Congress Votes to Restore FHA Loan Limits

On Nov. 17, 2011 Congress voted to restore loan limits and the maximum cap for Federal Housing Authority (FHA) loans. 

The provision reinstates the FHA loan limits through 2013 at 125 percent of local area median home prices, up to a maximum of $729,750 in the highest cost markets. The floor will remain at $271,050.  The loan limits for Fannie Mae- and Freddie Mac-backed mortgages will remain at 115 percent of local area median home prices, up to $625,500.

To find the FHA loan limit for your area go directly to HUD’s website for FHA Mortage Limits.  It’s easy to use – simply select State and Limit Year and it will sort by county.  Better yet, narrow the results by entering your specific County.  Then, make certain to curser down the page to see Year 2012’s information.

For more details on this subject go to NAR's Press Release.  To see additonal information and visuals on stat’s go to Conforming Loan Limits. 

Please contact me directly with any questions you may have.  I would love to help you find your next home... and would be happy to put you in touch with mortgage lenders I know and trust.  I always encourage my clients to meet with a lender as early as possible [in the purchase planning process] to make certain they are prepared and confident with your decisions.  To learn more go to DarleneDiamond.com.

Opposition to the QRM 20% Down Payment

The QRM 20% Down Payment Rule... a 'proposed' lending concern that everyone needs to be aware of. 

The Dodd-Frank Act, which became law on July 2010, requires financial institutions (lenders) that securitize mortgages loans to retain at least 5% of the credit risk.  The Act, however, exempts from the risk-retention requirement securities backed exclusively by Qualified Residential Mortgages (QRMs) – in particular, mortgages with underwriting and product features that are expected to result in a lower risk of default.

To accomplish this task Federal regulators under the proposed ‘QRM Rule’ are trying to put in place a 20% down payment requirement for mortgage loans.  For barrowers who don’t meet the 20% threshold, their loan would be considered more risky and would be expected to pay a hefty premium [estimated at 50 to 100 basis points higher] for a loan in the private (commercial loan) market to offset the increased risk to lenders. 

FHA loans are exempt from the QRM (conventional loan) requirements.  However, the consequence of this change would cause concern for over-exposing FHA.

A change such as this would have dramatic impact on the number of buyers capable of qualifying for a home loan and legislation such as this would without question pro-long our already struggling economy/housing market. As the diagram shows, it would take the average buyer a significant number of years to save enough for a 20% down payrment requirement. 

As can be expected, there has been a lot of opposition to this rule.  Banking regulators’ proposing the QRM rule have gotten consumer groups, mortgage insurers, real estate professionals, and a good portion of the lending industry up in arms over the rule’s 20-percent down payment requirement (and other standards). 

The proposed QRM rule would create an enormous down-payment requirement and reduce the availability of affordable mortgages for qualified consumers.  Few borrowers would be able to meet these requirements and those that do would be forced to pay much higher rates and fees for the safe loans that did not meet the exceedingly narrow QRM criteria.

To get a good picture of what regulators are proposing view Ability to Repay Qualified Mortgage Rule: How it Works (a seven minute video presented by Jeff Lischer, managing director of regulatory policy for NAR).
  

For additional insight on this topic, go to Learn About the Latest on the Proposed QRM Rule

Also reference Coalition for Sensible Housing Policy submitted to Federal Regulators on July 11^th, 2011.

The End of Quantitative Easing (QE2)

Interesting article... providing perspective on Quantitative Easing

Goodbye QE2 (published 6/27/11) by Preston Howard

Preston
Howard

I’ve been waiting for this day to come. By June 30^th, the Federal Reserve will have completed its $600 billion worth of purchases of treasury and mortgage securities and not a moment too soon. The second round of Quantitative Easing (QE2) had mixed results in the broad economy, but negative results on the mortgage market. Accordingly, for those of us who have been waiting for Ben Bernanke to take his hand off of the throttle, the day has finally arrived!

When I state that QE2 has had mixed results, it’s true. We didn’t experience inflation that was so low that it could have led to Japanese-style deflation. The stock market most certainly shot up. In some cases, shareholders recovered 80% of the value they had pre-recession, if not more. That was the good news. The bad news was and is that job growth has been anemic. Only 54,000 jobs (net) were created in the entire nation for the month of May. Not only did the price of oil increase during this time period, but the prices of other commodities increased significantly as well, which severely limited the purchase power of consumers. The first negative effect which was a direct consequence of the announcement of the start of QE2 was its effect on mortgage rates. When the program was launched in November, rates jumped up almost a full percentage point across the board. The refinance market came to a halt and with regards to the purchase market, marginal buyers who barely qualified due to tight ratios no longer qualified. So, as far as a mortgage professional or a buyer with tight ratios or interest rate sensitivities, the demise of QE2 couldn’t come fast enough.

