Mortgages: an interesting conundrum

calculator Your Guide encountered an interesting situation this morning.  A buyer who lives overseas, but wishes to return to Chicago in the future has been viewing studios and one-bedroom condo’s over the last few weeks.

The buyer made an interesting choice recently by trying to purchase a studio that is significantly under his price point – not a bad idea. 

What we ran into this morning was a snafu with the predatory lending guidelines.  By purchasing for $90,000, and putting $40,000 down, his mortgage will only be $50,000.  Various guidelines limit the amount of fees and costs, or the loan cannot be processed.  The guideline that is giving us trouble today is a Cook County guideline that states that we fall outside the regulations because:

The points and fees payable by the borrower at or before closing will exceed 5% of the total loan amount…

On our hypothetical $50,000 loan, title insurance, loan origination fees, and Chicago Transfer Taxes will exceed $3,000.  That’s in excess of the 5% threshold.

This seems to be a problem that no one really carefully considered here in Chicago.  My average transaction is closer to $400,000.  But with the current market, and the number of foreclosures and short sales in the marketplace, I am imagining that more and more buyers are encountering this catch-22.

By selecting a property that is LESS expensive, and being responsible by making a LARGER down-payment, they are disqualifying themselves from being able to qualify for a mortgage. 

Just to make the situation more ridiculous, some of the advice to overcome this hurdle includes:

  • Do a cash-out re-finance of their principal residence in Indiana.  Oh yes, because THOSE are so easy to do these days.
  • Use more liquid cash to simply purchase with no mortgage.  But then we don’t get the benefit of using the rent to help pay the mortgage, nor do they get the mortgage interest expense that is a benefit to investment buyers.
  • Borrow against retirement assets.  Yikes, scary!  However, interest paid on this arrangement goes directly back to the borrower.  So he would be paying himself interest.  Hmmm – mildly interesting.

I think the clients are still game, since it makes much more sense to stick with this particular condo instead of one that costs more money.  But this certainly highlights some of the new issues in the mortgage industry.


Some more of the “Fine Print” from the website

When is a Home Loan a "High-Risk Home Loan"? A high-risk home loan is defined as a home equity loan that satisfies either of the following tests:

  1. APR Test: At the time of origination, the APR exceeds by more than 6% (for first liens) or 8% (for subordinate liens), the yield on Treasury securities having comparable periods of maturity as of the 15th day of the month immediately preceding the month in which the application is received by the lender; or
  2. Points and Fees Test: Total Points and Fees payable by the consumer at or before closing exceed the greater of (i) five percent (5%) of the total loan amount, or (ii) $908 (figure is adjustable annually by changes to the CPI).

The Points and Fees Test: "Points and fees" are defined substantially similar as under Section 32 to include (or exclude) the following:

Prepaid Finance Charge – the total amount of prepaid finance charges

Prepaid Interest – to be deducted from prepaid finance charge

+ Other Mortgage Broker Compensation – the total amount of all non-prepaid finance charges paid directly or indirectly to a mortgage broker, including a broker that originates a loan in its own name in a table funded transaction, that is not otherwise included in the Prepaid Finance Charge

+ Other Charges Paid to Creditor/Affiliate – the total amount of all Regulation Z Section 226.4(c)(7) charges not included as a part of the Prepaid Finance Charge if paid to the creditor or creditor affiliate

+ Single Premium Credit Insurance/Related Products and Financed – the premium of any single premium credit life, credit disability, credit unemployment, or any other life or health insurance that is financed directly or indirectly into the loan

+/- Creditor Requested Adjustments – the total amount of all customer requested overrides