Month: September 2013

FHA-backed mortgages will be halted in a shutdown

By Les Christie  @CNNMoney September 27, 2013


If the government shuts down, what happens to all the Uncle Sam-backed mortgages that are in the pipeline? They account for about 90% of U.S. home loans, so reducing that flow could hurt the housing recovery.

The good news is that most government-backed home loans – those purchased and securitized by Fannie Mae and Freddie Mac – will be unaffected by a shutdown. Those companies pay for their operations out of the fees that they charge lenders.

The bad news is that loans guaranteed by the Federal Housing Administration, the Veteran’s Administration and the rural development loans of the United States Department of Agriculture, won’t be processed. If an application for an FHA-insured loan has not been approved by the time of the shutdown, it will have to wait until after the shutdown ends.

FHA-backed loans accounted for 45% of all mortgages used to purchase homes issued in 2012, according to the Federal Reserve. The FHA alone insures about 60,000 loans a month.

“FHA will be unable to endorse any single-family loans and FHA staff will be unavailable to underwrite and approve new loans,” in the event of a shutdown, according to the contingency plan from the Department of Housing and Urban Development, the FHA’s parent agency.

Of the 9,300 employees who work for HUD, only 350 (3.8%) will be able to work, according to a HUD release.

“The housing market is searching for recovery, and we’ve been seeing signs of optimism,” said said David Stevens, CEO of the Mortgage Bankers Association. “This could have a sizable impact on the recovery.”

Many buyers have no alternative to FHA, VA or USDA mortgages. First-time buyers in particular often lack the cash for the large downpayments that other lenders require. FHA rules allow homebuyers to make a downpayment of as little as 3.5% of the selling price — $7,000 on a $200,000 home. A 20% downpayment is normal, which would be $40,000 for that $200,000 purchase.

The FHA also has more flexible rules for borrowers who have had payment problems in the past, or who have thin credit histories.

What happens in a government shutdown

A slowdown in home sales would be felt beyond the housing market. Homebuying triggers related economic activity. New homeowners have their homes painted, they buy furniture, install floors or carpeting and put in new decks and landscaping.

“All that would come to a stop,” said Stevens.

And, if a shutdown drags on for more than a few days, “The impact on the housing market and the economy could be significant,” he said.

But things aren’t likely to come to that, according to Mark Zandi, chief economist for Moody’s Analytics.

“The effects of a shutdown would be so dark,” he said, “I can’t believe the legislators would not come to terms to end it.”

Are we still heading toward 5% mortgages?

By Les Christie  @CNNMoney September 19, 2013

30 year fixed mortgage 091713Rates on a 30-year fixed mortgage are currently averaging 4.6%, up from 3.35% in early May.


Prospective buyers who have been shying away from the housing market due to rising rates may have reason to start shopping again.

On Wednesday, the Federal Reserve surprised market watchers when it announced that it would not start tapering its purchases of mortgage-backed securities and Treasury bonds.

Mortgage rates have risen significantly amid concerns that the Fed would cut back on its $85 billion a month bond-buying program. Rates on a 30-year fixed mortgage are currently averaging about 4.5%, up from 3.35% in early May. That rate increase has meant an extra $132 a month in payments for a homebuyer with a $200,000 30-year loan.

But now that the Fed has said it will continue to purchase the bonds, rates will likely retrace some of those gains, said Keith Gumbinger of mortgage information provider

“Now, we do have some space for rates to fall,” he said. “I don’t expect a plummet, just a drop of 0.1 percentage points or so over the next week or two.”

The day after the Fed’s announcement, Freddie Mac reported that rates on 30-year fixed-rate loans fell from 4.57% to 4.5% over the past week. Freddie Mac’s chief economist, Frank Nothaft, said rates were reacting to the same economic trends that influenced the Fed’s decision.

Among them: slowing growth in retail sales and industrial production and the lowest reading in consumer sentiment since April. He also noted tighter financial conditions, including the sharp increase in mortgage rates in recent months.

Should the economy gain more momentum, however, fears that the Fed will taper off its bond purchases will most certainly resurface and rates will move higher again, he said.

Nothaft expects rates to hit about 5% by mid-2014. That’s an increase of less than $24 a month for every $100,000 borrowed — enough to weed out borrowers who are struggling to afford homes but not enough to impact overall demand.

Despite recent increases, rates are still low by historical standards. During the housing boom years, they typically ranged between 6% and 7%.

