HUD has regrettably increased the annual mortgage insurance premium and soon will have succeeded in reducing the allowable seller concessions. It's easy to know that this will have a big impact but it will actually change the lending landscape by dramatically decreasing FHA's presence in the marketplace and shifting loan volume to Fannie Mae and FreddieMac who share an uncertain future to say the least. It will also shift loans to private mortgage insurers, most of whom are either financially anemic or are still reeling from the volatile markets of the last 2.5 years. And it needn't be said that the private sector isn't ready, willing and able to jump into the residential housing lending market just yet. In a time where tinkering with the housing market should be done delicately, this change will torpedo an already fragile housing market. IMPACT ON AFFORDABILITY AND HOUSE PRICES A buyer in Saint Paul, MN purchasing a three bedroom home at the median sales price and qualifying with Saint Paul's median household income, is going to be a harder thing to do. Let's use these statistical examples and assume the borrower has a car loan of 330 dollars a month and a credit card payment of 65 dollars. Currently, this is affordable. Now that FHA has increased the annual mortgage insurance premium, this same buyer will now lose $6,500 in purchasing power and could not purchase at 151,000 dollars but rather at 145,500 or more interestingly 4.3% less of the Saint Paul median sales price (assuming market property taxes and hazard insurance rates). So, with this change, an entire class of buyer has lost purchasing power and whenever this many people lose this kind of purchasing power, it would be naïve to think that it won't have an adverse impact on already precarious home prices. With these changes in place, it will make more sense for nearly all buyers with a credit score of 680 or higher and debt to income ratios of 45% or lower to use conventional financing. Firstly, private mortgage insurance will be equal to or cheaper than FHA insurance in most cases. Secondly, there are more choices in types of mortgage insurance and means of payment with conventional financing. Thirdly, after HUD reduces allowable seller concessions, the allure of a low down payment loan with FHA will be gone to this type of borrower (this change is a back door way of FHA increasing the down payment requirement). Some may see a silver lining in these changes but it will have unintended consequences. EFFECT ON BUYER'S LOAN DECISIONS AND UNFORESEEN CONSEQUENCES Each mortgage insurance company has its own set of underwriting guideline overlays and most have their own declining markets lists. With some, if a property is in the wrong zip code it will be subject to a loan amount cut of 5% of the appraised value or purchase price (whichever is less). With others you won't know if a loan might get cut until the appraisal comes back. If the appraisal comes back with the "oversupply" or "declining" box checked in the One Unit Housing Trends section, a loan officer might only know then that the loan will be cut. To navigate this, a loan officer must have control over the selection of their mortgage insurance provider and know their respective guidelines. Some do but they are the best of the best. In short, buyers, sellers and Realtors will be subject to unexpected transactional disruptions when this trend inevitably emerges. Sadly, these transactional difficulties will happen to the very best of borrowers. WHICH BORROWERS WILL BE DRAWN TO FHA LOANS NOW? Despite the changes, there will still be buyer and borrower profiles that make a match for FHA. Here is a brief list: 203K rehabilitation mortgages HECM reverse mortgages Loans for borrowers with credit scores at or under 679 & with loan to values over 80 percent Loans for borrowers with high debt (many investors will approve FHA loans for borrowers with debt to income ratios of up to 55%) Loans for borrowers who either own or are buying a home in a declining market (FHA loans aren't cut if a property is in a declining market) FHA to FHA streamline refinances (although they are now less appealing as well) Loans in need of manual underwriting due to no credit or strange circumstances such as incorrect data on a credit report from an ex-spouse if the items are covered by a divorce decree That's about it. HAS HUD SUCCEEDED IN THEIR GOALS? HUD's stated objective in making this change was to shore up their capital base. The not so stated objective was to reduce their market share. They will succeed in the latter (with a flight of high quality borrowers). Ironically, they will fail in their stated objective. While it may work out financially for HUD in the short term, we have to consider the long-term consequences of HUD chasing the highest quality borrowers away from their insured portfolio leaving behind an insured portfolio of loans that will have a lower average credit score, higher average debt to income ratios and the loans will be secured by housing that will be more susceptible to being in a declining market. These soon-to-emerge portfolio weaknesses will increase the number of defaults and claims against the FHA insurance fund and, in time, this policy change will be looked back on as a disaster. It is likely that this change is HUD cutting off its nose to spite its face.
