Christmas Eve Closing

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As your financial advising team, we recommend that you act on your three day right of recession and rescind the mortgage you entered into with Mr. Sullivan at Ameriquest on December 24, 2002. We feel that the option recommended by Tim Sullivan is not in your best interest. Our analysis shows that your current mortgage is more financially stable and includes lower risk. You currently have a 30 year fixed mortgage of 7.25%, which is below current par 30 year fixed rates for subprime borrowers (currently estimated at 8.08%). Below is our analysis on your situation supporting the reasons for our recommendation. We understand that the surface savings with the Ameriquest loan are appealing, but we believe you are not benefiting financially with the new mortgage.

Home Value:
Per Tim Sullivan the home is now worth $230K. However, there is no evidence of an appraisal. We would advise that you have a certified appraiser appraise the home to find the true market value. Based on the information in Exhibit 1, the median home prices increased by 20% from 2001 to 2002 in Lawrence. Given that you purchased the home in 2001 for $157,900 including a 20% increase, the home value would be $189,584. Unless significant improvements have been to the property, it would be highly unlikely that the value increased 46% to $230,000. Without an appraisal, I would take the conservative approach that the home value is no more than $189,584. Furthermore, looking at historical home prices from 1988, home prices have increased by about 3% per year, with fluctuations in individual years. We believe that you should not believe that the home values would continue to increase at 20% per year. Therefore, continuing to borrow against the equity to pay down other debt is not advisable.

Underwriting Criteria:
Historically, loan officers have used the Five C’s to determine the type of loan the borrower could qualify for. These are items that determine if a borrower will qualify, and does not determine how much the borrower can afford. 1.)Collateral: This refers the amount of money borrowed versus the value of the home purchased, and is referred to as Loan to Value ratio. Please see Exhibit 2, which shows the calculation of the loan to value for your home. We calculated based on the give value of $230K as well as the conservative value of $189K. With the $230K value, your loan to value is 90%, and with the $189K value to the loan to value is 109%. In both cases, you would be considered high-risk. 2.)Credit/Character: This is based on your FICO score and credit report. Typically, a FICO score above 630 would be considered prime, and scores below 620 would be subprime. When you originally purchased the home in March of 2001, you had a FICO score of 630, and Tim Sullivan has now classified you as subprime, meaning below 620. However, we would argue that your credit score has increased from March 2001. You have not had any missed payments and are still continuing to pay all debts on a regular basis. 3.)Capacity: Determined by the debt to income ratio. An acceptable debt to income is 36%, and a ratio higher than 40% requires extenuating circumstances and excellent credit. After our analysis, your debt to income ratio is approximately 47.6%, which puts you outside of the acceptable range given your current situation and credit score. See Exhibit 3 for Calculation. 4.)Capital: This refers to how much stake you have in the house, either in down payments or accumulated equity. Given the conservative appraisal, you would not have any equity in the home and only about 10% with the $230K value. This would cause you to be more high-risk. 5.)Conditions: This is what the loan or refinance is being used for. In your case you are refinancing to pay down other debt including credit cards and HELOC loan.

You are currently in a prime mortgage situation with a fixed rate. Based on the criteria above and the Ameriquest mortgage moves...
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