The unfortunate solace to QE2 was all of the bad news that truly brought interest rates back down and not QE2 itself. It wasn’t the first $10 billion dollar tranche, the second or the third tranche that brought rates down; in fact, it’s quite to the contrary. Rates always increased whenever a large purchase of securities was made--from .125% - .25%. In fact, it was the paltry job growth, low payroll figures from ADP, high initial unemployment claims, declines in durable goods, the Euro flu, the fall of Greece, and a drop in consumer confidence which attributed to an improvement in rates. The one lone QE2 announcement that brought rates down was when the Fed confirmed that QE2 would indeed be terminated at the end of June and that there would be no QE3! On that day, mortgage rates actually dropped by .25%. How amazing is that--the announcement of the Fed program’s demise causes the markets to cheer!

So, QE2’s days are truly numbered. It wasn’t all that it was cracked up to be. At the end of the day, the economy has actually slowed down since the second rendition of Quantitative Easing; and Ben Bernanke has admitted such. In a recent interview, he stated that after the Fed has done everything in its power and utilized every tool at its disposal, the job growth still isn’t there and there is nothing else that they can do. He capitulated in stating “we project unemployment to come down very painfully slowly.” The new projection is for growth to accelerate during the fall of next year. For the real estate professional, QE2 was a disaster. Housing sales plummeted, the pending sales index fell, and the total number of homes sold all decreased during the seven-month tenure of QE2. If the program hurts the housing industry, it won’t be good for the rest of the economy. The Fed knows this. At least the program will have ended at the close of business on the 30^th and an anemic recovery can get started with participation from the housing industry, leading the way. As I have said it once and will say it again, an economic recovery without a housing recovery is no recovery at all.

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at howardpr@rosecityrealtyinc.com.

The Green Appraisal Challenge for Earth Friendly Homes

Read an interesting article today.  Going Green is great and certainly important for our environment.  Issue at hand is that appraisers aren’t recognizing the invested value.  Why, mainly because there aren’t enough suitable homes out there to use as comps.

This particular buyer was interested in a home with numerous “green” features, to include passive solar, upgraded windows, and a tankless water heater. The dilemma -- their appraisal came in at a lower value than what they were contracted to pay for the home.  Consequently, they were being asked to make up the difference in cash at close.

The article goes on to say - appraisers aren’t recognizing the value of the net green costs which [in addition to the appraisal concern] is affecting manufacturers’ marketability of the products. Builders are also complaining that it’s difficult, if not impossible, to get appraisers to recognize green’s worth.  Why? Again, it all goes back to not enough comps [like homes of a similar type] to justify the increased value.

As one appraiser stated -- “Market value is based on a simple concept: How much would someone pay for a home with certain features/attributes in a specific location, based upon and as measured by recent sales of similar homes with the same or similar features in the same location. [Value] isn’t a matter of what some appraiser thinks, guesses, or what in theory the energy savings could possibly be. It is based upon what the market has been willing to pay for similar properties with similar improvements.”

After lengthy discussion, he concluded by proposing that federal regulators modify appraisal guidelines to [in essence] create an index establishing a range (in value) that an appraiser could use to adjust sales/values based upon what specific green (added value) features were in the home.

Sounds like a feasible approach to me… as we shift more towards a green conscious environment.

The article (by Lew Sichelman) posted April 2th, is titled: ”Good luck getting a ‘green’ home appraised as such -- With few comparables, appraisers struggle to account for earth-friendly features”.  To read the article in its entirety click here.

FHA Mortgage Insurance Increasing Again on April 18th

A growing number of home buyers are using government-insured FHA home loans due to the favorable terms that they offer, compared to other loan types.  With all the changes in 2011 FHA guidelines, potential buyers need to educate themselves on new developments and requirements.  

For the third time in 10 months the FHA has altered its home loan insurance costs.  Starting April 18^th, 2011, the new monthly MI (mortgage insurance) factor(s) will be as follows: 

• If LTV is <= 95% then the annual MIP increases to 1.10% of the amount borrowed (previously this rate was 0.85%) 
• If LTV is > 95% then the annual MIP increases to 1.15% of the amount borrowed (previously this rate was 0.90%) **

Why is the FHA increasing its annual MIP?  The main reason is because the FHA now insures a much larger percentage of the total U.S. housing market. As the WSJ graph supports, in 2010 a good 50% all new mortgages were insured by the FHA. Due to last years’ rising delinquencies/defaults on its loans [and shrinking reserves] the FHA has been forced to raise insurance premiums for new borrowers.  The FHA has stated that the 0.25% increase to the MIP will “significantly strengthen” its reserves (which by law must remain above certain minimum levels).

