Maybe stop worrying about what rate to disclose on construction loans?
Doing construction lending? Maybe one less thing to worry about.
There has been a trend away from construction lending since October 3rd, with the industry in general concerned with uncertainty of how to disclose holdbacks and other unique features on a Loan Estimate and Closing Disclosure.
Lenders that haven't given up on construction loans altogether have transitioned towards more "vanilla" construction products, i.e. by not requiring escrow accounts and sticking with fixed-rate products only (no ARMs).
Well if you don't have a construction ARM product because you're worried about what interest rate to disclose, maybe we can stop worrying.
Let's go through a scenario and then the answer.
Scenario
Your bank offers a single-closed construction-to-permanent loan with a 12- month interest only period followed by a 30-year permanent portion. Your bank would prefer to offer adjustable rate products, but that seems so complicated, and risky!
For starters, what interest rate do we even disclose if we do not know what the index is going to be in 12 months? (The 12-month interest only period is offered at a fixed rate). If we are not certain, does this mean we need to do a two-close construction loan with a separate closing after the interest-only period? Do we need two sets of disclosures?
Answer
No, no no. It's just a friendlier than that. The simple answer is that the interest rate used for the permanent portion of the loan is our best guess at the time of closing. No need to make it any more difficult on ourselves than that.
See the example above (no I didn't calculate real numbers, to everyone who's going to write in and tell me my payment is wildly wrong). Here's a 12/30 construction to permanent loan with 2/6 caps that's starting at an index of 1.25 and a margin of 2.25. It's a 5/1 adjustable rate loan.
If the 1-year LIBOR is at 1.25 at closing, and we have a margin of 2.25, we're just going to disclose the payment for Years 2-6 using the estimated rate of 3.5%. Maybe that's actually a lot different in 12 months - but that's not a concern. We just do the best with what we can at the time.
In Other News:
Big news that the BOA case was overturned. Does that mean that BOA gets $1.27 billion back? (By the way, if you're gaming the system, even a little, you HAVE to use a better name than the "Hustle" program. That's like calling yourself the Deflator.
Are borrowers reading their loan documents more carefully post-TRID? One survey by ALTA says yes.
I feel torn. While here is a story saying 1/3 of millennials live with their parents, here is an article from the Harvard Business Review saying, "The Problem with Millennials?: They're Way Too Hard on Themselves."
Who's next? That's the question many people ask about the mortgage industry. How many mortgage professionals are nearing retirement age? How many 12-year olds (or college students for that matter), say "When I grow up I want to be a mortgage banker!" So for a number of reason of which we're all well aware of, we can admit to an aging workforce. The question is what are we going to do about it?
Other industries must face this problem. Here were some of the top 10 Fortune 500 companies in 2011 with the highest numbers of "older" (50+, their definition, not mine: American Airlines ($39%), Kodak (38%), Delta Air Lines (37%, United Airlines (37%). Looking back on this now from 2016, that's not good company to be in. Several of those companies completely fell off the list since then.
An interesting case study is with Dow Chemical (Washington Post story here). With 40% of its 4,200 employees eligible for retirement within a tight time frame, Dow has some scrambling to do. And that's not necessarily a brand new problem - the Post story shares the story of one employee who was called back in as a contractor after Dow discovered everyone with his job skills had retired. He stayed on (I'm sure not at the same salary) ... for 10 years.
Glad to share that Spillane Consulting has brought fresh faces into the industry recently, including a couple of difference-makers on our team now that energize us and clients (shout out to Bryan Noonan and Justin Coscia). Of course that brings our company's average years of experience per employee statistic down to probably around 42 years in mortgage banking.
"Uncertainty.... While we sit on one side with a recovering economy, good data around demographics and housing and demand issues looking forward, we worry about things like shortages of inventory and getting regulatory confusion out of the marketplace.
The real challenge is what change is coming our way and how the US economy is going to react to this and how it is going to ultimately affect your business."
- Dave Stevens
(Remarks at MBA's national secondary market conference on what the biggest challenge to our industry is).
*paraphrasing slightly
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