negative 6
4amortizing loan.  The Accrual Rate increases 1% per 8
6year while the Payment Rate is 8.5% for the first two :
8year, then goes 10.5%, 11.5%, 12.5%.  At the sixth year 9
7the Payment Rate goes to the Accrual Rate (16%) and we 5
3get the payment shock.  Worst case scenario number 8
6three is an ARM starting at 11.875% increasing 2% per 5
3year to a life cap of 18%.  This mini-amortization ;
9schedule is an important thing for the borrower to see.  ;
9It shows what the loan could do over a six-year period.  2
0It should be a required schedule for disclosure 8
6purposes.  But it is not.  Nor does any lender, to my 6
4knowledge, show the borrower anything even close to 9
7what I've developed.  The literature talks about going %
'beyond disclosure' bah ... humbug!
7     (Note:  The FHA disclosure does require a similar -
schedule to show the worst case situation.)
=          2.4.6  Loan Payment is the monthly payment.  It is 6
a factor of the loan balance, payment rate and term.
<          2.4.7  Interest is the monthly interest charged.  7
5It is based on the Monthly Rate (under Accrual Rate)
times the loan balance.
8          2.4.8  Amortization is the difference between :
8Monthly Loan Payment and Interest.  If negative it's in 1
parenthesis and would be negative amortization.
;          2.4.9  Loan Balance is the balance at the end of 9
7the year.  It is found by subtracting the Amortization 5
3number (after multiplying by 12) from the previous 9
7year's Loan Balance.  (Multiplying by 12 introduces an :
8error since the monthly interest figure would vary in a ;
9full blown monthly amortization schedule.  Oh, well...)  7
5If it is a negative amortizing loan the Loan Balance
will increase, of course.
     Important note:
<     Now we finally get to the real guts of this thing.  It :
8takes all of this preparatory work to really understand 4
2what we are working with.  This discussion of the 3
1estimate of APR is, in my opinion, the only real 9
7workable way to evaluate the actual interest rate cost
of an ARM.
;     The average life of a mortgage is supposedly around 5 8
6to 7 years.  I suspect the average life for an ARM is 7
5much shorter, maybe 2 to 3 years.  I've been getting 7
5alot of calls  to refinance negative amortizing ARMS :
8and they are only six months to a year old.  My program 7
5only goes to six years but could be extended further :
8without too much work.  In the establishment literature 5
3you will note that they say to compare programs by 6
4looking at 13 different variables.  Nowhere do they 7
5suggest looking at an APR statement.  (Under current 4
2regulations the traditional APR statement is only 4
2required to show the first two years payments and 8
6assumes the remainder will stay the same - hogwash.)  7
5My premise is to look at the worst case scenario and 3
1bring the cash flow back to a present value that :
8represents the APR (Annual Percentage Rate).  Of course 5
3the underlying premise is that interest rates will :
8eventually continue upwards or why else would the banks 9
7promote ARMs?  I could discuss this point further, but
I won't.
=     2.4.10  Estimate of APR.  The way the spreadsheet works 3
1is a two pass calculation of Net Present Value.  :
8Compliments of Notes for Appleworks, Robert Ericson.    :
8The Estimate of APR is THE NUMBER to determine the cost 9
7of the loan program in a worst case scenario.  One can 3
1still determine the APR based on his forecast of 5
3interest rates, by adjusting his input of interest
rates.
;     2.4.11.  Cashflow.  This is the Monthly Payment times 9
712 for each year.  The end of year six Loan Balance is
at the end.
<     2.4.12.  Net Present Value.  Investment.  When the Net 9
7Present Value equals the Investment you have found the 8
6correct estimate of APR.  This is done by plugging in 8
6different estimate of APR numbers until they do equal 8
6(or get real close).  Investment is the original loan
minus the points.
3.0  Final Summary.
>     This concludes my discussion for how the programs work.  :
8I have noticed that the general public seems to be wary 7
5of the new adjustables but at the same time, seem to 9
7think they may be of some benefit to them.  I think it 7
5is the chance that the interest rate may come down.  7
5People love to gamble on the long shots, I guess.  I 8
6would like to point out that I haven't set this up to 7
5compare an adjustable with a fixed rate mortgage.  I 9
7generally try to get people into a fixed rate mortgage 9
7anyways, I feel they are safer.  The FHA adjustable is 8
pretty good, I guess, but has a limited applicability.
=     Anyways, thank you for reading this specification.  Let
me know what you think.

     Pete Fifer