If you are in the process of buying (going under contract) make certain your loan officer has ordered your FHA case #. Either way, consult your lender to get the full scoop!  If you need help finding a trusted lender, please ask.

NOTES -

 ** The higher MIP rate is based on putting down less than 5% (LTV > 95%) allowing the buyer to bring less cash to close.
  

- The Upfront cost of 1% of Base Loan Amount remains the same (last change was Oct 2010). 

- FHA loans are known for being the primary loans for first-time home buyers due to the 3.5% low down payment. 
- A first time buyer, as defined by HUD, is anyone who has not owned a home within a 3 consecutive year period.
- An FHA loan can be for any future homeowner who qualifies under the FHA loan underwriting guidelines and property type requirements.

- FHA loan limits vary by County with larger loan amounts allowed in areas with higher housing costs.  FHA’s maximum SF home loan limit in Wake County is currently $295,000.
- FHA loans are loans originated by private mortgage lenders and insured by the Federal Housing Administration against default by the borrower.

- MI is the type of insurance that covers the lender (not the consumer) against default on a government, FHA loan.

The Changing Lending Environment

Good article... providing perspective over time

Higher Down Payments May Be the New Norm.... (Published on 3/28/11)  by Preston Howard



Preston Howard

At the height of the mortgage boom, required down payments were at an all time low. In June of 2006, the average down payment percentage on the purchase of a single family residence was 4%. If you had good credit and a heartbeat, there were lenders who would provide you with a 100% loan with no documentation outside of your name, address, and Social Security Number. Now, all of that is about to change. Serious talk is being floated around Washington D.C. that the return of the days of a minimum of 10% and an average down payment of 20% is swiftly approaching.

The Obama Administration has called for 10% minimums on Fannie/Freddie loans. Sheila Bair, Chairwoman of the FDIC has stated that she flat out wants 20% down payments. Many banks are already there. An analysis of major metropolitan areas reveals that the current average down payment is at 22%. Much of this is driven by the large commercial banks pushing for higher down payments to stem their losses and discourage delinquencies with borrowers having “more skin in the game.” In addition, this is also a form of pre-emptive planning as housing prices continue to fall. The thought is that lower leverage equals lower risk. This conventional wisdom holds true in the majority of cases as most property owners are less likely to walk away from a property in which they have made a significant investment. However, what happens to the individual who wants the “American dream” but no capital? Their option will most likely be a government agency.

As previously mentioned, Fannie/Freddie will require 10%. That’s half of the new norm, but depending on who you are and your price maximum, that’s still a lot of money. Then, there is the FHA and the VA. They have seen a lot of action over the last 2.5 years. In 2009/2010, 50% of all mortgages originated were made with FHA guaranteed funds. The caveat is that FHA funds have various financial handcuffs, e.g. tax impounds, forced insurance, upfront MIP fees, and higher interest rates. If a borrower puts down 20% or more on a non-government backed loan, the rates are usually lower, impounds aren’t required, and mortgage insurance is illegal. Essentially, a new “sub-prime” market is being created whereby those without sufficient down payments are forced to pay extra fees and incur higher rates, or continue renting.

These actions have resulted in the financial world of two extremes: those with a 20% down payment who get all of the perks, and those without the capital who get all of the fees. I foresee a great demand for something in the middle to be created. It may take some time to materialize as the methods of filling the void in the past have faltered. Mezzanine financing above 80% CLTV is currently non-existent. Currently, cities are broke so the availability of the Housing Finance Agency’s “silent seconds” is scarce. The private market hasn’t been incentivized to fill the gap, so the void with the need to be filled will remain, and hard money is too expensive. I believe that if the American public was aware and takes a close look at this new reality, protests will ensue, lobbying will occur and something will be done, as the “charges for some, but not for all” mantra can’t continue for too long. Eventually, a product or solution will be produced, as the margin between 3.5% and 20% is too wide, the demand is heavy and the pending increases in Fannie/Freddie costs are too real.

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at howardpr@rosecityrealtyinc.com.

Challenges to Mortgage Interest Deduction are on the forefront

As a new Congress meets this spring, they’ll begin debate on the potential elimination of the mortgage interest deduction… in a continued effort to reduce the federal deficit.