HUD has regrettably increased the annual mortgage insurance premium and soon will have succeeded in reducing the allowable seller concessions. It's easy to know that this will have a big impact but it will actually change the lending landscape by dramatically decreasing FHA's presence in the marketplace and shifting loan volume to Fannie Mae and FreddieMac who share an uncertain future to say the least. It will also shift loans to private mortgage insurers, most of whom are either financially anemic or are still reeling from the volatile markets of the last 2.5 years. And it needn't be said that the private sector isn't ready, willing and able to jump into the residential housing lending market just yet. In a time where tinkering with the housing market should be done delicately, this change will torpedo an already fragile housing market.
IMPACT ON AFFORDABILITY AND HOUSE PRICES
A buyer in Saint Paul, MN purchasing a three bedroom home at the median sales price and qualifying with Saint Paul's median household income, is going to be a harder thing to do. Let's use these statistical examples and assume the borrower has a car loan of 330 dollars a month and a credit card payment of 65 dollars. Currently, this is affordable. Now that FHA has increased the annual mortgage insurance premium, this same buyer will now lose $6,500 in purchasing power and could not purchase at 151,000 dollars but rather at 145,500 or more interestingly 4.3% less of the Saint Paul median sales price (assuming market property taxes and hazard insurance rates). So, with this change, an entire class of buyer has lost purchasing power and whenever this many people lose this kind of purchasing power, it would be naïve to think that it won't have an adverse impact on already precarious home prices.
With these changes in place, it will make more sense for nearly all buyers with a credit score of 680 or higher and debt to income ratios of 45% or lower to use conventional financing. Firstly, private mortgage insurance will be equal to or cheaper than FHA insurance in most cases. Secondly, there are more choices in types of mortgage insurance and means of payment with conventional financing. Thirdly, after HUD reduces allowable seller concessions, the allure of a low down payment loan with FHA will be gone to this type of borrower (this change is a back door way of FHA increasing the down payment requirement). Some may see a silver lining in these changes but it will have unintended consequences.
EFFECT ON BUYER'S LOAN DECISIONS AND UNFORESEEN CONSEQUENCES
Each mortgage insurance company has its own set of underwriting guideline overlays and most have their own declining markets lists. With some, if a property is in the wrong zip code it will be subject to a loan amount cut of 5% of the appraised value or purchase price (whichever is less). With others you won't know if a loan might get cut until the appraisal comes back. If the appraisal comes back with the "oversupply" or "declining" box checked in the One Unit Housing Trends section, a loan officer might only know then that the loan will be cut.
To navigate this, a loan officer must have control over the selection of their mortgage insurance provider and know their respective guidelines. Some do but they are the best of the best. In short, buyers, sellers and Realtors will be subject to unexpected transactional disruptions when this trend inevitably emerges. Sadly, these transactional difficulties will happen to the very best of borrowers.
WHICH BORROWERS WILL BE DRAWN TO FHA LOANS NOW?
Despite the changes, there will still be buyer and borrower profiles that make a match for FHA. Here is a brief list:
That's about it.
HAS HUD SUCCEEDED IN THEIR GOALS?
HUD's stated objective in making this change was to shore up their capital base. The not so stated objective was to reduce their market share. They will succeed in the latter (with a flight of high quality borrowers). Ironically, they will fail in their stated objective. While it may work out financially for HUD in the short term, we have to consider the long-term consequences of HUD chasing the highest quality borrowers away from their insured portfolio leaving behind an insured portfolio of loans that will have a lower average credit score, higher average debt to income ratios and the loans will be secured by housing that will be more susceptible to being in a declining market. These soon-to-emerge portfolio weaknesses will increase the number of defaults and claims against the FHA insurance fund and, in time, this policy change will be looked back on as a disaster. It is likely that this change is HUD cutting off its nose to spite its face.
wow... check out this chart:
If you haven't completed a mortgage transaction in the last year or so... this is an example of why its a completely different situation:
On August 16, 2010, the Federal Reserve Board announced FIVE ACTIONS in almost 1,200 pages! Some of the financial/mortgage experts in industry believe it MAY be possibly in a defensive move to preempt any chance for the new Director to do things his or her way.
