Month: April 2011

FHA mortgages may still beat loans available from private-sector rivals

Although it has raised fees, the FHA continues to offer much higher and more flexible maximum debt-to-income ratios, far more generous underwriting and lower down payments than conventional lenders.

By Kenneth R. Harney, LA TimesApril 24, 2011
Reporting from Washington—

Is the Federal Housing Administration losing some of its post-boom, post-bust oomph? Is the Obama administration’s plan to gradually throttle back the FHA’s home mortgage insurance volume already having effects — and if so, what might this mean to you as a buyer? There are definitely signs that something is brewing:

•Total applications for FHA-insured single-family mortgages are down 30% year over year through March, according to the agency’s data. Applications from prospective home purchasers are down 35%. The FHA’s popularity with buyers previously had sustained its high origination volumes.

•The FHA put its second increase in premium charges in six months into effect April 18. Higher premiums mean higher monthly payment requirements for buyers and could have the effect of squeezing some consumers with tight budgets out of the market entirely.

•The private mortgage insurance industry, which competes with the FHA for borrowers who make small down payments, is touting its newly resurgent conventional mortgage products, which may offer significant monthly savings compared with the FHA.

•Some of the agency’s long-standing advocates are wondering aloud whether the administration’s policy tilt toward more private-sector involvement in the mortgage arena may be hurting first-time buyers who can’t bring large cash resources or high credit scores to the table.

“Here you have our last refuge for ordinary people to buy a home, and the government is making it tougher to qualify” by raising insurance premiums, said Mario Yeaman, senior loan officer for Milestone Mortgage in Manhattan Beach.

Brian Chappelle, a principal of Potomac Partners, a mortgage banking industry consulting firm in Washington, D.C., said he worried about the direction the FHA had begun pursuing. “FHA’s role was designed to be the first rung on the homeownership ladder. If you raise fees, increase down payments and lower mortgage limits, it would be a serious impediment for future buyers and the economy.”

Chappelle’s concern about higher down payments stems from the Obama administration’s February “white paper” on housing reform in which policymakers called for higher down payments across the board — including at the FHA. To date, no increases have been proposed by the agency, but some analysts believe that a move to a 5% minimum down payment — up from the current 3.5% — would not be surprising in the months ahead. The FHA’s maximum loan amounts might also drop significantly in October if Congress does not renew the economic recovery law ceilings, which now top out in high-cost areas at $729,750.

Given these developments, how does FHA financing stack up against rivals in the low-down-payment space? Private mortgage insurers have a quick response: They say their lower monthly costs already are winning back some of the business they lost to the FHA during the recession.

For instance, Radian Guaranty Inc., a major home loan insurer, claims that in the wake of the FHA’s premium increases, a low-down-payment conventional mortgage carrying its insurance coverage requires monthly payments 15% lower than FHA-insured mortgages for borrowers with FICO credit scores above 720.

Radian provided this cost-comparison example to illustrate: Say you’ve got a FICO score above 720, and you need a $285,000, 30-year loan with 5% down at a 5% interest rate. The FHA mortgage would cost $1,806 in principal and interest a month. The same loan insured by Radian would cost from $1,530 to $1,753 a month, depending on the type of premium payment plan you chose.

Brien McMahon, chief franchise officer of Radian, said that as a general rule, private insurance on low-down-payment loans would beat the FHA whenever the buyer put down 5% and had a 720 or higher FICO score or put down 10% and had at least a 680 FICO.

So does this mean that all buyers with low down payments should abandon the FHA and switch to conventional loans? Hardly. David Van Waldick of Western Realty Finance in Carlsbad, Calif., said the majority of FHA users couldn’t fit into the private insurers’ high-FICO, strict-underwriting model, so those vaunted savings may be illusory.

The FHA, by contrast, continues to offer much higher and more flexible maximum debt-to-income ratios, far more generous underwriting and lower down payments, and will accept FICO scores that conventional lenders and private insurers won’t touch.

Bottom line: If you’re purchasing a home with a small down payment, check out both the FHA and the private alternative with your loan officer. It’s true that the FHA has just gotten a little more expensive. But it may still have the total package you need to do the deal.

‘Uneven’ housing recovery continues

By Annalyn Censky, staff reporterApril 20, 2011

NEW YORK (CNNMoney) — Sales of existing homes increased in March, “continuing an uneven recovery” in real estate, an industry group said Wednesday.

