By Michelle Singletary
Sunday, September 30, 2007
The news in the housing sector just keeps getting worse.
Most recently, the National Association of Realtors reported that in August -- for the sixth consecutive month -- sales of existing single-family homes declined. The association expects similar results when the numbers come in for September.
But there is good news in the sales slump.
"Mortgage interest rates have been declining and loan availability is improving," said NAR President Pat V. Combs. "The abundant choice of homes is permitting buyers to better negotiate price and terms."
For the savvy buyer, this market can yield a good deal. On the other hand, what about those buyers who don't know how to negotiate with lenders or loan officers?
Part of the reason the mortgage industry is in such a mess is that borrowers were steered into bad loans by greedy and, in some cases, unethical lenders, loan officers and mortgage brokers.
It's more likely that people need an outside coach with inside information.
And that's the role author David Reed plays in "Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You" (American Management Association, $16.95). It's why I've chosen the book as my October selection for the Color of Money Book Club.
In a survey by Bankrate.com earlier this year, homeowners with mortgages were asked what type of loans they had. It doesn't surprise Reed that 34 percent of the respondents had no clue.
"The average loan officer might close 80 loans per year," he writes in his book. "But you might buy only two or three houses in your lifetime. That means that your loan officer does on a routine basis what you do on very, very rare occasions."
Clearly that disparity puts borrowers at a disadvantage.
As a former mortgage banker and senior loan officer, Reed has closed more than 1,000 home loans. He said he's seen it all.
"I've seen people attempt to commit loan fraud -- consumers and loan officers alike," he said. "I've watched the interest rate market shake, rattle and roll through various rate hikes and rate cuts."
Throughout the book Reed stresses the need to understand mortgage terms.
For example, if you're applying for an adjustable rate mortgage, you should know what a margin is.
"ARMs can get lost in a sea of vocabulary," Reed writes. "Start rates, LIBOR, annual caps, lifetime caps, fully indexed -- it can get confusing. It's the margin that you need to concentrate on."
The margin is the number, expressed as a percentage, that is part of what is used to determine the rate a borrower will pay, Reed writes. Let's say, for example, that your loan is based on a six-month CD at 4 percent and the margin is 2 percent. You may have been attracted to the loan by that 4 percent teaser, or starter, interest rate. But your fully indexed rate is that 4 percent teaser plus the 2 percent margin, for a combined rate of 6 percent.
"It's not uncommon for lenders who offer lower start rates to offset that with a higher margin," Reed said.
A common margin is 2.75 percent. "Anything above that is nothing more than a lender's attempt to get more interest from you faster," he writes.
Reed covers everything from where the money for mortgage loans really comes from to closing costs (I found the tips in this chapter particularly enlightening) to refinancing to the various loan choices available.
The greatest service Reed provides is acting as an interpreter.
"Mortgage Confidential" is like reading the Cliff's Notes for "Hamlet." You shouldn't substitute the notes for actually reading the play, but reading the notes beforehand can help you understand the language. You feel less intimidated.
Reed breaks down the lingo of the industry and provides good unbiased information that will help you ask the right questions and avoid getting snookered.
If you don't want to be like a third of homeowners who don't know what type of loans they have, get a copy of this book.
To become a member of the Color of Money Book Club, all you have to do is read the recommended book. I also invite you to join me online to chat with the author. If you are shopping for a home loan, you won't want to miss the discussion of this month's book selection. So join me online at http://washingtonpost.com at noon Oct. 25. Reed will be available to take questions.
In addition, every month I randomly select readers to receive a copy of the book, donated by the publisher. For a chance to win a copy of "Mortgage Confidential," send an e-mail to email@example.com. Please include your name and an address so we can send you a book if you win.
¿ On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.She also has a new personal finance call-in show that airs Sundays on XM Satellite Radio, Channel 169 "The Power," at 8 to 10 p.m.
¿ By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.
¿ By e-mail:firstname.lastname@example.org.
Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.