My Financial Healthcheck

What will happen to the housing market is anyone’s guess, sales spiked with the April 30 deadline of the homebuyer tax credit, interest rates remain low, some areas have rising prices…but bank repossessions are on track to surpass a million homes in 2010, more than a quarter of borrowers are “underwater”, and other homeowners are walking away from their homes when they can’t afford the payments.  New home construction rose 5.8% April, but permits sank 11.5%.  Mortgage delinquencies 10% during the first quarter of 2010, the foreclosure rate was 4.63% in the first quarter of 2010.  Lenders have slowed repossessions due to being short staffed, prevention initiatives and banks are approving more short sales.  Existing home sales rose 7.6% in April and new home sales were up 14.8% in April as homebuyers sought to claim the expiring tax credit.      

USDA Rural Housing Update: Fundings Dry Up Across the Country

by John Rodgers

In March we learned that USDA Rural Housing funds were expected to run dry by the end of April. 

Here is a quote from the story:

"Every year USDA runs out of money for their fundings and normally you are not affected by this however, this year is very different. The USDA Section 502 guaranteed Rural Housing Program will have exhausted there 2010 fiscal funds by the end of April. The USDA would need to receive about $150 million in funding to be able to continue funding loans for the rest of fiscal year 2010."

USDA Section 502 Single Family Housing Guaranteed Loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities. There is no required down payment. The lender must determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt.

You’re probably asking yourself how it is possible for the USDA to fund all affordable housing demand with only $150 million dollars.

This is possible because the USDA is not the actual “lender,” instead the USDA “guarantees” loans by charging borrowers an upfront fee, similar to upfront mortgage insurance premium charged by the FHA. The upfront fee for a Section 502 loan is 3.5%. This loan guarantee fee was not paid by the borrower at closing though. Instead 2% of the 3.5% fee was financed into the deal so it can be paid over the course of the loan. The remaining 1.5% of the 3.5% was covered by USDA government subsidies.

This is where the "funds running dry" problem comes back into the picture.

By early May, high demand for the Rural Development loan product had rapidly exhausted Section 502 subsidy funding to the point where it was believed the program would shut down for the remainder of the government fiscal year (ends on Sept.30).  As a result lenders were forced to stop accepting USDA Section 502 loan applications. This effectively cut off affordable housing financing to low income consumers who live in rural areas. 

Then on May 11, 2010 we received good news from the USDA’s Office of Rural Development. The Guaranteed Rural Housing Program would once again accept loan applications and issue approvals! Lenders reacted quickly to the announcement by re-opening their doors to new USDA guaranteed loan applications. Unfortunately there was a caveat …all new conditional commitments must be modified to read:

Loan approvals are “subject to the availability of funds and Congressional authority to charge a 3.5% guarantee fee for purchase loans and a 2.25% guarantee fee for refinance loans”.

To put it simply, the USDA would continue to issue Section 502 Loan Guarantees when the Congressional vote was final.  All indications were that the vote was just a formality

Rich Van Tassel President of Royal Oaks Building Group says; “We (home builders) were under the impression that the heavy lifting relative to getting additional USDA funding had been completed by both the US Senate and US House of Representatives.  We understood it to be a formality for congress to pass a bill that made the USDA Guaranteed Rural Housing Program self sustaining and re-capitalized the program to not cause a hiccup in getting mortgages for our buyers at no extra expense to the US taxpayer.”

Well it wasn’t a given. The legislation has not been passed yet.

On May 12, 2010 the USDA’s Office fo Rural Development issued an announcement recalling and voiding the guidance offered the day before on May 11, 2010. Lenders who had just resumed taking new Section 502 loan applications were forced to once again shut their doors to Affordable Rural Development loan programs. I would like to share that press release with you but it has been removed from the Rural Development website, along with the May 11th announcement.

WHY?

Here is the legislative update on H.R.5017: Rural Housing Preservation and Stabilization Act of 2010….

