This may be a first for us. We are printing a response we received to an article we wrote on our blog. Not to mention, we hardly ever print articles written by other people. But this one is different. This response was emailed to me from a very valued relationship we have in the lending community. Kathleen Kramer, of RPM Mortgage, has been a trusted confidant for the past two years and has assisted with private money programs for our company. Kathleen also has reviewed and advised us on our procedures and processes and visited our offices here in Memphis. We have tremendous confidence in her knowledge of the lending industry, so when she sends us an email response to our recent blog article...well, we listen!
I love having interaction with other real estate investing professionals and have no problem with someone disagreeing with my point of view. Sometimes, I view things from a different perspective and it is important to remember that people can disagree without being uncivil. In this case, Kathleen sent me an email disagreeing and explaining why she felt my article was wrong on some points. I loved her response and asked her permission to print it. Why? Because it was a good and valid argument and I felt anyone reading our blog would appreciate it! I wanted our readers to know we are ok with differing points of view as long as they are well informed.
I also wanted to point out a great line in her response that I think we can all agree with:
"In the humble opinion of this author, the primary issue is suitability of the product matching the need and capacity of the borrower. The loan product itself is just a tool, which may be quite effective when used correctly. "
If lenders can stick to strict guidelines and effectively use the tools at their disposal correctly, then we my have a shot at avoiding another bubble and possible meltdown in the near future - just my opinion.
Please feel free to weigh in with your thoughts in our comments section.
Her response is in reply to our article: Are Lenders Seriously Writing These Real Estate Loans...Again?
Chris,I hope you will appreciate these comments - in the spirit they are intended which is positive to further the conversation about lending and suitability.
I have the utmost respect for you and the service Memphis Invest is providing to the real estate investment community.
Your recent post on ARM and stated income loans has some inaccuracies and I have a few comments in response to your recent post on ARM and 'stated' income products.
A 5/1 ARM is an adjustable rate loan, fixed for 5 years (not for 1 year as you mention in the blog), which can then adjust 1 time per year, usually for a maximum of 2% up or down per year and a maximum of 6% over the starting rate over the 30 year life of the loan. They are not new and they have been available consistently through the years, even in the downturn. They are offered by both FNMA/FHLMC lenders and portfolio lenders and come with 3 year, 5 year, 7 year and 10 year start rates.They can be suitable as a tool to lower borrowing costs for a variety of clients, for example those with a short time horizon on owning, or with a jumbo loan amount.
The 'stated income' loans I have seen coming back into the market, are not without income documentation as your article suggests, they just do not rely on tax returns to support the capacity to repay the loan. There is a large population of self employed borrowers, many with excellent credit who are currently shut out of lending due to the strict guidelines (getting stricter in January with the QRM rules).The most prevalent investor in CA offering 'stated income' loans has some pretty stringent guidelines for credit and post closing reserves that protect both the bank and the borrower. The borrower has to document cash flow in the form of 12-24 months bank statements and show they have 12 months payments as reserves. The income is there, it is just documented in another way than a tax return. The loan to values on these loans are also quite conservative with the bank requiring protective equity in exchange for the risk of booking a loan which cannot be sold to FNMA/FHLMC.
Compare this to a FNMA loan where a W-2 borrower can put 3% down and have just 2 months reserves, or an FHA loan where a borrower with a 580 credit score and no reserves can finance 96.5% and the entire down payment may be a gift. In my humble opinion, just because a person is an employee and pays payroll tax does not guarantee them job stability or continuance.Which is the 'safer' loan?As more lenders start to offer these products, we must be vigilant to be sure the industry does not "take off" and start offering these types of loans where it is inappropriate, as it most certainly did in the mid 2000's. Credit rating agencies who grade the bonds that underly these loans must properly score them for the additional risk they carry and institutional investors must dig deeper into the guidelines for the loans they purchase in bulk to be sure they are properly secured.In the humble opinion of this author, the primary issue is suitability of the product matching the need and capacity of the borrower. The loan product itself is just a tool, which may be quite effective when used correctly. As industry and mortgage professionals, we have to insure the products we offer to our borrowers fit the credit, capacity and collateral they offer as security to the bank. I am much more concerned with the suitability of FHA loans than with the relative handful of 'stated income' transactions in todays market.
Warm regards to you and the family.
Senior Loan Officer
RPM | MORTGAGE
23 Corporate Plaza Suite 280
Newport Beach, CA 92660
CA DRE License # 01198187
NMLS # 114502