Minnesota Real Estate Investors Association, Inc.

How to Choose the Right Third-Party Mortgage Originator

Understanding Third-Party Mortgage Originations and the Role of Third-Party Originators (TPOs)

In the mortgage industry, third-party originators (TPOs) play a significant role in connecting buyers with lenders and facilitating the loan process. A TPO typically works on behalf of a mortgage lender to assist in various stages of home loan origination, including underwriting, gathering necessary buyer information, and even funding the loan.

What Are Third-Party Originations (TPOs)?

Third-party originations refer to mortgage loans that are originated, processed, underwritten, packaged, funded, and/or closed by an entity outside of the loan seller (or its parent or affiliate) that ultimately sells the loan to a buyer like Fannie Mae. This group includes mortgage brokers and correspondents, collectively known as TPOs. The TPO channel is often referred to as the “wholesale channel,” where the third party performs all or part of the loan process on behalf of the seller.

The Seller’s Responsibility in TPOs

While TPOs handle many loan origination tasks, the seller is ultimately responsible for the quality and integrity of the loan
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Understanding Wraparound mortgages: A Unique Home Financing Approach

When navigating the complexities of real estate financing, unique structures such as the wraparound mortgage offer alternative pathways for both buyers and sellers. But what exactly is a wraparound mortgage, and how does it function? Let’s dive into what makes this method appealing, along with the potential benefits and risks it presents.

What Is a Wraparound Mortgage?

A wraparound mortgage is an alternative home financing option where the seller maintains their existing mortgage while creating a new loan that “wraps around” the existing amount owed. Unlike conventional home sales where buyers secure mortgages through banks or lenders, buyers in a wraparound agreement make their monthly payments directly to the seller. The seller, in turn, uses part of those payments to continue paying off their original mortgage. This type of mortgage often comes with higher interest rates than traditional loans, giving sellers an opportunity to profit.

How Does a Wraparound Mortgage Work?

In a typical real estate transaction, a mortgage lender provides the loan for the home purchase, and the seller uses the
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Everyone knows that as interest rates rise, real estate prices drop.  It is only natural.  If the current interest rate is 4% on a $300,000 loan, the monthly PI (Principle & Interest) payment is $1,432.25.  If the interest rate goes up to 7% and the average buyer can only afford a monthly payment of $1,432.25, then the maximum amount they can borrow goes down to $215,277.40.

This is affectively what has happened over the past year and a half, so why have prices continued to climb?  That’s a great question and can be explained by the extremely low inventory levels.  The level of inventory has been so low for so long that the principles of supply and demand have caused prices to increase dramatically. 

In other words, if interest rates hadn’t risen so much so fast, the average loan balance may have risen to $565,000.  That is what the borrowers could afford based on the current average monthly PI payment of $2,700 and an interest rate of only 4%.

The following chart shows the affect interest rates have on a borrowers ability to pay over the past 18 months.

Yah… Your mortgages are going to cost you more to help offset the cost of people who have bad credit, isn’t that wonderful?  Yes, it’s true, beginning May 1, 2023, upfront fees for loans backed by Fannie Mae and Freddie Mac will be adjusted because of changes in the Loan Level Price Adjustments (LLPAs).

Example, beginning May 1, 2023, a buyer with a good credit score of 750 who puts down 25% on a $400,000 home would now pay 0.375% in fees on a 30-year loan, or $1,125, compared to 0.250%, or $750, under the previous fee rules, which is an increase of $375.

Meanwhile, a buyer with a credit score of 650 putting a 25% down payment on a $400,000 home would now pay 1.5% in fees on a 30-year loan, or $4,500. That compares with 2.75%, or $8,250, under the previous rules, which is a decrease of $3,750.

It is true that the increase to buyers with good credit is a small percentage of the overall loan and the borrowers with poor credit are still paying more, albeit less than before.  However, why should those of us who have worked hard and shown prudent money management and done without some things to build up good credit have to pay to lower the costs of those who have not suffered as much as those of us that have built good credit.

25% of all listing had a price reduction last month and inventory levels are rising. We are still in a sellers’ market, but we are transitioning into a buyers’ market.  When that happens, sellers buyers become picking and stubborn sellers slowly become more receptive.  The first phase of this transition is for sellers to drop their asking prices, and that is starting to happen. 

The next phase, if interest rates remain high, will shock the sellers and if they have to sell, they will drastically drop their price to get a sale and that has a snowball affect on prices.  The only thing that can help the sellers now is for inventory levels to remain low and interest rates to drop a little.