Latest Major Action: 4/28/2010 Referred to Senate committee.
Status: Received in the Senate and Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.

The new legislation essentially removes the 1.5% government subsidy and puts the entire 3.5% guarantee fee on the shoulders of the borrower, but some politicians think the guarantee fee should be larger.  As a result the bill is still stuck in committee, the USDA is not issuing new loan approvals,  and lenders are not taking new loan applications.

There are several issues here…

1. First time home buyers fueled the recent uptick in housing demand. With it now expired, do we really want to remove a program that is intended to attract the very same potential homebuyers who supported the real estate and mortgage business over the past 12 months?
2. An increase in fees would wreak havoc on high cost calculations. READ MORE
3. While the likelihood of this bill passing remains very high, there is good reason for the industry to be frantic about the timing of its passage: CONGRESS GOES ON MEMORIAL DAY VACATION FROM MAY 31 TO JUNE 4. If a the legislation does not pass before then, we would have to wait at least another week for the program to reopen. This would be critical time wasted for many prospective home buyers who need to utilize Section 502 funding and still take advantage of the tax credit.  Did you know that USDA loans are underwritten twice? Once by the investor and once by USDA. The Section 502 qualification process is not short! Wasting a week would surely push some USDA loan closings past the June 30 tax credit cut off date.

Housing Starts Rise as Builders Begin Working Through Backlog of Permits

by Adam Quinones

The Commerce Department released April New Residential Construction: Building Permits and Housing Starts data this morning.

From the Release…

HOUSING STARTS
Privately-owned housing starts in April were at a seasonally adjusted annual rate of 672,000. This is 5.8 percent above the revised March estimate of 635,000 and is 40.9 percent above the revised April 2009 rate of 477,000.
Single-family housing starts in April were at a rate of 593,000; this is 10.2 percent above the revised March figure of 538,000. The April rate for units in buildings with five units or more was 68,000.

BUILDING PERMITS
Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 606,000. This is 11.5 percent below the revised March rate of 685,000, but is 15.9 percent above the revised April 2009 estimate of 523,000.

Single-family authorizations in April were at a rate of 484,000; this is 10.7 percent below the revised March figure of 542,000. Authorizations of units in buildings with five units or more were at a rate of 103,000 in April.

HOUSING COMPLETIONS
Privately-owned housing completions in April were at a seasonally adjusted annual rate of 769,000. This is 19.2 percent above the revised March estimate of 645,000, but is 8.7 percent  below the revised April 2009 rate of 842,000.

Below is a summary of the data including a regional breakdown.

The uptick in Housing Starts was expected as last minute buyers rushed to finalize sales contracts before the homebuyer tax credit expired on April 30th.  The 11.5% decline in Building Permits was however not expected. The first thing that comes to mind when attempting to rationalize why Building Permits fell by an annualized 79,000 units is: OH NO THE TAX CREDIT HAS EXPIRED AND BUILDERS ARE LIMITING NEW CONSTRUCTION PLANS!

But then I look at the Building Permits chart above and I am reminded that permits rose steadily throughout the winter months even though housing starts were stuck at record low levels. Building Permits were preparing to break ground for the summer months ahead, now there is a backlog of permits to work through! I would expect the number of new Building Permits to move lower while previously approved Permits become new Housing Starts. The question is: how much of a backlog has accumulated and when does a lack of new building permits imply new construction will once again come to a standstill? It won’t be long…we should see the two metrics get more in-line with one other by mid-summer.

Builders are feeling more confident about the next six months because they have orders to fill, but that doesn’t change the BIG PICTURE perspective. Existing Home Sales and the Employment Situation Report are still the most important forward looking indicators for the health of housing.