Home sales rose at an annual rate of 5.1 million in March, up 3.7% from February, the National Association of Realtors said Wednesday. However, sales were 6.3% lower than in March 2010.

Government reports released a day earlier showed new home construction and permits for future construction both ticked up in March.

Those reports are not bad, but not great either. Despite slight upticks in home sales and construction, the housing sector is still in the doldrums as supply continues to far outweigh demand for homes.

“Even as buyers scoop up deals of a lifetime, the river of foreclosed properties continues to flow,” Douglas Porter, deputy chief economist at BMO Capital Markets, said in a note to investors Wednesday morning.

The median home price slipped 5.9% to $159,600, compared to a year earlier.

Meanwhile, some buyers are still finding it tough to get a mortgage, Lawrence Yun, chief economist for the National Association of Realtors, said in a release. The average credit score to get a conventional mortgage has risen to 760 from 720 in 2007.

“Although home sales are coming back without a federal stimulus, sales would be notably stronger if mortgage lending would return to the normal,safe standards that were in place a decade ago — before the loose lending practices that created the unprecedented boom and bust cycle,” he said.

First-time buyers purchased 33% of homes in March, down from 44% in March 2010. Investors accounted for 22% of sales, up from 19% a year ago.

All-cash sales were at a record high in March, accounting for 35% of existing home sales.

The report was roughly in line with economists’ forecasts for home sales to grow at an annual rate of 5 million. To top of page

IMF Urges US To Weigh Cutting Mortgage Interest Tax Deduction

By Alan Zibel and Ian Talley

Published April 06, 2011| Dow Jones Newswires

WASHINGTON -(Dow Jones)- The U.S. should consider capping or cutting the popular tax deduction for mortgage interest as it prepares to debate what should replace mortgage giants Fannie Mae (FNMA: 0.39, -0.00, -0.08%) and Freddie Mac (FMCC: 0.39, -0.00, -0.76%), the International Monetary Fund said Wednesday.

The IMF, in an analysis of housing finance systems around the world, said an Obama administration paper released earlier this year makes progress toward needed changes in the U.S. mortgage system. But the report criticized the U.S. for not tackling the popular tax deduction for mortgage interest, which the report termed “expensive and regressive.”

The U.S. government’s support of the housing market “has been pervasive but has not yielded many of the expected benefits to prospective or existing homeowners,” the report said. “It is clear that an overhaul is needed.”

“As a first step, we would very much recommend that the U.S. would at least cap the mortgage interest deductability,” said Ann-Margret Westin, an IMF senior economist and one of the authors of the housing report. She approved of the recommendation by the U.S. fiscal commission to halve the mortgage limit for deductions and to let it apply only to private residences, but the IMF said any such move would have to be undertaken over time.

The report is one chapter of the IMF’s larger annual Global Financial Stability Report that will be published in full next week.

More generally, the IMF confirmed that government participation in housing finance throughout rich countries exacerbated house-price swings and amplified mortgage credit growth during the run-up to the crisis. The warning advises emerging countries as they seek to develop their own economies.

“Countries with more government involvement also experienced deeper house price declines,” the IMF said.

Pointing to the U.S., both the explicit and implicit subsidies offered by authorities fueled a boom in housing debt and helped overinflate prices. The popping of the housing market helped to spark the global credit crisis.

“The faster you grow, the harder you fall,” said Westin.

The U.S. has a long tradition of providing government support for housing through government-controlled mortgage giants Fannie Mae, Freddie Mac, the Federal Housing Administration and other government agencies. Lawmakers on Capitol Hill are starting what promises to be a lengthy debate about whether to reduce federal support, including winding down Fannie Mae and Freddie Mac.

The two mortgage buyers have been under federal control since September 2008, a rescue that has cost taxpayers $134 billion to date. Fannie Mae and Freddie Mac buy up loans and package them into securities with a guarantee against default.

In February, the administration called for eventually phasing out Fannie Mae and Freddie Mac, releasing a “white paper” providing three options for what might take their place, each with varying levels of government involvement.