And higher rates should prompt some banks to ease up on their lending standards, helping more people to buy homes, said Jed Kolko, chief economist for Trulia.

“Rates will be slightly higher next year but not enough to derail the housing market recovery,” he said.

Signs of an easing of credit requirements are surfacing

By Kenneth R. Harney
September 20, 2013, LA Times

WASHINGTON — Could the end of the refinancing boom be stimulating slightly more favorable mortgage terms for home buyers? The latest comprehensive study of activity in the market suggests the answer could be yes.

Ellie Mae Inc., a mortgage technology firm in Pleasanton, Calif., conducts a survey involving a massive, nationally representative sample of loans closed each month. Its August findings point to a gradual easing on credit scores for borrowers.

Consider these hard numbers provided by Ellie Mae Chief Operating Officer Jonathan Corr:

•Last month, 30% of all successful applicants for home mortgages had FICO credit scores less than 700, compared with 15% a year earlier. That doubling in just 12 months is significant and tells prospective buyers: Just because you don’t have stellar scores, you can still be approved if your application shows compensating strengths such as steady income, solid recent payment performance on credit accounts, moderate household debt loads and adequate financial reserves in case you run into a rough patch. (FICO scores run from 300 to 850; higher scores signify a lower risk of default for the lender.)

•Average FICO scores are down across the board. Conventional Fannie MaeFreddie Mac scores for approved applicants dropped a point from July to August to 758. That’s still high in historical terms but down from 764 in November. Federal Housing Administration-insured loans for buyers continued their slow decline, hitting 695 last month versus 702 in April 2012. The biggest drops in scores have been on Fannie-Freddie refinancings as recent interest-rate jumps have scared away applicants. Approved borrowers in August had average scores of 737 compared with 746 in July.

Corr said in an interview that many lenders are seeing refi applications decline sharply, and this may be pushing them to be more flexible and competitive on loans for home purchases.

One example of a major lender loosening up a little: Wells Fargo Home Mortgage has relaxed its minimum down-payment requirement on so-called jumbo mortgages, those with starting balances above the Fannie-Freddie conventional limit of $417,000. Rather than its previous minimum of 20% down, Wells is now accepting 15% on primary residences “in most markets around the country,” company spokesman Tom Goyda said. There is no mortgage insurance requirement, but applicants must have a minimum 740 FICO score, no higher than a 35% total household debt-to-income ratio and 12 months of financial reserves available to them. Essentially, Wells Fargo is saying: If you are a strong candidate on most criteria, we’ll give you the benefit of the doubt and lower the amount of cash you need to bring to the table.

Some mortgage companies say that for well-qualified applicants they can go one step better. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says that he can arrange jumbos with 10% down payments: A standard first mortgage and an accompanying second mortgage or deed of trust that in combination create a 90% loan-to-value ratio for the borrower.

But not everybody in the mortgage market is seeing an easing trend.

The Mortgage Bankers Assn. has reported a slight tightening of lending conditions. The reason: Fewer lenders are offering specialized products such as interest-only mortgages and loans with terms extending beyond 30 years. Both of these features render loans ineligible for the federal “qualified mortgage” designation that is scheduled to go into effect nationwide in January.

Other banned types: Loans with negative amortization, balloon payments and adjustable rate mortgages underwritten at teaser interest rates. Fannie Mae and Freddie Mac have announced that they will not invest in or guarantee loans that are not qualified mortgages.

“I don’t see any easing in lending,” said Bruce Calabrese, president of Equitable Mortgage Corp. in Columbus, Ohio. He cited FHA’s increases in mortgage insurance premiums and Fannie Mae’s recent cancellation of its 3% minimum down payment program as troubling signs for borrowers.

Bottom line here: Credit score requirements are definitely more flexible than a year ago, and jumbo loans might require less cash out of pocket. But we’re still in a highly restrictive market compared with seven or eight years ago near the peak of the boom.

Taking Over a Seller’s Loan

The New York Times
Published: September 19, 2013

Homeowners with a mortgage insured by the Federal Housing Administration or the Department of Veterans Affairs should consider using their loan terms as a marketing tool when it comes time to sell.

Mortgage loans from both government agencies include a little-known feature known as assumability. In other words, the buyer of a home financed with an existing F.H.A. or V.A. loan may be able to take over, or assume, the seller’s loan, under the same terms, rather than take out a new mortgage.

During periods when interest rates are rising, homes offered for sale with an assumable, lower-rate mortgage may have extra appeal for certain buyers.