Despite the housing bust and high foreclosure rates, in some areas real estate agents are complaining that they don’t have enough homes to sell.  There is currently an eight-month supply of homes on the market.  Lenders are holding back on foreclosing at all, either because they’re having trouble handling the volume of repossessions or because they want to sell off some of the inventory they already have.  Fannie Mae asks for another $8.4 billion from the federal government, saying that it expects its losses to continue because of trends in the housing and financial markets.  Now how is it possible that Fannie Mae and Freddie Mac are not included in the current proposed financial reform bills, shows how political and smacks of a cover-up on how bad these two mortgage giants finances really are.   Giving people free money to cover their homes is just one of the radical ways that four states, Florida, Michigan, California and Arizona plan to use $1.4 billion the Obama administration is sending their way to help the unemployed and underwater avoid foreclosure.  In other words, you and I are paying to bail these homeowners out…give me or us the money, who makes people any more special to receive free money than us, it’s crazy.   The total number of foreclosure filings, notices of default, auction notices and bank repossessions fell by 9% from March to April.   The number of homes repossessed during April us at an all-time high of 92,432, a 45% increase over April 2009.  If repossessions continue at this pace, more than 1.1 million homes will be lost in 2010.  In terms of rankings, Nevada is worst, then Arizona, California and Michigan. 

Home Sellers Push Buyer Incentives as Tax Credit Expiration Erodes Loan Demand

by Adam Quinones

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending May 7, 2010. 

Michael Fratantoni, MBA’s Vice President of Research and Economics says:

"The recent plunge in rates on US Treasury securities, due to a flight to quality as investors worldwide sought shelter from the Greek debt crisis, benefited US mortgage borrowers last week. Rates on 30-year mortgages dropped to their lowest level since mid-March.  As a result, refinance applications for conventional loans jumped, hitting their highest level in six weeks….In contrast, purchase applications fell almost 10 percent in the first week following the expiration of the homebuyer tax credit, as the tax credit likely pulled some sales into April that would otherwise have occurred in May or later." 

The Mortgage Banker’s application survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a look into consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payments which can result in increased disposable income and therefore more money to spend in the economy or pay down other debts like credit cards and car loans. A rising trend of purchase applications indicates an increase in home buying interest, a positive for the housing industry and the economy as a whole.

From the Release…

The Market Composite Index, a measure of mortgage loan application volume, increased 3.9 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 3.4 percent compared with the previous week.   The four week moving average for the seasonally adjusted Market Index is up 4.4 percent.

The Refinance Index increased 14.8 percent from the previous week. The four week moving average is up 4.4 percent for the Refinance Index. The refinance share of mortgage activity increased to 57.7 percent of total applications from 51.9 percent the previous week.

The seasonally adjusted Purchase Index decreased 9.5 percent from one week earlier.  The unadjusted Purchase Index decreased 8.9 percent compared with the previous week and was 0.6 percent lower than the same week one year ago.  The four week moving average is up 4.5 percent for the seasonally adjusted Purchase Index.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.96 percent from 5.02 percent, with points decreasing to 0.91 from 0.92 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate also decreased from last week.
The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.32 percent from 4.34 percent, with points increasing to 0.81 from 0.80 (including the origination fee) for 80 percent LTV loans. The effective rate also decreased from last week.
The average contract interest rate for one-year ARMs decreased to 6.86 percent from 7.03 percent, with points increasing to 0.35 from 0.28 (including the origination fee) for 80 percent LTV loans.  The adjustable-rate mortgage (ARM) share of activity remained unchanged at 6.3 percent of total applications from the previous week.

The homebuyer tax credit has expired and the housing industry is scrambling to refocus its marketing efforts on the core fundamentals of sustainable homeownership.

From a CNBC story titled: "Homebuyer Tax Credit Ends, But Other Incentives Emerge"

"The expiring credit—which gives first-time homebuyers and some current homeowners a tax credit of up to $8,000 if they sign a contract by midnight tonight and close the sale by June 30—has been widely viewed as helping boost home sales in recent months. For that reason, some real estate firms are pushing home sellers to offer incentives of their own, usually by agreeing to refund some of the purchase price to the buyer. Some developers are offering similar refunds to buyers of new homes or condos."

