mortgage

On Friday afternoon, just hours after swearing in, President Donald Trump suspended a Federal Housing Authority (FHA) mortgage premium rate cut issued by former President Barack Obama earlier in the month. The quarter-point cut would have taken effect on January 27.

An FHA loan, with its low down payment and less stringent credit score requirements, offers first-time and low-income homebuyers the opportunity to get a foot in the proverbial door. Aimed at countering rising interest rates following the November elections, the Obama administration’s mortgage insurance premium (MIP) cut would have made it possible for a greater number of buyers to be eligible for credit based on their debt-to-income ratios. For even more buyers, it may have made a monthly mortgage payment more affordable.

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Courtesy Kirwan Institute This 1937 Home Owners' Loan Corp. map of Dallas (laid over a current map for reference) shows who could get a loan, and who couldn't.

Courtesy Kirwan Institute
This 1937 Home Owners’ Loan Corp. map of Dallas shows who could get a loan, and who couldn’t.

If the lending practices of the 1940s were still in place, would you have been able to get the mortgage you currently have? In some neighborhoods in Dallas, you’d be fairly confident in saying yes. But in others, the answer might surprise you.

A week ago, I was able to attend a workshop hosted by Children’s Medical Center and Ohio State’s Kirwan Institute about (in part) lending practices in the post-Depression era. Many of these practices openly continued until 1968, when they were forbidden by law. But they continue to shape and affect some neighborhoods even today.

But first, some history on home ownership prior to the Depression. Prior to the FDR era, home finance was not the standard 80/20 30-year mortgage we are all familiar with. Home ownership tended to be for the wealthy, or those who could afford variable rates, very high down payments and short terms. Many renegotiated their mortgage every year. Many also were faced with a large balloon payment at the end of the loan.

Partly in a bid to create steady work for construction sector and partly to address pressure placed on the housing market by banks reselling foreclosures (nearly 10 percent of all homes were in foreclosure at the height of the Depression and around 250,000 homes per year were foreclosed upon between 1931 and 1935), the federal government stepped in to modify the business of financing a home.

One of the results of that intervention was the Home Owners Refinancing Act of 1933, which created the Home Owners’ Loan Corporation, or HOLC. The HOLC raised funds through government-backed bonds, purchased the defaulted mortgages and then reinstated them. The agency also changed the terms for mortgages entirely, creating the mortgage as we know it now – fully amortized mortgages that were fixed rate and long term. (more…)

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Like they say, there’s good news and there’s bad news.

Realtors and brokers won’t come out unscathed from the federal government shutdown, as a report from the National Association of Realtors shows. If you’ve got a closing coming up, best be prepared to have some hiccups.

While the NAR report says that FHA will “continue to endorse new loans in the Single Family Mortgage Loan Program, multi-family loans won’t be processed. VA loans will be processed, too, and flood insurance from FEMA will get a government stamp, and Fannie Mae and Freddie Mac are still keeping the gears greased.

On the flip side, if you have to process IRS forms or verify Social Security numbers through the SSA, you’re out of luck because these offices are closed.

Read the whole document below.

NAR Government Shutdown Brief

I hate to put a damper on your holiday week, but hope you saw this item: the agency responsible for guaranteeing most of our housing loans, may need a bailout: FHA. The agency doesn’t make loans, but it backs lenders if borrowers stop paying, like a nice parent or co-signee. With this guarantee in place, banks are more comfy offering mortgages to borrowers with lower credit scores or incomes. It also allows prospective homeowners to buy property with down payments as low as 3.5%, such as first time home-buyers. So even with 872,000 new housing starts in September, home prices up nationally by 11.7% and us  humming right along with a 29% increase in home sales in North Texas in October, we hear the FHA may be headed to the ER:

The Federal Housing Administration, which has played a critical role in stabilizing the housing market, said it ended September with $16.3 billion in projected losses — a possible prelude to a taxpayer bailout.

The precarious financial situation could force the FHA, which has been self-funded through mortgage insurance premiums since it was created during the Great Depression, to tap the U.S. Treasury to stay afloat.