We are in the process of digging into and digesting these developments and will relay insight about these issues to you as we uncover the details that impact you and YOUR situation.
Click HERE to read a little more about it.
Beginning June 1, 2010, with all new applications, Fannie Mae wants lenders to verify that borrowers have not taken on new debt during the underwriting phase of the mortgage.
If new debts are found, the mortgage is subject to a re-underwrite and a possible turndown.
For Fannie Mae, the goal is to reduce the number of loans that go bad because of new, non-disclosed debt. Lenders have the freedom to verify in whatever manner they wish, but in most cases, the verification process will amount to a credit re-pull made just prior to closing.
The underwriters will be looking for 3 things in particular — even after your loan is approved.
First, your updated credit report will show your current credit card bills and minimum monthly payments. Those numbers will replace your original numbers made at the time of application. If the debts exceed a certain threshold, your loan will be denied.
Second, underwriters will be looking at your updated credit score. If your FICO has dropped below minimum lending standards, your loan will be denied. Or, you may be subject to a new loan-level pricing adjustment.
Loan level pricing adjustments are mandatory loan fee based on your credit score.
And, lastly, underwriters will be looking at your credit report’s Credit Inquiry section. The goal is to see if you’ve been applying for credit elsewhere. Underwriters can use this information at their discretion.
Fannie Mae’s Loan Quality Initiative is just one more way that the government-backed group is trying to improve its loan pools. Unfortunately, it’ll mean more turndowns for mortgage applicants.
Therefore, take extra care of your credit between the time of application and the time of closing. Don’t buy new cars, don’t buy new appliances, and — most definitely — don’t open new credit cards. Be extra safe with your credit because a mortgage application that’s supposedly cleared-to-close can be revoked at the eleventh hour.
When in doubt, talk to your loan officer about what may or may not trigger the Loan Quality Initiative. Your loan approval is at stake.
This week's FOMC meeting has adjourned with no change to key short-term interest rates. This was widely expected and has not affected the markets or mortgage rates. The post-meeting statement did help influence opinions and bond trading. One of the points of interest was a comment that said the "economic recovery is proceeding" which differed slightly from the previous meeting that said economic activity continued to "strengthen." Traders are taking that to mean the economic recovery is at a slower pace than previously thought.The Fed indirectly indicated that concerns about Europe could affect that recovery, but said that they don't expect that it to push the U.S. economy back into a recession. They also said that inflation remains subdued, which means there is no pressure to raise key rates anytime soon.Overall, the lack of a change to rates has had no impact on the markets or mortgage rates , but the post-meeting statement was taken as favorable for the bond market. The lack of concern about inflation and the more cautious remarks on the status of our economic growth makes long-term securities such as mortgage-related bonds more attractive to investors.
May's New Home Sales from the Commerce Department was today's only relevant economic report. It revealed a whopping decline of 33% in sales of newly constructed homes, pushing sales levels down to record lows. This further indicates that the tax credits being offered to homebuyers were heavily supporting the housing market. That raises significant concerns about the growth ability of the housing sector now that they are expiring. This data is favorable news for the bond market and mortgage rates because a weakening housing sector will make a broader economic recovery more difficult and eases inflation concerns.
Last week (and in recent months even) we had some serious movements in the Stock Markets AND in the Bond Markets. This coincided with movements in Mortgage Interest Rates.
Markets are triggered sometimes by kneejerk reactions in certain "reports" that come out relative to our economy and jobs etc. The JOBS REPORT that came out last week had a VERY big impact on the markets last week... and it wasn't good for the Stock Markets... which improved long term Mortgage Rates.
There is no relevant data scheduled for release tomorrow or Tuesday. The first report comes Wednesday afternoon when the Federal Reserve will release its Beige Book. This data details economic conditions throughout the U.S. by region. It is relied upon heavily by the Federal Reserve to determine monetary policy during their FOMC meetings. If it shows surprisingly softer economic activity, the bond market may thrive and mortgage rates could drop shortly after the 2:00 PM ET release. If it reveals signs of inflation growing, we could see mortgage rates revise higher Wednesday afternoon.
Remember... I keep track of these things so YOU don't have to.