The IMF report noted that “an overhaul of the housing finance system will take years to complete” but called on U.S. officials to “step up their efforts now to develop and implement an appropriate action plan.” It did not recommend a specific approach for the U.S. other than to say the role of Fannie and Freddie “should be reassessed.”

The report said that there “is a need for better-defined and more transparent government participation in the housing market, with all such policy measures, including strict affordable housing policy goals, transparently shown in the government’s budget.”

A presidential deficit commission proposed late last year to reduce the mortgage-interest deduction, the largest U.S. government subsidy for housing. Congress, however, has repeatedly fended off efforts to pare back the mortgage tax break, arguing it makes homeownership more affordable and the real-estate industry is warning that any policy changes could be disastrous for the fragile housing market.

The deduction is generally disliked by economists, who say it mostly encourages wealthier Americans to take on more debt. The deduction applies only to the roughly one-third of taxpayers who itemize their returns, typically those with higher incomes.

They say industrialized nations such as Canada and the U.K. have achieved comparable rates of homeownership without such incentives. The U.K. gradually reduced its mortgage-interest break over 12 years, scrapping it for good in 2000 without hurting homeownership rates.

The IMF report noted that the U.S. provides a “plethora of tax breaks and subsidies, including mortgage interest deductions at the federal level, as well as state and local property tax deductions and exclusion from capital gains taxation.”

More broadly, as emerging economies take heed from the housing crisis that enveloped the U.S. and other advanced countries, the IMF said best practice should include better risk management and underwriting standards, more careful government involvement and more prudent incentives for lending through the capital markets.

Read more:


Changes in mortgage finance rules could hurt housing recovery

The government is proposing to limit the best interest rates and terms to buyers who can put 20% down, meet stringent debt limits and have sterling credit.

By Kenneth R. Harney, LA Times

April 10, 2011

Reporting from Washington

You may have seen reports that the federal government is proposing new mortgage finance rules under which only home purchasers who can afford a minimum 20% down payment on a conventional loan would get a shot at the best interest rates and terms.

That is correct, and it’s deeply sobering news for large numbers of first-time and moderate-income buyers who can’t come up with that much cash or afford to pay higher rates.

But some of the other requirements that federal agencies and the Obama administration are proposing in the same plan have gotten much less attention yet could prove just as troublesome for consumers:

•Strict mandatory debt-to-income limits. Under the proposal, to get the best mortgage rates, you would need to spend no more than 28% of your gross monthly income on housing-related expenses, and you couldn’t have total monthly household debt that exceeds 36% of your income.

There would be no flexibility to go beyond these ceilings, unlike in today’s marketplace, in which Fannie Mae and Freddie Mac consider debt-to-income ratios along with other factors through their electronic underwriting systems. Freddie Mac, for example, has an overall debt-ratio limit of 45% of an applicant’s stable monthly income.

•To refinance your existing mortgage and replace it with one carrying the best interest rate, you’d need no less than a 25% equity stake in your house to qualify. If you sought to take any additional cash out through a refi, you would need 30% equity. Today’s typical requirements for a conventional refi are nowhere near as strict.

•Pristine credit standards. For example, if you were 60 days late on any credit account during the previous 24 months, you would be ineligible for a mortgage at the best terms.

These are all core features of what may be the most sweeping and controversial set of changes in decades for the housing and mortgage markets. The so-called “qualified residential mortgage,” or QRM, proposals were released at the end of March by banking, securities and housing regulators, along with the Department of Housing and Urban Development. The agencies were required by the 2010 financial reform legislation to come up with new standards for low-risk conventional mortgages.

Congress did not specify what a “safe” mortgage should look like but directed the agencies to consider such factors as full documentation of borrower income and assets plus avoidance of toxic features such as negative amortization and balloon payments. Congress was silent on the subject of minimum down payments.

Under the law, loans that do not meet the strict QRM tests will be pushed into a less-favored, higher-cost category: Banks and Wall Street securitizers would need to set aside 5% of loan balances in reserves to cover possible losses from defaults. This extra capital cost inevitably would be passed on to consumers.

Mortgage industry estimates of the interest rate differential between ultra-safe, QRM-qualifying loans and all others range from three-quarters of a percentage point to 3 percentage points. In today’s market, this would mean that mortgages that meet the federal agencies’ stringent new standards might go for 5%. But all others — the vast majority of today’s conventional loans — could cost from just under 6% to 7% and higher.