“You could now have a seller saying, ‘I have a great house to sell you and a great mortgage to go with it, which is better than my neighbor, who only has a great house,’ ” said Marc Israel, an executive vice president of Kensington Vanguard National Land Services and a real estate lawyer. “It’s a very clever idea.”

The savings for buyers assuming a loan extend beyond a lower interest rate. Assuming a loan is cheaper than applying for a new one because there are fewer settlement fees. An appraisal is not required (though a buyer may want to obtain one anyway). And in New York, borrowers assuming a loan do not have to pay the hefty mortgage recording tax a second time, Mr. Israel said.

F.H.A. loans do demand that the borrower pay for mortgage insurance over the life of the loan. But when assuming a loan, borrowers do not have to pay the upfront mortgage insurance premium required on a new loan, according to John Walsh, the president of Total Mortgage Services in Milford, Conn.

And, he noted, because the original mortgage holder would have been paying the loan for a number of years, the buyer assuming the loan will start at a point deeper into the amortization schedule than on a new loan. That means more of the monthly payment will go toward principal.

“In a rising rate environment, assumability is a very attractive option,” said Katie Miller, the vice president of mortgage products for Navy Federal Credit Union. “It ends up making homes that much more affordable.”

She emphasized, however, that loan assumptions are often not a viable option for first-time buyers if the seller has accumulated substantial equity in the home.

Say, for example, that the seller’s loan balance is $150,000, and the sale price for the property is $200,000. The borrower assuming the loan must come up with the $50,000 difference, either in cash or through some type of subordinate financing.

That can be too big a hurdle for first-time buyers. The more attractive option at Navy Federal is the HomeBuyers Choice loan, which offers 100 percent financing. These loans currently account for about a quarter of the credit union’s purchase volume, and 65 percent of those borrowers are first-time buyers, Ms. Miller said.

Borrowers seeking to assume a loan must also prove their creditworthiness as they would for any F.H.A. or V.A. loan.

Under F.H.A. rules, once a new borrower is found to be creditworthy enough to assume a loan, the lender must release the seller from any future liability for payment of that loan.

Borrowers considering loan assumption should weigh the costs against other loan options, paying attention to the principal and interest payment, the amount of cash required upfront, and the private mortgage insurance premium. “At the end of the day,” Mr. Walsh said, “if the prospective buyer can come up with the down payment and qualify for the loan assumption, then it could be a huge benefit.”

Are we in a housing bubble? Not even close, experts say

Soft home prices equal a healthier market

September 23, 2013

While some borrowers might pull out of the housing market at the sight of the the slowdown in home prices, market experts are cautioning consumers not to slam on the housing brakes just yet. Home prices only increased from June to July by 0.6%, Lender Processing Servicesrevealed Monday in its U.S. Home Price Index.

However, from last year, July prices soared 8.7% above 2012 levels, the company said.

The report is the result of a survey of July transactions from more than 18,500 U.S. ZIP codes.

Last week’s housing data points to positive signs in the housing market. But when taking a closer look, the market posted mixed views.

For instance, housing starts were up in August, but only due to July starts being revised down, which means housing may be flattening.

On the reverse, existing-home sales came in at a recovery best, hitting an annual rate of 5.480 million in August, well above market consensus.

Earlier this year home prices were rising at an unsustainably fast pace, so it’s important to remember that even with the recent modest price slowdown, prices are still rising at more than a 10% annualized rate, explainedTrulia chief economist and vice president of analytics Jed Kolko.

“Our Bubble Watch metric shows that price levels nationally are undervalued by 5%, which means only small further price gains are needed to get prices national back at normal historical levels,” Kolko stated.

He continued, “We are not at risk of a bubble today, but if prices rose 10% a year for the next three years, we’d all be calling bubble.”

On a similar note, National Association of Realtors chief economist Jed Smith is confident the slowdown is healthy for the market so housing does not hit a bubble.

“It’s the normal market reaction to getting back to a normal market,” Smith explained.

The majority of the country continues to remain affordable, with the average home price coming in at $231,000, up 8.7% from year-ago levels — only 14.7% from the June 2006 peak level of $270,000, according to LPS.

All five of the largest states and metropolitan areas saw the pace of price growth decrease month-over-month.

California experienced the most marked change, with the pace of growth down to 0.5% in July from 1.6% in June.

Additionally, Los Angeles posted the biggest drop, with growth down 0.3% in July compared to 1.2% in June, respectively.