AND…

"One of the larger companies pushing the new incentives is Coldwell Banker, a subsidiary of the global real estate giant Realogy. It is asking sellers to participate in a program that will give buyers 3 percent off the agreed-to sale price, up to a maximum of $8,000. The program will run from May 1 through July 31."

While I do not see any RESPA or Reg Z violations yet, these "incentives" are misleading.

If the refund strategy is attempted before closing, it would be viewed by an underwriter as a reason to reduce the sales price by the size of the "refund"….which negates the refund, lowers the value of the home and increases the loan to value ratio (which could affect loan pricing). If the refund is done post-closing and the HUD is amended, the loan would be a prime "buyback" candidate as appraisals are under a great deal of scrutiny by regulators, specifically over-inflated valuations. If the refund is done post-closing and the HUD is not amended…that is when we can start talking about illegalities.

The Coldwell Banker program that "gives buyers 3 percent off the agreed-to sale price, up to a maximum of $8,000" is smoke and mirrors (not in a fraudulent way). This is nothing more than good ‘ol seller concessions. Fannie Mae calls them "Interested Party Contributions".

NOTE: The article is written as "3 percent off the agreed-to sale price". That should have read "3 percent OF the agreed-to sales price"…if it was not a typo, this tactic is not seller concessions, it is a refund. See comments about refunds

From the Fannie Mae Seller Guide:

Interested party contributions (IPCs) are costs that are normally the responsibility of the property purchaser that are paid directly or indirectly by someone else who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property. Fannie Mae does not permit IPCs to be used to make the borrower’s down payment, meet financial reserve requirements, or meet minimum borrower contribution requirements.

IPCs are either financing concessions or sales concessions. Fannie Mae considers the following to be IPCs:

• funds that are paid directly from the interested party to the borrower;
• funds that flow from an interested party through a third-party organization, including nonprofit entities, to the borrower;
• funds that flow to the transaction on the borrower’s behalf from an interested party, including a third-party organization or nonprofit agency; and
• funds that are donated to a third party, which then provides the money to pay some or all of the closing costs for a specific transaction.

Plain and Simple: seller concessions are very common in this housing environment, every buyer should request this "incentive". While the borrower is required to have "skin in the game" (3.5% for FHA), these IPC are intended to help cover a portion of the borrowers closing costs or buydown their interest rate. Nothing illegal about that…unless the concessions are coming from a builder and are offset by higher costs elsewhere in the transaction.

The removal of government funded homebuyer incentives is forcing loan originators, realtors, and builders to produce new promotion strategies and modernize long-standing advertising approaches. Given the ever-evolving regulatory regime and super sensitive risk retention environment, the rush to innovate new trade tactics will likely lead to more and more violations and loan repurchase requests. Be very careful and always ensure you are within compliance.

Credit Loss Reserves and Foreclosed Inventory Expenses Eat at Fannie Mae’s Earnings

by Jann Swanson

Fannie Mae has reported First Quarter 2010 Earnings Results.

The government-sponsored enterprise, which has been operating under government conservatorship since September 7, 2008, lost $11.5 billion in the first quarter compared with a net loss of $15.2 billion in the fourth quarter of 2009. Fannie Mae paid $1.5 billion to the Treasury Department during the quarter in the form of dividends on senior preferred stock held by the U.S. government.

The loss attributable to common stockholders was $13.1 billion or ($2.29) per diluted share.  The shareholder loss in the fourth quarter of last year was $16.3 billion or ($2.87) per diluted share.

Net revenues in the current statement were $3 billion compared to $5.8 billion in Quarter Four and $5.2 billion during the same period one year ago.  Net interest income was $2.8 billion compared to $3.7 billion last quarter and $3.3 billion a year ago; and guarantee income was $54 million compared to $1.9 billion and $1.8 billion respectively.