Bank financing is getting harder to qualify for, interest rates are rising, and people are getting scared.  This is exactly what most investors have been waiting for.  Opportunity is brewing, the question is, are you ready for the coming storm? 

Inflation is destroying the value of the dollar. Every time this has happened in the past, people look for other investments and commodities to beat inflation or at lease does not lose too much value from it.  Hard assets like gold and silver tend to do well in times of out-of-control federal spending and inflation.

Real estate is another hard asset that does well over time. This is why so many people are looking to put their money into real estate.  Real estate investors are struggling to find good deals right now, but as the storm approaches, deals will become more readily available, however, the easy bank financing is also drying up.  This presents a problem to investors who have not prepared for this and started to raise their own private financing. 

Having access to private money is a game changer and will separate the doers from the wantabees.  You see most people get into real estate when things are going up because they heard about all the money that can be made in real estate.  However, that money was mad by the dowers who bought when everyone else was getting out and then resold years later to the new investors getting in.  It’s a vicious cycle, the question is, when will you be the buyer?  When everyone is getting out so that you can be the seller when everyone is getting back in, or when everyone is getting back in?

 When you first think of the consequences of rising interest rates, you could naturally conclude that would drive real estate prices down.  Over the long haul, you would be right.  However, when you look at what is going on now as rates are rising, you might be shocked to see that both rates and prices are rising together.

Mortgage rates have been increasing steadily since the begging of the year 2022.  At the beginning of the year, mortgage rates were right around 3.2%.  As of the end of April 2022, mortgage rates have risen to around 5.2%. Some resources are show as high as 6.1% as of this writing.

The interesting thing is that the median sales price for real estate is also increasing. The median home values of Minnesota, my home state is currently $326k, the twin cities metro area is a little higher at $340k. 

So why are prices still increasing at the same time interest rates are also increasing.  To explain that you need to have a little understanding of economics.  In the simplest form, when supply is high and demand is low, rates tend to drop lower to encourage borrowing.  This is one of the tools that the federal reserve uses to spur growt
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During these uncertain times, many people are struggling with the question, should I request a mortgage forbearance from my lender.  That is not a simple question to answer unless you know the reasons why you need to request a forbearance and what the ramifications are.

First question is, can you continue to make your mortgage payments?  If the answer is yes I can, then the answer is obviously no you should not request a forbearance.  If the answer is not, then yes you should request a mortgage forbearance. 

If however the answer is yes, but you won’t be able to afford something else like utilities, gas for your car to get to work, food for the kids, medication or so other necessity, then you probable should request a mortgage forbearance from your lender.

What is a Mortgage Forbearance?

Forbearance is when your mortgage servicer, that’s the company that sends your mortgage statement and manages your loan, or lender allows you to pause or reduce your payments for a limited period of time.
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Over the past, the most common question I have heard is “what are you going to do about the Dodd-Frank Act”?  And my common responses have been, “not worry about it” or “understand it and work around it”.  So what is your response, and will you survive not that the dastardly bill that is now in full affect?

Many people are worried that this new law that has been in effect since January 10, 2014 will put them out of business.  There are many new regulations pertaining to lending and one segment in particular that affects investors the most, especially in the coming years with our current economic situation and that is seller financing.  People are worried that these new regulations will have a dramatic impact on our business, and I have heard several people predict that parts or all of the Dodd-Frank law will be repealed.

I don’t put a lot of faith in congress repealing anything these days.  Look at Affordable Health Care for instance; does it look like that will be repealed?  No, so why would you expect the Dodd-Frank Act to be any different?  The Dodd-Frank Act was a response to the sub-prime mortgage meltdown crisis to put the blame on a segment of the economy that was politically acceptable and to repeal it now would be an admission to that fact.  In an attempt not to offend certain political ideologies here, I will not get into the cause of the sub-prime mortgage meltdown crisis, or the political reasons for appealing the Dodd-Frank Act, but I will explain what it means to us as investors.

Here is the simple break down, as I understand it.
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This spring the market was chugging along just fine.  Then a 30 year fixed rate loan increased to just under 5% and the market came to a crashing halt. During the months of August and September, one of our largest local lenders saw a 72% decline in new and refinance mortgage applications and retail, renovated properties seemed to just sit there if they were priced a little high. 

Interested rates dropped by a mere half percent and houses that were sitting there started selling again and mortgagee applications returned to the same levels as they were in June and July.

I am assuming that the Feds will keep rates low for the foreseeable future because the economy is still too fragile, as evidence by less than a 1% rate increase in the real estate market.