Types of Mortgage Lenders

An institution which is lending their own money and originating loans for itself is called a "portfolio lender." This is because they are lending for their own portfolio of loans and not worried about being able to immediately sell them on the secondary market. Because of this, they don't have to obey Fannie/Freddie guidelines and can create their own rules for determining credit worthiness. Usually these institutions are larger banks and savings & loans.

Quite often only a portion of their loan programs are "portfolio" product. If they are offering fixed rate loans or government loans, they are certainly engaging in mortgage banking as well as portfolio lending.

Once a borrower has made the payments on a portfolio loan for over a year without any late payments, the loan is considered to be "seasoned." Once a loan has a track history of timely payments it becomes marketable, even if it does not meet Freddie/Fannie guidelines.

Selling these "seasoned" loans frees up more money for the "portfolio" lender to make more loans, which is another way that portfolio lenders engage in mortgage banking. If the loans are sold, they are packaged into pools and sold on the secondary market. You will probably not even realize your loan is sold because, quite likely, you will still make your loan payments to the same lender, which has now become your "servicer."

Direct Lenders

Lenders are considered to be direct lenders if they fund their own loans. A "direct lender" can range anywhere from the biggest lender to a very tiny one. Banks and savings & loans obviously have deposits they can use to fund loans with, but they usually use "warehouse lines of credit" from which they draw the money to fund the loans. Smaller institutions also have warehouse lines of credit from which they draw money to fund loans.

Direct lenders usually fit into the category of mortgage bankers or portfolio lenders, but not always.

One way you used to be able to distinguish a direct lender was from the fact that the loan documents were drawn up in their name, but this is no longer the case. Even the tiniest mortgage broker can make arrangements to fund loans in their own name.

Correspondents

Correspondent is usually a term that refers to a company which originates and closes home loans in their own name, then instead of selling those loans in pools, they sell them individually to a larger lender, called a sponsor. The sponsor acts as the mortgage banker, re-selling the loan to Ginnie Mae, Fannie Mae, or Freddie Mac as part of a pool.

Mortgage brokers deal with lending institutions that have a wholesale loan department.

It is almost like being a mortgage broker, except that there is usually a very strong relationship between the correspondent and their sponsor.

Banks and Savings & Loans

Banks and savings & loans usually operate as portfolio lenders, mortgage bankers, or some combination of both.

Read More »

How Safe Is Your Personal Data When You Apply for a Mortgage?

You provide reams of personal and financial information to your mortgage lender when applying for a home loan or refinance. But how safe is this information?

It's a legitimate question, and one that might give you pause as you're gathering copies of your paycheck stubs and tax forms as you're applying for a new mortgage.

Brian Seibert, president of Michigan First Mortgage in Waterford, Mich., says that he understands the concerns of consumers. Applying for a mortgage loan, and providing the necessarypaperwork, can be an intimidating process.

"There is a fear out there," Seibert said. "Why do we want so much information? Is someone else looking at it? It does become a concern that we do see from consumers."

Seibert, though, says that lenders need this personal information to make sound lending decisions. The days of borrowers sailing through the mortgage process without having to prove their financial health are long gone, Seibert said.

"We are asking for more information these days to make sure that borrowers can pay back their mortgages," Seibert said. "Before, lenders were too lenient. The documentation wasn't as important. There was little fear out there. But we saw where that led us. Today, lenders are far more meticulous when it comes to having their borrowers verify their information."

Lenders say that they do take steps to protect the personal information of their borrowers. tThe federal Gramm-Leach-Bliley Act says that financial institutions must notify consumers of how much or little of their financial information that they share with third parties.

But is there enough protection? A lot of that depends on how mortgage lenders and borrowers communicate with each other.

Risks of submitting information by e-mail

More than 70 percent of mortgage lenders might be putting consumers' sensitive financial data atrisk during the mortgage-loan application process, according to a study released last year by Schaumburg, Ill.-based HALOCK Security Labs. That's how many lenders the study found permitted borrowers to send their personal and financial information through unencrypted e-mail as attachments. In other words, they let borrowers send their tax and bank information as messages that cybercriminals can easily access.

The reason? According to HALOCK, it's because lenders are more interested in making the application process an easy one than they are in making it a secure one.