Fannie Mae said that its first-quarter results were driven primarily by credit-related expenses, which are total provisions for credit losses and foreclosed property expenses. Credit related losses for the quarter were $11.88 billion compared to $11.92 billion in the fourth quarter of 2009.  The losses, however, were substantially lower than the $20.87  billion reported one year ago.  These expenses remain at elevated levels because of the on-going recession and weakness in the housing market; weakness the company says it expects will continue through 2010.

The company made the following statement in its First Quarter Form 10-Q filed with the Securities and Exchange Commission:

"There is significant uncertainty in the current market environment and any changes in the trends in macroeconomic factors that we currently anticipate, such as home prices and unemployment may cause our future credit-related expenses and credit losses to vary significantly from our current expectations.   Although Treasury’s funds under the senior preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting dividend payments are substantial.  Given our expectations regarding future losses and draws from Treasury, we do not expect to earn profits in excess of our annual dividend obligation to Treasury for the indefinite future.  As a result of these factors there is significant uncertainty as to our long term financial sustainability."

The loss resulted in a net worth deficit of $8.4 billion as of the end of March, taking into account a $3.3 billion reduction in the deficit related to the adoption of new accounting standards and unrealized gains on available-for sale securities during the first quarter.

Fannie Mae’s balance sheet reflects several changes because of new accounting rules including:

• A significant increase in loans and debt and a decrease in trading and available-for-sale securities.
• Separate presentation of the elements of the consolidated MBS trusts (such as mortgage loans, debt, accrued interest receivable and payable) on the face of their condensed consolidated balance sheets.
• Significant increase in allowance for loan losses and significant decrease in reserve for guaranty losses.
• Elimination of substantially all previously recorded guaranty assets and guaranty obligations.

During the quarter Fannie Mae purchased or guaranteed an estimated $191.4 billion loans based on the unpaid principal balance.  This included $40 billion in loans purchased in March from Mortgage Backed Securities (MBS) Trusts. Not including the delinquent MBS purchases, Fannie Mae’s purchases financed approximately 516,000 single-family homes and 61,000 multi-family units.  The corporation had a 40.8 percent share of the single-family market.

The company acquired 61,929 single-family properties through foreclosure during the first quarter compared to 47,189 in the fourth quarter.  The total inventory of owned single-family real estate at the end of March was 109,989 compared with 86,155 at the end of December. 

The GSEs single-family serious delinquency rate increased to 5.47 percent as of March 31, 2010 from 5.38 percent as of December 31, 2009, but grew at a slower pace than in each quarter of 2009 as they continued to work with servicers to reduce delays in completing workouts and more modifications and foreclosure alternatives. Total nonperforming loans in Fannies’ guaranty book of business were $223.9 billion as of March 31, 2010, compared with $216.5 billion as of December 31, 2009.

Fannie Mae said it had maintained pricing and eligibility standards that promote sustainable home ownership and stability and the risk profile of the loans it acquired remained strong.  Single-family loan acquisitions had a weighted average original loan to value ratio of 69 percent and a weighted average FICO score of 758.

HERE are tables and graphs presented by Fannie Mae in their Credit Supplement.

Due to the loss, Fannie will join Freddie Mac in asking the Treasury Department for additional funding . Fannie Mae has already asked the Acting Director of the Federal Housing Finance Agency (FHFA) which acts as Fannie’s conservator, to request a cash infusion from Treasury of $8.4 billion by the end of the second quarter, June 30, 2010.

Fannie Mae President and CEO Mike Williams said of the financial results, "In the first quarter we continued to serve as a leading source of liquidity to the mortgage market, and we made solid progress in our ongoing efforts to keep people in their homes.  Working with our lender partners, we completed 94,000 loan modifications in the quarter, more than half of which were conversions of trial modifications under the Obama Administration’s Home Affordable Modification Program."

