Host, Christine Karpinski:  I'm Christine Karpinski. Thank you for listening to the How to Rent Vacation Properties by Owner podcast. Today's guest is Dave Motley. He is the President of Colonial Savings, and as you may recall we have spoken with Dave in the past, and he knows a lot about mortgages.

I thought it would be really neat to bring him back on, because everybody seems to have a lot of questions regarding their current mortgage situation.

I've been on the road a lot and a lot of people are saying they're thinking about buying vacation rentals, because the market has dropped, and the prices have dropped. And so they had a lot of questions regarding mortgaging.

So we're going to talk to Dave about mortgaging in today's market as well as if you're looking at an ARM or a balloon payment that might need refinancing, we'll get his opinions on that as well.

Dave so, thanks so much for joining us.

David Motley:  It's great to be with you Christine.

Christine:  OK, so let's just jump right into this. Like I said in the intro, a lot of people are thinking about buying right now, which I know the vast majority of people with today's economic situation and all the gloom and doom you hear, you don't necessarily think, "Hey, this is a good opportunity.” But a lot of vacation rental owners who have been successful are going, "Wow! The prices are really low, and I'm thinking about buying again.

What are some of the things that I'm going to run up against with regards to mortgages?"

David:  Well I think the first things that folks want to consider is, don't plan on getting out of it quickly.

Christine:  Yeah.

David:  Because we don't know if we're at the bottom of the market yet, but it's possible that we could. As you say, prices have dropped already quite a bit. One of the things they can expect to do though, these days is to provide full documentation for qualification. Gone are the days of the stated income, the NINJA Loans, no income, no asset type loan.

Borrowers are going to have to put some of their own money into the purchase of a second home these days, qualification guidelines are somewhat more strict, but they're not drastically so. All that we're seeing is that borrowers need to be able to prove that they have the sort of traditional types of qualifications that we saw 10 years ago.

They need to be able to provide a down payment, they need to show that they have the commitment to make the payments, and that they have the capacity, the income to make these payments, so the triple "C's."

Christine:  So, you mean they actually have to be able to afford that property?

David:  There you go! That was a new concept these days.

Christine:  [laughs] Wow, imagine that! What a concept! So you had said that borrowers are going to have to put a little bit more money down. If you purchased maybe five years ago, you could have purchased with no money down, or even 5% or 10%. Are we looking all the way into 20%, like we...

David:  No, you can still do a second home at 90%.

Christine:  OK.

David:  The price might be a little bit higher then it was, but you can still do that. 80% loans are still very prevalent.

Christine:  Right.

David:  Depending on the market that you're buying in, you won't be able to get private mortgage insurance on a second home in a declining market, i.e., that area that's designated as one of those areas where prices are significantly declining, Southern California might be one.

Christine:  Right.

David:  However, still in Colorado, those are not declining market properties. There are several other resort areas that are not declining.

Christine:  Sure. Now, what does that to me as a purchaser not being able to get private mortgage insurance?

David:  Well it means that typically, a lender must get private mortgage insurance on a loan, if the loan to value or loan amount vs. the purchase price, is greater than 80%. So anything over 80%, you have to have private mortgage insurance on or you have to have another party that's willing to carry back a second lien.

Those second liens are very scarce these days, because investors have lost so much money on carrying back a subordinate lien, those are almost non‑existent. There's still a few, but almost non‑existent, particularly on second homes.

Christine:  Right. So if you're purchasing in one of those markets, then most likely you will have to come up with 20% down, right?

David:  Yes, you would.

Christine:  OK, yeah. In the end, even so, we know a lot of vacation home owners do actually purchase with a fair amount down. So, hopefully that won't change too much for them.

David:  Sure.

Christine:  Now, what about the documentation process? I know that the last time we did an interview, we talked about some people that were going to the closing table and finding out that their mortgage wasn't done, and their mortgage was being held up for a couple more weeks.

Do you think that things have settled out a little bit now, that the banks are figuring out ahead of time, and not giving false sense of dates, so to speak?

David:  Yes, yes, I really do. I think that everybody understands the rules these days to a much greater extent. People realize that they're not going to be able to do those types of loans that they could have done nine months or a year ago.

Everybody's pretty much got—my sense of it is—that everybody's got with the program, that "Hey, we're going to have to do full doc. We're going to have to prove up these things.” These loans are not going to get out of underwriting and into closing, without everything being buttoned up, before the loan is approved.

Christine:  Sure, I mean it's going to really take it ... Gone are the days of being able to purchase something, and close on it within a week. I actually had one time a mortgage that I closed on with 24 hours.

Now, mind you, I had the inspection and everything done, and literally they assigned the appraisal and the inspection, and everything over to the new mortgage company.

David:  Well, I would tell you though, Christine, that if a borrower comes in and he's got his ducks in a row so to speak, and he's verified the income, verified the cash, we got a good appraisal, loans can still get closed in very few days, inside of a week, we still do that.

It's just that you can't delay things to the closing table. You can't prove up a condition at closing. Those things have to be addressed before the loan gets approved.

Christine:  Gotcha. Well, that's good news! I mean, because that's something we haven't heard, that if you do come with all of your ducks in a row, with all of your documentation, all of your income statements, everything that you possibly could think of that they would need for documentation, then you could possibly get a loan through in faster than 30 days.

David:  Sure. Yeah, that's absolutely true. It's probably even an easier thing to get done right now, because the things that often take a lot of time, getting a title commitment, getting an appraisal done, getting a survey, those service providers aren't as busy.

Christine:  Yeah, they're sitting around.

David:  They're hungry, and they're eager to make something happen quick.

Christine:  I envision the Maytag man sitting there snoring.

David:  Yeah.

Christine:  I mean, because not as many properties are selling that was always a challenge, scheduling time with an appraiser. So, that's good news as well!