You can muster only a 10% down payment? Tough. You can’t quite fit into the tight confines of the QRM’s debt-to-income ratio rule? Pay up.

Where and when will this all start hitting the marketplace? The proposals are out for public comment through June 10 and probably won’t be put into effect until mid-2012. The agencies’ proposal, though not the legislation, exempts mortgages sold to Fannie Mae and Freddie Mac from the rule as long as both remain under federal conservatorship — a date uncertain. FHA and VA mortgages would not be subject to QRM either.

Meanwhile, builders, consumer groups, banks, real estate agents and others are readying campaigns to persuade the regulators and the Obama administration to back off some of the provisions. Michael Calhoun, president of the Center for Responsible Lending, argues that if adopted in its current form, the proposal would make it much tougher for modest-income and minority consumers to afford a first home.

Jerry Howard, chief executive of the National Assn. of Home Builders, says the agencies and the administration have strayed far beyond Congress’ intent, and their proposals threaten to wreck any recovery in housing and force millions of Americans to rent rather than to own.

“I think we’re in for a hell of a fight,” he says.


‘Shadow inventory’ of 1.8 million homes could prolong housing slump

The glut of troubled homes not yet on the market represents a nine-month supply at the current sales pace. That’s in addition to 3.49 million previously owned homes already on the market.

By Alejandro Lazo, Los Angeles TimesMarch 31, 2011

A glut of troubled homes not yet on the market threatens to prolong a housing slump already burdened by weak job growth and a lack of enthusiasm among buyers.

This so-called shadow inventory amounted to 1.8 million properties at the end of January, Santa Ana mortgage research firm CoreLogic reported Wednesday. While that was a decrease from 2 million properties in January 2010, it remained about a nine-month supply because the sales pace has weakened this year in the absence of federal tax credits for buyers.

“We are still talking about a very large supply by any measure,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “It is going in the right direction, but we are continuing to look at a situation where there is going to be downward pressure on house prices.”

The nation’s housing market increasingly appears headed for a double dip, and a large supply of distressed homes could hold back a long-term recovery. Home prices in January remained barely above lows hit during the worst of the recession, according to a closely watched index of 20 major American cities.

The Standard & Poor’s/Case-Shiller index, released Tuesday, dropped 3.1% from January 2010. Recently reported national statistics for new-home sales, previously owned home sales and housing starts for February also were worse than economists had expected.

“The adjustment in the housing market is going to take a long time,” said Patrick Newport, U.S. economist for research firm IHS Global Insight. “The numbers have been absolutely horrible, and I think a lot of this is related to the fact that we haven’t done much of a job getting rid of the glut.”

In California, an estimated 16.8 months’ worth of shadow inventory hung over the market, up from 15.3 months in January 2010, according to CoreLogic.

Celia Chen, a housing economist with Moody’s, said the big supply of homes and weak housing prices will hold back the broader economic recovery.

“Obviously, this will have a negative impact on consumer spending, because falling home prices weigh on household wealth,” she said. Also, “the inability to sell a house does reduce the mobility of a workforce, so it will be hard to move out of some areas where there are not many job opportunities.”

Shadow inventory, as defined by CoreLogic, is property that is in foreclosure, has a loan 90 days past due or has been taken back by a lender and is not yet listed for sale.

The CoreLogic statistics don’t include nearly 2 million homes that are more than 50% “underwater,” those worth less than half of the mortgage balance. These homes will probably fall into foreclosure in the near future, CoreLogic and other experts say.

“The reality is we just built too many homes and sold too many homes to borrowers who didn’t have any business buying them,” said Michael D. Larson, an interest rate and housing market analyst with Weiss Research. “Those homes have to be dealt with in one way or another.”

While policymakers and regulators are hoping to whittle down some of that inventory by pushing lenders to modify troubled loans, many properties will end up in foreclosure, Larson said. Some of those homes will be sold. But others may have to be razed because they are “in such lousy shape,” he said.

Shadow inventory typically isn’t included in the unsold inventory numbers reported by the National Assn. of Realtors. Economists and real estate agents keep a careful eye on this statistic to gauge the health of housing. The Realtors group recently reported that the inventory of previously owned homes — the bulk of the U.S. real estate market — listed for sale was 3.49 million homes at the end of February.