For the first time in four years, demand for new homes is outstripping supply but until there is strong job creation the economy will remain stagnant.  in February home prices posted their first year-over-year increase since December 2006, they inched up 0.6% compared to February 2009.  Home prices actually fell in January by 0.9%.  Fannie Mae has new guidelines that go into effect this August for interest-only loans, a homebuyer or owner will need 30% equity or down-payment, 720 FICO score and 24 months of reserves in the bank.  The home-buyers tax credit expired April 30, now we will see what the true home market will be without government intervention.  For anyone in the mortgage business, the new GFE (Good Faith Estimate) has been a mess, those in Washington that approved making a one page document into a three page one were idiots.  It is more complicated to clients, many lenders have different opinions on how the numbers on the forms work and the penalties to the mortgage industry are an overburden.  The more that government tries to fix the housing industry, the worse it gets.

Freddie Mac Needs More Funding to Support Housing. Expects Prices to Fall Further

by Jann Swanson

Freddie Mac released its financial reports for the first quarter of 2010 showing a net loss of 6.7 billion and announced that its Conservator, the Federal Housing Finance Agency (FHFA), will be asking the Department of the Treasury for a draw of $10.6 billion under the Senior Preferred Stock Purchase Agreement.

This request, which is proforma as Treasury has already authorized nearly unlimited draws, will bring the total borrowed from the Treasury by Freddie to $61 billion.  Freddie said it expects to request additional draws under the Purchase Agreement in future periods and the Congressional Budget Office estimates that the ultimate cost to taxpayers from bailing out Freddie Mac and Fannie Mae will be $389 billion through 2019.

The net loss attributable to common stockholders during the quarter was $8.0 billion or $2.45 per diluted common share.  This reflects $1.3 billion in senior preferred stock dividends payable to Treasury. Freddie had reported a net loss of $6.5 billion or $2.39 per share for the fourth quarter of 2009.

The corporation’s net worth deficit was $10.5 billion at the end of the quarter compared to positive net worth of $4.4 billion at December 31, 2009.  This shift resulted from the losses and dividends outlined above but was also driven, Freddie said, by significant adverse impact of the adoption of new accounting standards related to transfers of financial assets and consolidation of variable interest entities (VIEs) effective at the beginning of the year.  The change forced Freddie to move all non-owned mortgages they guarantee onto their books and resulted in a decrease in total equity of 11.7 billion. 

Freddie also reported provision for credit losses of $5.4 billion, down from $7.0 billion for the fourth quarter of 2009; derivative losses of $4.7 billion due to the decline in long-term rates during the quarter; and net interest income of $4.1 billion.  The last figure reflects an increase in the average balance of non-performing mortgage loans for which the company recognizes debt funding costs but not interest income.

The company continued to experience deterioration in its single-family credit guarantee portfolio during the quarter with the single family delinquency rate including Structured Transactions increasing from 3.98 percent in Quarter Four, 2009 to 4.13 percent. The increase was despite the positive impact of seasonal factors and a higher volume of loans completing modification or proceeding to foreclosure during the quarter.  Single family net charge-offs increased to $2.8 billion from $2.4 billion, primarily due to an increase in foreclosure transfers.

Single-family non-performing assets, including real estate owned properties and delinquent loans underlying the company’s issued PCs and Structured Securities, increased to $115 billion at March 31, 2010, compared to $103 billion at December 31, 2009.

Freddie said its continued support of the housing market during the quarter included approximately $97 billion in liquidity and increased efforts to prevent foreclosures.  The corporation helped finance more than 390,000 single family homes and 50,000 units of rental housing; helped refinance 320,000 homes; and continued with its administration of the Home Affordable Modification Program.  The company also assisted 71,000 homeowners to identify alternatives to foreclosure.  Its efforts resulted in 44,076 loan modifications, 8,761 borrowers receiving repayment plans; implementation of 8,858 forbearance agreement and 9,619 homes sold prior to foreclosure.

Freddie Mac CEO Charles E. Haldeman, Jr. said that Freddie Mac’s support of the housing market is vital but expressed concern about the future of the housing market.   "Though more needs to be done," he said, "we are seeing some signs of stabilization in the housing market, including house prices and sales in some key geographic areas, "But as we have noted for many months now, housing in America remains fragile with historically high delinquency and foreclosure levels, and high unemployment among the key risks.