The agency said a determination on whether it needs a bailout won’t come until next year.

The FHA is required to maintain enough cash reserves to cover losses on the mortgages it insures. But in its annual actuarial report to Congress, the FHA said a slower-than-anticipated housing market recovery has led its reserves to fall $16.3 billion below anticipated losses.

The FHA’s cash reserves aren’t supposed to drop below 2% of projected losses. They ended the 2012 fiscal year at -1.44%, down from the seriously low level of 0.24% at the end of 2011.

Isn’t it interesting how we didn’t hear one peep about this BEFORE the election, just AFTER?

So it’s a delinquency problem of people not paying their mortgages, and FHA cannot keep up: 11.14% hosed them in September, down from 11.89% in June, and 12.09% in 2011. But the super delinquent category (more than 90 days past due) is up from 8.39% in 2011 to 8.54% in 2012. Which is weird because A,  the “housing market is back rah rah!” and B, everyone is supposed to be making more careful loans, not just handing out money to anyone who fogs a mirror like they did in the boom without checking to see if they could actually pay back the loan which got us here. (Whew!)

And as usual, my mantra: the midde class will get hosed. FHA insures some 16% of home purchases (in 2010, ’twas 19.1%), and they’ve taken steps to mitigate the loss — which include mortgage insurance rate hikes and keeping borrowers paying even after their loan reaches 78% value of the home — or they have a 12% equity. In other words, more skin in the game. And I think they are going to try to unload the bad super delinquents through short sales etc — good.

But lest we panic — Fiscal Cliff ? — this does not mean that FHA has insufficient cash to pay its claims or needs a cash infusion, it says. Last Thursday the Department of Housing and Urban Development, which oversees FHA, said there’s only a 5% chance the agency will run out of cash in the next seven years. The decision about whether FHA needs an infusion will be determined by the calculations used in President Obama’s fiscal 2014 budget proposal, released in February.

Now I’m panicking.

We all know how much this administration loves housing. Let them eat rentals. Already the folks at The Atlantic say it’s time to end the government’s  “massive and distorted” support of housing.” Four words: First time homebuyer’s credit. “End lending to people who cannot afford to repay their loans” (we have); “help homeowners establish meaningful equity in their homes” (how, higher down payments they don’t have since they’ll be paying higher taxes?)”return to the agency’s historical roots: help the truly needy” (defined as…). “Finally, step back from markets that can be better served by private lenders and insurers.”

Right. Ever heard of Dodd-Frank? Get this:

FHA’s FY 2012 Actuarial Study for its main single family program shows that its capital position has turned negative, by $13.5 billion. That’s a shift of $23 billion in economic value in a single year, and it puts the 78-year-old agency $34.5 billion short of its legal capital requirement.

If it were a private company, it would be shut down.

Really? On a 5% chance the agency will run out of money? For God’s sake, even the Hostess Twinkie company is going to mediation to avoid a shut down — surely we can figure something out for housing?

 

 

 For decades, it was a pat answer. If the borrower’s home mortgage application had a little ugly around the edges, push them toward an FHA loan.

That’s because FHA loans would accept all of the hard cases that made conventional mortgage lenders turn up their noses. From wee down-payments and less-than-pretty credit to iffy loan-to-value or debt-to-equity ratios, FHA loans were the very best bet.

That may not be the case any longer, says my friend Marcus McCue, Senior Vice President of Guardian Mortgage Company.

Have FHA loans grown hairy legs, gotten more expensive, or have conventional loans become cheaper? What’s happening here?

It’s actually both. Thanks to all the fun we had during the real estate boom, and loosey-goosey lending practices, we consumers get spanked. FHA mortgages now require a mortgage insurance policy (MIP) that costs 1.75% upfront, compared to the past rate of just 1%. Plus, FHA loans also now require an annual MIP payment of 1.2% for a 30-year fixed mortgage (assuming the buyer made a down payment of 5%). Together, these MIP payments are pushing the cost of FHA loans up considerably.

