Category Archives: Finance

Antonakes, #2 at the CFPB, Is Stepping down #realestate #mortgage

Citing personal reasons, the No. 2 official at the Consumer Financial Protection Bureau, Steven Antonakes, is resigning. There’s no word on where he’s going, but time will tell whether the Bureau suffers any difficulties with the transition. In particular, it’ll be interesting to see how industries react to whomever is chosen to replace him.

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Rob Bodine is a Virginia attorney focusing his practice on real estate and intellectual property law. He’s currently Virginia counsel with First Class Title, Inc., a Maryland title insurance and settlement company. Rob is also a licensed title insurance agent in Florida, Maryland, Pennsylvania, and Virginia.

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Are You Kidding Me? #Zimbabwe Hyperinflation #economics #finance #math

This is a real thing. Seriously.

So this happened: Zimbabwe phases out local currency at 35 quadrillion to US$1.

In short, Zimbabwe’s dollar faced record-breaking levels of inflation. They’ve decided to standardize themselves against the US dollar. The result? “People with accounts of up to 175 quadrillion (175,000,000,000,000,000) Zimbabwean dollars will be paid $5.” When I next discuss Graham’s Number with someone, I’ll add 175,000,000,000,000,000 as an example of a “useful number.”

Follow me on Twitter @PropertyAtty

Rob Bodine is a Virginia attorney focusing his practice on real estate and intellectual property law. He’s currently Virginia counsel with First Class Title, Inc., a Maryland title insurance and settlement company. Rob is also a licensed title insurance agent in Florida, Maryland, Pennsylvania, and Virginia.

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Filed under Economics, Finance, Math, Science

#SCOTUS Holding: Rescission and the Truth-in-Lending Act #law #TILA #jesinoski

A recent Supreme Court opinion interprets a provision of the Truth-in-Lending Act (“TILA”) favorably to borrowers. Most borrowers are aware of the three-day right of rescission: For most federally-insured mortgages on a primary residence, the transaction isn’t considered effective until three business days after the closing (i.e., the signing of all of the final loan documents), as the borrower enjoys an absolute right to rescind the loan. However, there’s another type of rescission available under TILA, and that’s what was at issue in the case. Lenders are required to issue certain disclosures to potential borrowers prior to the actual closing. This reduces the ability of the lender to surprise a borrower with hidden fees. If the lender fails to make the required disclosures, the borrower has three years to notify the lender that he wishes to rescind the loan.

The question before the Supreme Court in Jesinoski v. Countrywide Home Loans, Inc. was whether the borrowers were required 1.) to file a lawsuit within three years, or 2.) merely notify the lender in writing of their intention to rescind. The trial court and Eighth Circuit sided with Bank of America, but the Supreme Court reversed. In an uncharacteristically short, five-page opinion, Justice Scalia pointed out that the language of the statute required merely notification and not the filing of a lawsuit. Bank of America claimed that cases where disclosures were missing should be treated differently from cases where, as in Jesinoski, the disclosures were made but their sufficiency was questioned, inferring such a distinction from a neighboring subsection of TILA. The Court was not convinced, noting that while Section 1635(g) allowed for the possibility of a lawsuit, it didn’t have any language requiring one.

It’s a shame that the borrowers in this case were required to fight all the way to the Supreme Court to enforce a statutory provision that clearly allows them a practically cost-free means to do so, but at least you won’t have to fight so hard if you find yourself in their position.

For more on the Court’s opinion, you can read it here.

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What Is the APR?

by Robert E. Bodine, Esq. and Dan Kotz, Esq.

The Truth in Lending statement (“TIL”) is a part of the real estate closing package that creates the most confusion for borrowers. The source of the confusion is the much-maligned Annual Percentage Rate (“APR”). In fact, the APR, if it were understood by the average borrower, could be a very useful tool for comparing the value offered by different loans. In this article, we explain what exactly the APR is and why it’s important.

What is So Confusing About the APR?

The APR is “much-maligned” because it looks like your interest rate, but for fixed rate loans it’s almost always larger, which has some borrowers thinking that the lender is raising their rate at the last minute. To make matters worse, most borrowers don’t understand it, so no matter how much they’re told it’s not their “real” interest rate, it continues to leave them unsatisfied. This is a shame because it’s really easy to explain by using straightforward examples, though the explanation does start with some confusing terms.

What Is the APR?

The APR is a composite number, combining the interest rates with the closing costs to arrive at a number that appropriately represents the cost of the loan.