David:  Yeah.

Christine:  OK, so then what about if I'm sitting on like an ARM with a balloon or something like that, is now the time to think to really start thinking about refinancing? Because they've dropped the interest rates, we're hearing all sorts of things are going on.

Interest rates are pretty low. Lots of people bought back 4, 5, 6, seven years ago. If they are sitting on the five to seven year balloons rate right now, where is it going to be a year from now when the balloons come due? Is today a good time to start thinking about financing?

David:  Well, it is always a good time to assess your position versus the market and if you have got a balloon that is coming through the next year or so yeah you want to be researching your options and understanding what those options might be.

But the very first thing that, I think, anyone would want to do is touch base with their existing servicer and see what the servicer has to say about their option. As you say, rates have gone down and treasury rates have gone down quite a bit. Mortgage rates though in the last three weeks have actually gone up.

Christine:  Right.

David:  There's a big divergence between treasuries and mortgages these days. Absolutely the best thing to do is to assess the situation. Even if you've got the balloon, it could very well be that the investor who will work with the servicer might be willing to not impose the full brunt of the conditions that were in your document—

Christine:  Sure.

David:  Just so he doesn't have to get into a foreclosure or a dispute. Maybe it ends up being some kind of a modification to your loan. That's the big buzz word these days. There's a whole lot of misinformation circulating around about modifications. But the first thing to do is always to talk to the servicer, explain what your situation is, and see what your options are.

Christine:  OK. So, that brings up another point regarding the modifications. Again, we are hearing all of this stuff about foreclosures and people going bad on their loans but what about the people who are paying well, always up to date. They are maybe even paying extra on their loan. Is there anything that those people can do?

Are the banks looking at the good mortgages with different glasses on right now because they are going, "Hey this is a good mortgage. This is somebody who obviously continues to pay. They have never been late. I would much rather keep those people as our mortgage and not risk it going away." Is there any incentive for you actually being a good customer?

David:  Well, there certainly is an incentive. Some lenders, including us, are offering some discounts on closing costs on refinances of good borrowers. So that's one thing. The other thing is to remember that you will keep your credit if you keep making your payment.

Everyone wants to keep making our payment. I think none of us want to see guys who made bad debts get bailed out.

Christine:  Right.

David:  That's what we hope does not happen with all this legislation that is going on. But those people who really try to do the right thing and try to make the payments for whatever reason. Typically the reasons for default are divorce, loss of job, death of a family member, that kind of thing.

Today, more than ever, lenders and mortgage servicers are going to try to help that person even to a greater extent than even before. They have always tried to help that person.

But today, we are going to great length to try to help that person who is genuinely in need but not necessarily that individual who made a speculative purchase and now decides he wants to give it back.

Christine:  Sure. I mean you guys are not in the business of owning real estate.

David:  No. Exactly.

Christine:  Nor do you want to go into the business of owning real estate. Another thing I heard out in the field is people are not going to the big huge national banks but are going to the smaller banks.

And one real estate agent, in particular, had told me, three years ago this little bank would have never written mortgages for vacation rental, and now this one little bank is writing all the mortgages on all the purchases that are going on right now.

Are we seeing a shift in some of the banks, and would you have a greater chance going to a bigger bank or a smaller bank?

David:  That's a good question. I don't know that you would have a better chance going with someone big or someone small. It's really more of a question of am I going to somebody who has a good capital base or not so good capital base. You want to make sure whoever you do business with is going to be there when it comes for the closing.

Christine:  Right.

David:  And, they have the capability to perform on the application that you are talking with them about. As we have seen larger banks can go belly up as fast as smaller banks. Small banks can go belly up too.

So it's really not so much, I don't think, a question of do I go with a larger bank or a smaller bank? You go with the institution that is going to be able to perform and has capital and staying power in a very, very difficult market.

Christine:  How would I an individual consumer looking for a mortgage loan, how would I know if a bank has good capital base?

David:  Well, virtually every bank, first of all is required to file audited financial statements and there are call reports that are available on FDIC.gov for each bank in the country. Those are publicly available.

But also and perhaps easier, you can go into any bank's teller window and ask for a statement, income statement or a statement of condition and those will be dated no more than a year old and they will give you all the information about that bank, what their assets are, what their liabilities are, their net worth, what their income statements are.

It doesn't take a whole lot of education to be able to look and see if bank is doing well or not and then just asking the question because most of the time, bank employees who are well capitalized are very happy to talk about the fact that yeah, they are strong.

Christine:  If I am looking at that statement and I go OK, obviously I want to see more capital than liabilities and is there anything else on that statement that I would necessarily want to look for?

David:  One thing you want to look for is to see that the net worth, the equity of that bank is at least 5% of the assets of the bank.

Christine:  OK.

David:  That's really a standard that regulators insist upon. If it is less than that you might have some concerns that they are able to continue in business, although there can be some temporary glitches there. If it's below 5% you want to ask the question.

Christine:  OK that's great advice. Well, David thank you so much for joining us impromptu like this. I called David last minute and said I really want to do another podcast about mortgaging and refinancing. I really appreciate your coming on and giving us some more information.

Now in case anybody wants to get a hold of you can I give your email address?

David:  Sure. Yeah.

Christine:  OK. David's email address is just Dave@colonialsavings.com. If you have questions, or certainly go check out his bank. Dave really does know a lot. He is the President of the bank. So just remember that if you are trying to send him questions he might forward them on to someone else in the organization. He doesn't have time to answer every email, do you? [laughter]

David:  Oh I get enough of them. I'm a much better typist than I used to be.

Christine:  [laughter] Yeah I found that to be true as well. Oh well I will just answer them myself. It's just quicker. Again, thanks Dave, much appreciated.