The mortgage interest deduction has been a valuable and popular tax break that has benefited middle-class homeowners for decades.  According to CBS News, currently 75 million Americans are eligible to deduct the interest paid on their home mortgage from what they owe the government at tax time. Those who do save an average of $2,078 per year.

This is at minimum a poorly timed idea… and would place additional burden on an already depressed housing market.  Members of the Federal Deficit Reduction Commission are considering -

• Restricting the mortgage interest deduction to principal residences only.  Therefore, second homes and home-equity loans would no longer qualify.
• Capping the qualifying mortgage amount to $500k (the current amount is $1 million).
• Converting the mortgage interest deduction to a 12 percent non-refundable tax credit.

The mortgage interest deduction has been a powerful incentive for home ownership for nearly a hundred years… with mortgages being the largest loan most people take out during their entire lives.  Tampering with the mortgage interest deduction at this critical time in the housing market could put additional pressure on an already disheartened recovery.  The suggested changes would at minimum make the dream of homeownership less appealing to buyers. 

As stated by NAR President Ron Phipps - “Any further downward pressure on home prices will hamper the economic recovery, raise foreclosures and hurt banks’ abilities to lend and likely tip the economy into another recession resulting in further job losses for the country. It will effectively close the door on the American Dream.”

So whether you currently own one or more homes or are looking to buy, keep an eye on Washington… more reports coming. For more on this subject go to Another Challange to the Mortgage Interest Deduction.

A Satire on 'Explanation of Quantitative Easing' (Click on the box to view the video)

New FHA MIP (Mtg Insur Premium) Changes Take Effect Oct 4th

For the second time this year, the FHA is modifying mortgage insurance.  On October 4th, the Federal Housing Administration (FHA) will implement another round of changes to the premium structures for FHA-backed mortgages.   Under the new terms, assuming a 30-year fixed rate FHA mortgage with at least 5 percent equity (financing < 95%) the changes include --

• Upfront MIP drops to 1.000% of the amount borrowed from 2.250%
• Annual MIP increases to 0.850% of the amount borrowed from 0.500% **

** When putting down less than 5% (LTV > 95%) the annual MIP increases to 0.900% (from 0.550%) of the amount borrowed.

In addition, borrowers will also be required to have a higher credit score than before. The FHA loan is popular because its minimum down payment is 3.5%, whereas most conventional loans require a much higher down payment.  FHA will make the premium fee changes on all new case numbers effective October 4, 2010.

Why is the FHA raising Mortgage Insurance (MI) payments now in this market? 

As the graph supports, the FHA’s reserve funds have been rapidly depleting and need shoring up soon to withstand future imminent defaults.  Money generated from these changes should help recapitalize and stabilize this government agency. For additional details see FHA BILL_H.R. 5981.  

Looking for more on the new FHA MI changes (and a little humor) check out Twist on New Home Buyer Tax.

If you’re unsure of how the new FHA mortgage premiums will impact your mortgage, be sure to call or email your loan officer for help.

30-year mortgage at lowest rate since 1971

NEW YORK (CNNMoney.com) -- Mortgage rates continued to decline this week, plunging to the lowest level in decades, according to surveys from Freddie Mac and Bankrate. Freddie Mac's weekly report said the 30-year fixed rate slipped to 4.44% for the week ended Thursday, the lowest since the government-backed lender began tracking the rate in 1971. Last week's rates stood at 4.49%, and a year ago it was at 5.29%.

The 15-year fixed rate fell to 3.92% this week, the lowest since Freddie Mac began tracking it 1991, down from 3.95% last week and from 4.68% a year ago.  Adjustable-rate mortgages also declined, with the 5-year rate falling to 3.56% this week, the lowest since 2005 when the lender began tracking it. 

Mortgage tracker Bankrate.com, which surveys large lenders across the country, said the average 30-year fixed loan sank to a record low for the fourth consecutive week, falling to 4.57% from 4.66% the previous week.

The 15-year fixed rate, which is a popular option for refinancing, also fell to the lowest level in the history of Bankrate's 25-year old survey, dipping to 4.06%, from 4.11% the week before.  While the 1-year adjustable-rate mortgage held steady at 4.8% for a fourth week, the 5-year adjustable rate mortgage dropped to a record low of 3.92% from 3.95% the previous week.

"Low rates are helping to heal many battered local housing markets by increasing home-purchase activity, said Frank Nothaft, chief economist at Freddie Mac.  Mortgage rate applications inched up a modest 0.6% during the week, according to the Mortgage Bankers Association. Applications for purchase rose 0.3% while refinance applications increased 0.6%.

Source:  CNNMoney.com -- By Hibah Yousuf, staff reporterAugust 12, 2010