When a lender proposes a loan, the loan comes with an interest rate, but also with closing costs (e.g., origination fee, credit report fee). Some of those closing costs are the same regardless of who the lender is (e.g., taxes), but some costs are the normal lender service charges representing the cost of doing business. Obviously, as with any service provider, that second group of charges will vary from lender to lender. So, if ABC Mortgage offers a 2% interest rate on a 30-year, $300,000 loan, the immediate instinct is to assume they’re giving a great deal. However, what if ABC Mortgage is charging $1,000,000 in closing costs? Clearly, those closing costs are ridiculous, and the borrower should probably shop around for a better deal. The problem, of course, is that usually the numbers are much closer, and thus harder to evaluate.

So, what if Wells Fargo offers a 30-year, $300,000 loan with a 5% interest rate with $2,000 in closing costs, Bank of America offers a 30-year, $300,000 loan with a 4.9% interest rate with $6,000 in closing costs, and Suntrust offers a 30-year, $300,000 loan with a 4.95% interest rate with $5,000 in closing costs (chart below)? Which represents the best deal? Clearly, over time, the 4.9% interest rate is better, because there’s less interest paid, but is it so much better that it’s worth the extra $3,000 or $4,000 paid in fees? How does a borrower compare these two loans without a college degree in mathematics?

The borrower doesn’t. The APR provides the answer instead. The lender factors in the closing costs into the interest rate, creating a new interest rate, the APR. The result is an interest rate that’s almost always going to be higher than the actual interest rate unless your closing costs are $0. This higher number often concerns borrowers, but keep in mind that the payment amount is based on your actual interest rate. The APR has no actual effect on the loan, instead simply demonstrating whether one loan costs more than another.

For the examples above, here are the results (care of http://www.debtconsolidationcare.com/calculator/apr.html, last visited August 21, 2012):

  Wells Fargo Suntrust Bank of America ABC Mortgage
Loan Amount $300,000 $300,000 $300,000 $300,000
Term (how many years) 30-years 30-years 30-years 30-years
Interest Rate 5% 4.95% 4.9% 2%
Closing Costs $2,000 $5,000 $6,000 $1,000,000
APR 5.0876% 5.0954% 5.0738% 19.156%

So in these hypothetical cases, Bank of America is offering \the best deal. This is interesting in that they’re charging three times as much up front as Wells Fargo. Not surprisingly, though, getting a lower interest rate is far more important than closing costs to getting the best deal, though it’s not the entire picture. Suntrust has a lower interest rate than Wells Fargo, but it’s still better to go with Wells Fargo based on the APR. ABC Mortgage, on the other hand, is clearly a scam artist.

TMI: How Is It Calculated?

It’s not necessary to know how the APR is calculated to understand what’s written above, but for those that want to know, it’s provided here. Using the Bank of America loan as an example, the TIL for that APR would have a table at the top of the statement that looks like this:

Annual
Percentage Rate   5.0738%
Finance
Charge   $284,647.20
Amount
Financed   $294,000.00
Total of Payments     
$584,647.20

 
You have the APR, the total amount of interest payments over 30 years, the amount financed, and the total amount of all payments over 30 years. The 2nd and 4th numbers make perfect sense. If the borrower pays $584,657.20 over 30 years, and of that $284,647.20 is interest, then the difference should be the “principal” paid (i.e., the loan amount). Sure enough, the difference is $300,000.00, the exact amount of the loan.

Now let’s dig a little deeper. There’s a complex mathematical relationship between the interest rate (5%), the loan amount ($300,000.00), and the total number of payments made over 30 years. If we change any one of those numbers, at least one of the other numbers must change to keep the equation balanced. Well, the total amount of payments is not going to change, so that remains constant. This means that if we change the loan amount, then the interest rate must be what changes to keep the equation balanced.

Notice that the Amount Financed of the loan is $294,000, which is the loan amount ($300,000) minus the closing costs ($6,000). So the “loan amount” is decreased, which means the “interest rate” has to increase in order to keep the Total of Payments constant. This new interest rate is the APR. The higher the closing costs, the lower the Amount Financed will be, which means the higher the “new” interest rate will be. In this way, we calculate the “new interest rate,” the APR, which is related to both the real interest rate and the closing costs.

In Summary

That’s what the APR is and how it’s calculated. We hope that’s clear. Whether or not the calculation is clear, three things should be.

  1. The APR is a “fake” number. It’s not your real interest rate. You haven’t been duped by your loan officer into a hidden interest rate increase.
  2. The closer the APR is to your real interest rate, the lower your closing costs must have been.
  3. The APR is the best way to compare what different lenders are going to charge you for the loans they’re offering you.

Also, you might not want to pay $6,000 up front in closing costs. That’s understandable. You might have very good reasons for wanting to pay more for your loan. The APR is simply there to tell you what the cost of your loan is, thus allowing a proper comparison between different loans offered by different lenders. Hopefully, it’s now a little less confusing.

Follow Robert E. Bodine, Esq. on Twitter @PropertyAtty
Follow Dan Kotz of First Class Title, Inc. on Twitter @REOAttorney

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