"Though we are encouraged by signs of modest stabilization in some trends on the credit side of our single-family business, given the many uncertainties in the economy, we remain cautious," Kari said. "Credit quality remains a major focus for the company, and we are pleased that new business being delivered to us is of notably high credit quality."

The company said it anticipates a further decline in home prices before the market begins a sustained recovery and sees four big risks over the next year;

• An increase in distress sales as lenders try to reduce the backlog of delinquent loans and owned real estate.
• Expiration of the homebuyers’ tax credit.
• A probable increase in interest rates during the year, and
• The likelihood that unemployment rates will remain high.

The company also noted that, home prices aside, credit losses will probably remain "significantly above historical levels for the foreseeable future due to the substantial number of borrowers in our single-family guarantee portfolio that currently owe more on their mortgage than their home is worth in today’s market."

Fixing the Housing Market: Subsidize Responsible Homeowners

by Amy Tierce

Here’s a novel idea, let’s help the employed, good credit home owners who are making their payments and want to stay in their homes. Let’s help these borrowers save money on their mortgages.
Imagine putting $300 dollars a month into the hands of a person who can actually meet all of their obligations, that $300 would become real disposable spending money. Wouldn’t that help the economy?
We are dumping millions of dollars to support people who are in trouble on their mortgages, in many cases these are people who over stretched, underemployed and really can’t be helped because they never qualified for their mortgage obligations in the first place.
But what about the others…

There are at least three categories of responsible homeowners who deserve some support and cannot get it.  Who are they?
1. Five years ago these borrowers bought their first home, they put 20% down,  they had and continue to have excellent credit, income and employment history.  Five years ago the Fannie Mae underwriting engine called DU for desktop underwriter or the Freddie Mac underwriting engine, LP or Loan Prospector approved these borrowers, they had at the time a back end ratio of 65% of their total income.  That was fine, the credit risk was evaluated and the borrowers were approved.
Today those borrowers still have perfect credit, have a perfect mortgage payment history, are still employed but now they cannot benefit from today’s low interest rate environment because even with the monthly savings that a refinance will bring them their back end ratio drops from 65% to 59% and that loan is declined. Today the maximum back end ratio allowed is 50%.
With a perfect payment history, do we really believe that these borrowers will stop making their payments when those payments drop by almost $300 a month?
2. Borrowers bought a condominium in a 3 unit property with 20% down.  At the time all three units were owner occupied.  Borrowers have again a perfect payment history and good employment and credit.  The other two unit owners in the building tried to sell their condos, when they couldn’t because of the today’s depressed real estate market they choose to rent instead.  Now the remaining owner occupant cannot refinance because the condominium does not meet the new more restrictive guidelines.  2/3 units must be owner occupied.  The remaining owner cannot sell easily either because a buyer will also have issues getting financed because of the condo regulations.
It is also true that a few years ago that same buyer could have purchased in a property with 2/3 units investor owned and gotten the loan approved with a “limited project review” finding, but today they cannot refinance the identical transaction because the condo is no longer acceptable by Fannie Mae or Freddie Mac.
On another, more ridiculous note, we are seeing refinance loans declined because the condo project does not have the utilities that are ‘separately metered’.  Are you kidding me?  This loan was fine when it closed and now because the 3 unit association has one central heating system the loan does not qualify for a refinance?
I appreciate that in the “go go” years of mortgage finance the underwriters may not have read every word on the condo docs, or the appraisal and that some of the loans approved at that time did not meet guidelines but to punish quality borrowers today because of lax underwriting standards in past seems short sighted and unfair.
We will pay $3000 to a homeowner in a short sale to assist with moving costs but we cannot find a way to help a high credit quality borrower save some money on their mortgage because the rules have changed and the building does not qualify.
3. Then there are the borrowers whose appraisals don’t come in.  Yes there is the Fannie Mae ‘Refi Plus’ program and the Freddie Mac ‘Home Possible’ program to assist these borrowers but not every one gets approved for reasons we cannot discern. 