The HALOCK study recommends that consumers instead upload their personal information through secure online portals created by their lenders, making it far less likely to be intercepted by cybercriminals.

"It's no longer feasible to rely on unsecure e-mail for the transfer of financial documents," said Terry Kurzynski, senior partner at HALOCK Security Labs, in a written statement. "Any type of weak link in a system involving sensitive information exposes people to unnecessary risk. It takes months to recover from an identity theft and minutes to log into a secure portal. Do the math."

If you're ready to apply for a mortgage what can you do to protect yourself? For one thing, you can insist on submitting copies of your documents through secure online portals that require passwords and log-ins.

If that's not an option, you can instead mail your information and documents to lenders or drop them off in person.

What safeguards does your lender take?

You can also ask your lenders what steps they're taking to protect your information.

Eric Meadow, chief operating officer and general counsel with Oak Brook, Ill.-based MidwestEquity Mortgage, said that his company sends consumers a dedicated Web address and log-in information to an account created for their mortgage application. They can then upload their sensitive documents into this secure online portal.

And when Midwest Equity Mortgage sends e-mail messages to consumers, the company usesencryption software to protect personal information, Meadow said.

Once Midwest Equity Mortgage has this personal information from its consumers, it makes sure to secure it internally, Meadow said. This means that Midwest Equity also relies on secure online portals when providing borrowers' information to outside parties such as credit bureaus, lawyers or title companies.

It also means that the company's servers and databases are locked down and password-protected, and that only those company officials who are directly working on a loan can access the information.

"We know, of course, that some of the most sophisticated companies in the world have been breached," Meadow said. "Whether you're talking about banks or stores like Target, there is no 100-percent-foolproof way to secure and lock down data. But there needs to be multiple steps taken to protect it and identify breaches quickly."

And if you have the option to either send personal information through e-mail or through an online portal, always go with the portal.

Policies vary

Lenders vary when it comes to security measures. Many lenders today, though, publish their privacy and security policies online. For instance, Emigrant Mortgage Company's privacy policy states that the company relies on technology such as encryption software to protect customer information, and that all employees of Emigrant must agree to a policy forbidding them from misusing their access to this information.

The privacy policy also encourages Emigrant's customers to avoid sending sensitive documents or financial information through e-mail because, as the policy says, e-mail communications with the bank are not encrypted.

Make sure when applying for a home loan, you ask to read your lender's privacy and security policies.

Can your information be sold?

Seeing your information fall into criminal hands is just one risk. You also need to worry about whether your mortgage lender might sell your personal information to third parties that would love to sell you credit cards, life insurance or other financial products.

Your lender wants copies of your bank statements. It wants copies of your last two years of tax returns and W2 statements. You need to send your two most recent paycheck stubs. And even after you send in all these documents, your lender will run your credit report, a report that tells lenders how many credit-card accounts you have, the balances of these accounts and your history of paying your bills on time.

That's a lot of sensitive personal and financial information.

This is where the Gramm-Leach-Bliley Act comes into play. When you apply for a mortgage loan, your lender should provide you with a document stating exactly what it does with your personal information and if they share it with others.

This document should state why your lender shares your information, whether it's to help third parties perform the services they need to help your lender close your loan, or to help your lender identify financial products that might interest you, or to help third parties do the same.

Much of this sharing is necessary. For instance, you lender has to provide your basic personal information to one of the three credit bureaus to receive your credit report.

You should also have an option to limit the amount of sharing your lender does. The document should list a phone number, Web site or mailing address that you can access to tell lenders that you don't want them to share your personal information for marketing or promotional purposes. You should be able to check options that, for example, forbid your lender from sharing information about your credit score with their affiliated credit-card branches.

Make sure to ask for this paperwork, and to ask your lender to explain how it shares your personal information, before you close your mortgage.

Paperwork not going away

Even with concerns about security and sharing, don't expect lenders to limit the amount of paperwork you'll need to present during the mortgage process.

Your lender needs this personal information to verify your monthly income and debts, job status and your bill-paying history. Your lender's job is to make sure that you can afford your monthly mortgage payments. That's why lenders request copies of your paycheck stubs, W2 forms, tax returns and bank statements. It's also why they access your credit reports.