I read a great article on CNN MONEY about this subject and ODDLY enough it looks like the TOP city in the COUNTRY to purchase a home instead of RENT right now is MINNEAPOLIS. Lets assume that this also means the surrounding metro area and get out and buy a new home if you're currently sitting on the fence!!
here's the link to check it out for yourself: http://money.cnn.com/2010/06/03/real_estate/rent_vs_buy/index.htm
http://money.cnn.com/galleries/2010/real_estate/1006/gallery.rent_vs__buy/index.html
Remember that you'll want to get pre-approved for that purchase first! Call Steve.. Your Favorite Mortgage Guy.com and he'll get you all set up!!
On all ARM's (adjustable rate mortgages) borrowers now need to QUALIFY at the "note rate plus 2% or the fully indexed rate/payment... whichever is higher".
On any "interest only" products borrowers now are limited to a maximum of 70% LTV (loan to value); they are required to have a minimum of a 720 credit score and AT LEAST 24 months of "reserves" for PITI.
There's not a HUGE demand for these products anyways but tightening these guidelines seems to kinda make sense anyway... right?
According to TBWS...
March "new home sales starts" were up 26.9% in March. good news!
Also... the total home sales for 2009 were $585 Billion. This number is DOWN $163 Billion from 2008 BUT the more important number is that total UNITS is UP over 100,000.
Although we understand that the numbers are most likely due to sales of "distressed properties"... its still a step in the right direction.
According to Keefe Bruyette & Woods... Commercial Real Estate loans make up 32% of the lending that was originated by REGIONAL BANKS compared to just 10% of the loans made up by Large National Banks.
Is this a reason to have your Residential Mortgage closed with a lender that works with National Banks or to "keep it local"?
Very interesting fact that may make you think twice.
The Fed is meeting April 27 and 28th, and its actions could impact home loan rates!
Don't Wait...
Call me before the Fed acts so we can review your situation and determine if there's anything you need to do.
Late last week we heard that Goldman Sachs got some REALLY bad news.
The SEC is filing civil fraud charges against G/S implying the firm allowed Paulson & Co. to essentially "hand pick" subprime loans specifically for the CDOs to sell to investors that were expected to fail. The result was a $1 Billion loss for several European Banks who bought those CDO's issued with AAA ratings.
Cllick HERE to get a better picture on how SUBPRIME MORTGAGES were bundled and sold.
BIG PICTURE:
As much as I think that the people who did this SHOULD get what they deserve... the size of Goldman Sachs is SO BIG that there is a little worry about what could happen to the mortgage industry and the recovery.
according to TBWS:
A Senate Panel that has been recently put together to analyze WAMU and other mortgage banks/institutions is a part of the US Department of Homeland Security (the agency created to protect our country against TERRORIST ATTACKS).
The question asked is now... "We know that the mortgage industry (along with others) created some problematic high risk loans but... is the mortgage industry on the same playing field as Bin Laden?!!"
Mortgage rates for fixed loans rose in the past week with the average rate on 30-year fixed rising to 5.08 percent (up from the prior week's 4.99 percent average), though adjustable-rate loans saw slightly lower rates, according to Freddie Mac's weekly survey of mortgage rates. The combination of spiking Treasury yields and the rise in the Fannie Mae benchmark bond (from 4.33 percent to 4.56 percent) caused mortgage rates to rise beyond the 5 percent mark.
Many in the market had come to believe that the Fed's $1.25 trillion mortgage securities buying program, which began in late 2008 and ended last Wednesday, would have little or no effect on mortgage bonds. They reasoned that there were enough other private investors on the sidelines ready to consume this extra yield and that these investors would be ready to step in to buy once the Fed had left the arena. Maybe so, but on the other hand, maybe not so much as previously envisaged. Risk premiums on mortgage-backed securities have been widening of late, in anticipation of the Fed's departure.
One of the biggest consequences of the Fed's exit is that mortgages are now likely to be more volatile.
April’s Fair Housing Month is a time of year when the nation commemorates the passage of the 1968 Fair Housing Act and reaffirms the right of every person to live where they choose, regardless of their race, color, national origin, sex, religion, familial status, or disability. This year’s theme Fair Housing Act 2010: A Time to Act reflects the urgent need to work together to eliminate those practices that still unlawfully deny individuals their right to equal housing.
If you feel like you’ve been a victim of housing discrimination or would like more information please call 1-800-669-9777 or visit www.hud.gov/fairhousing
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