What about the borrowers who have a first and second mortgages, there is absolutely nothing we can do for them in this environment if they appraisal comes in too low to roll the second mortgage into the first mortgage.  Second mortgage servicers are still not subordinating their mortgages essentially handcuffing the borrower from any ability to refinance to take advantage of the current market.
Can we make it mandatory that second lien holders subordinate purchase money second mortgages if the credit profile meets certain criteria?  Again, I would suggest that a second mortgage is more secure if the borrower is saving $300 a month on their first mortgage.
There is an easy solution to put more money into our economy, and to secure and stabilize homeownership for those who have proven that they can be successful homeowners: Create a true streamline refinance program. 

If the borrower has a perfect mortgage payment history, remains employed, and meet some general credit score requirement – simply refinance their mortgage no matter what the property value, loan to value or condominium make up.  The servicers have these mortgages already, Fannie Mae and Freddie Mac have these mortgages on their books, and do these mortgage holdings become more risky if we drop the payments for the borrowers?
The large mortgage servicers cannot possibly meet the needs or return the calls of each borrower seeking relief.  The most qualified of those have been left out of the dance and we are doing that part of the population a huge disservice.  We are rewarding consumers who cannot meet their obligations and are over extended and we are completely ignoring the responsible consumers who should be shown some love and appreciation.  Remember these are also the consumers who are paying the bulk of income taxes in this country.
Fannie Mae and Freddie Mac need to create a streamline program, one with very easy processing guidelines, and these refinances should go back to their original servicers so that they do not loose the servicing revenue from their portfolios.  The servicers could pay a flat per loan fee to correspondent lenders or brokers to originate the loans. Streamline the closing requirements to keep the closing costs low, make this a true streamline process so that the originating company can process and close these loans quickly and help millions of American homeowners who have been left out of the conversation but deserve more than anyone to get some reward for their good credit and fiscal management.

By Jann Swanson

On Tuesday the House Financial Services Committee approved a request by the Federal Housing Administration (FHA) to raise the ceiling on annual FHA mortgage insurance premiums from its current level of 0.55 percent.

FHA had requested the increase as one part of a plan aimed at shoring up its capital reserves which have dropped below the 2 percent required by law.  The agency already raised the up-front premium charged to borrowers closing effective April 9.  If the full Congress approves the annual increase, FHA will then shift some of the upfront premium to an annual premium to reduce the burden on borrowers at closing.

FHA says it intends to gradually raise the annual premium to 1.5 percent. 

FHA revealed late last year that its current reserves are at .53 percent, but officials have said that their tightened lending requirements as well as the increase in premiums would allow them to restore the levels by collecting an additional $5.8 billion over the next few years.  The Congressional Budget Office has put the number at a much more conservative $1.9 billion.

While approving the increase, the Committee defeated a proposal sponsored by Scott Garrett (R-NJ) which would have increased the minimum down payment for FHA guaranteed loans from 3.5 percent to 5 percent.  It also would have prohibited sellers from participating in the buyer’s closing costs and prohibited the inclusion of any initial services charges such as appraisal, inspections, and other fees in the principal amount of an FHA mortgage loan.  The FHA has already reduced the amount that a seller can contribute to the buyer’s closing costs from 6 percent of the loan amount to 3 percent.  Garrett has also submitted separate legislation which would prohibit the buyer from rolling the upfront premium into the loan which would effectively increase the cash required of the borrower at closing.

Had the Garrett Amendment survived the Committee vote it could have had a considerable negative effect on the housing market.  FHA guaranteed loans have historically been a minor factor in mortgage financing, but in the last few years, as credit tightened, the FHA was forced to increase its funding efforts up to 25 percent of all mortgage loans and an even high proportion of loans to first time home buyers.