Seibert says that without accessing this information, lenders would make far too many loans to consumers who couldn't afford their payments.

"The goal here is to make sure that everyone we lend to can pay back their loan on time," Seibert said. "We do ask for a lot of information. But we do it for a reason."

Read More »

Unemployment Insurance Can Help First-Time Homebuyers

The national unemployment rate was 5.4 percent in April, a far drop from the 10 percent seen in 2009, according to figures from the Bureau of Labor Statistics.

That lower rate, however, could be enough to keep first-time homebuyers up at night, or even prevent them from buying a home. Unemployment insurance could make that decision a lot easier, along with preventing foreclosures.

The insurance can be bought by home buyers, or offered for free or at a low cost by mortgage lenders and home sellers - including new home builders - as a way to entice buyers and help put their mind at ease in case they're worried about losing their jobs and not being able to afford their home during an extended job hunt. Real estate agents, realty groups and housing agencies also offer it.

"This has been around for some time, usually used in period when people are worried about the direction of the economy and their job prospects," says Bruce Ailion, a real estate agent at RE/MAX Town and Country in Atlanta.

It's more widely used by new home builders because their homes cost 20 percent more than a resale home, and buyers are typically moving up 40-50 percent in price to move so a new home buyers is paying substantially more per month than their prior home, Ailion says.

"The decision to move and to buy new is often in response to a new job or promotion," he says. "Both of which are more subject to reversal than a steady job."

Coverage criteria

Policies differ, but they generally cover all or part of a mortgage payment if a job is lost. Some may only cover the minimum payment to keep the home from foreclosure. A policy may also have apayment cap, either in a dollar amount or timeline, such as up to $9,000 or up to nine months of payments.

The amount of your home down payment may also figure into unemployment insurance coverage. Radian Group, a private mortgage insurance group, started offering unemployment insurance in May of up to six months at up to $1,500 in monthly payments on new mortgages for up to $9,000, but only to buyers who put down less than 5 percent of the price of their homes. The coverage is only for the first two years of the mortgage.

Job loss will likely have to be proven, and insurance policies may not take effect for a month or more after they're bought so that a worker can't sign up for a plan when they know they may lose their jobs soon.

Once a job is lost, it could take two months or so for the check to be sent to the mortgage company, requiring the homeowner to come up with the payment in the interim.

Whatever policy someone gets, it's worthwhile to read the fine print to see how much coverage they'll get, says Rich Leffler, director of training at AxSellerated Development, a mortgage training company in Maryland, and a former customer service worker in the insurance industry.

Where to get it

"I think the insurance is worthwhile but it's often overpriced for the services," says Leffler, who recommends checking an independent insurance agent for the best price instead of a mortgage broker or another business connected to the home you're buying. Be especially wary if it's offered for free, he says.

"If they're giving it to you for free in one area, they're probably giving you a higher price in another," Leffler says.

Also called optional credit insurance, unemployment insurance can be bundled with life and disability insurance and can be cheaper as a package, Leffler says. It can't be bundled with a home loan, he says.

It can also be bought through a homeowner's insurance policy, or through a mortgage company and have the premium added to the mortgage payment, says David Bakke, an insurance expert at Money Crashers.

The federal government's Home Affordable Unemployment Program, or UP, doesn't provide mortgage payments to the unemployed, but qualified homeowners can either lower their mortgage payments to 31 percent of their income or temporarily stop payments for a year or more. It's not available for homeowners with mortgages held by Fannie Mae or Freddie Mac, though both have their own forbearance arrangements for unemployed homeowners.

The California Association of Realtors' offers a free mortgage protection program for first-time homebuyers. It provides up to $1,500 per month for six months for mortgage payments.

If you work for a company or are in a field that doesn't have job stability, or are a recent college graduate, then unemployment insurance may be worth considering if you're buying your first home.

Just remember that for the coverage to be effective, any job loss must be involuntary. You can't quit, resign, retire or have your employment contract expire. Workers also can't be fired for cause or leave because of an accident, illness, disability, pregnancy or scheduled seasonal breaks at work.

And consider that any payments made to your mortgage company may be considered taxable unemployment benefits.

Read More »