Another past advantage of FHA mortgages was that they allowed family members to provide a down payment, while conventional mortgages did not. Now, however, most conventional lenders are allowing 100% of the down payment from family members, putting both types of loan on even footing in this regard.

Question: Is there some magic number for a borrower’s credit score where they will be better off financially with a conventional mortgage?

Borrowers with scores as low as 660 will, in most situations, find conventional lending to be cheaper. Mid-credit-score borrowers of 720 or greater will save quite a bit by going the conventional route.

Question: Can you give me a real-world example of the difference between FHA and Conventional loans today?

Yes. This example is based on an actual analysis we recently compiled for a borrower. We looked at a home that was $213,500 with 3.5% down (FHA loan) and 5% down (FHA & Conventional). In addition, we looked at a 3.75% rate and a higher 4.125% rate on the conventional loan (as if the borrower was a poorer credit risk) and the conventional loan was still a better choice because there was no MIP.

Money Down Estimated Monthly Payment

3.5% down (FHA – 3.75% rate) $6,394 down, $1,735 monthly payment

5% down (FHA – 3.75% rate) $9,670 down, $1,708 monthly payment

5% down (Conventional – 3.75% rate) $9,919 down, $1,603 monthly payment

5% down (Conventional – 4.125% rate) $10,214 down, $1,533 monthly payment

In the two highlighted examples, the difference between the FHA and the Conventional loan is approximately $37,500 over the course of the loan. In the last example, the lender paid the mortgage insurance rather than the homeowner, which made a difference of over $63,000 over the course of the loan.

Question: If I want to compare a conventional loan vs. an FHA loan for myself, where can I go?

There are some excellent online calculators that will help borrowers and their agents determine which flavor of loan works best in their situation. Check out the online calculator from Radian. For your comparison, select “Borrower-Paid-Monthly (BPMI) Non-Refundable” for a conventional loan. Then you can select the other products you’d like in the comparison.

If you’re an agent looking to help a client, then you may want to delve into the issue a bit more. These sites have FAQs and more technical information:

• Genworth – Conventional PMI vs. FHA resource center

• Radian – Conventional PMI vs. FHA Frequently Asked Questions

• MGIC – Conventional PMI vs. FHA Sheet

If you have additional questions about your particular situation, feel free to contact Marcus McCue at 972-200-3380, marcusmccue@gmc-inc.com or on Facebook.

 

There’s no April Fool’s about it: new FHA regulations will make mortgage loans more expensive in just a few short days. Major changes coming down the pike make it even more urgent that you get clients into the pre-approval process before April 1, 2012.

What’s happening? The Upfront Mortgage Insurance Premium (MIP) is going up. I checked in with Marcus McCue over at Guardian Mortgage to see what the hec homebuyers need to know:

• The MIP applies to both FHA purchase and refinance transactions

• The FHA Upfront MIP (which rolls into the loan amount) will increase from 1.00% to 1.75%.

• $1,500 will go on the loan balance of a typical $200,000 loan, and increase homebuyer’s monthly payments about $7.00 ($420 over just five years) at current FHA rates.

• The FHA Annual MIP (which is the monthly MIP included in the borrowers mortgage payment) on a 30-yr Fixed will increase from 1.15% to 1.25% with a down payment of 5.00% or less.

• Homebuyers will pay an additional $16 a month ($960 over just five years) for their Annual MIP if they have a typical $200,000 loan.

• Affects all FHA case numbers assigned on or after April 1, 2012.

For a typical $200,000 loan, that adds up to $1,380 during the first five years alone. FHA case numbers are assigned when a borrower applies for financing with the lender and has a verbal accepted offer or executed contract on the home, so getting them pre-approved now to ensure a quick-turn on an offer and contact when submitted to the seller could save your clients thousands over the life of the loan.

Stay tuned for even more changes in the FHA program expected later this year, including the possibility of a reduction in the seller concessions to the buyer of 3.00% or $6,000 (whichever is higher).

Editor’s note: Grrrrreeaatttt…