On the reverse side, Texas posted an impressive uptick in home prices.

Of the 40 largest metro areas, Austin, Dallas, Houston and San Antonio continued their upward trajectory, marking new home price highs in July.

The overall point is that while data seems to fluctuate, the majority of the information concludes that the housing recovery is still a local phenomenon.

Going forward, home prices will continue to slow for three reasons: more housing inventory, higher prices are turning investors off and rising mortgage rates.

“Rising rates is probably the least important of the three reasons past trends show that prices tend not to suffer as much as mortgage rates rise,” Kolko said.

He concluded, “Other factors, like a slowly strengthening economy and expanding mortgage credit, should give prices a tailwind and prevent them from slowing sharply.”

Housing Market: 5 Years Later

By Kathryn Buschman Vasel

Money Tree

Published September 16, 2013

  • housing market, new home sales, for sale sign, home buyer, seller, agent, real estate

It’s been five years since the financial system collapsed and the housing bubble burst, and it’s been a long road to recovery. The housing market has only been on the mend over the last year, and according to experts, it still has some healing to do.

“There are still many homeowners who are underwater, there are still many foreclosures in the pipelines, and there are still too many folks whose access to credit is still impaired,” says Keith Gumbinger,  vice president with HSH Associates.

But we’ve come a long way.

New home sales hit their highest level since May 2008 in June, fewer homeowners are underwater and home prices in the country’s 20 largest cities were up 12.1% in June from a year earlier.

“Right now, I would say we are 64% back to normal and a lot of what is driving the housing market’s strength is existing home sales, but prices have also helped push the recovery,” says Jed Kolko, chief economist for Trulia.

Home Sales/Starts

Sales of new U.S. single-family homes vaulted to a five-year high in June, according to the Commerce Department.

According to Jed Smith, managing director of quantitative research at the National Association of Realtors, home sales stood at 4.2 million in 2010, and he predicts a rise to 5.1 million by the end of this year. “We continue to see good sales, we expect them to increase 5% next year as prices continue to rise. The market isn’t fully running on eight cylinders yet, but we are getting there.”

Existing-home sales are only off by 2% from normal levels, adds Kolko, but construction starts are the recovery’s biggest hurdle — off by 40% of normal activity.  “There is a drop in the creation of households, young adults are moving back in with their parents or living with roommates a lot longer before striking it out on their own.”

According to Pat Newport, an economist for IHS Global Insight, housing starts need to be closer to 1.4 million in order for shortages to ease, and it takes about eight months to build a single-family home.

“When the housing bubble burst, construction levels collapse and stayed at historic lows for four and half years,” Newport said.


“The key lesson we learned is that housing prices can fall. No one seemed to think that leading up the bubble burst. That was the reason for the whole mess, and now we know better.”

– Pat Newport, an economist for IHS Global Insight


Steady home sales and new construction is not only important to the housing market, it’s a boon to overall economy. “For every two home sold, a job is created,” says Smith. “New home construction brings in three jobs for every house build.”

Home Prices

Housing experts say U.S. home prices peaked in early 2006 and fell to record lows in 2012. The widely-watched Case-Shiller home price index fell to its lowest level at the end of 2008.

Smith says home prices began to improve in 2011 when the market had almost digested the crisis and left the average median home price at $166,100. Now he says the average price is $213,500 — up 15% from last year.

Rising prices will also help maintain the recovery because it changes a homeowner’s mindset. “Someone who is 5% underwater in an environment of falling home prices might be discouraged and more likely to walk away from a mortgage; if they are underwater but home prices are rising, they are more likely to stick it out,” says Kolko.

The importance of homeownership has faded over the last five years as consumers’ shy away from the idea that real estate is a sound investment. Newport says the homeownership rate shot up in 2005 to 69%, and is now around 65%. He expects the rate to fall to levels not seen since the 1960s.

“The key lesson we learned is that housing prices can fall. No one seemed to think that leading up the bubble burst,” says Newport. “That was the reason for the whole mess, and now we know better.”

Distressed Sales

Smith from the NAR says during the height of the crisis, distressed sales, which include foreclosures and short sales, made up 49% of the market. Now, that number is closer to 12%. Last week, RealtyTrac reported foreclosure filings fell 34% in August as first-time defaults dropped to the lowest level in almost eight years, thanks to rising home prices.

The foreclosure process varies by state, and those that involve going to court draw the process out, making it harder for foreclosures to work through the system.

“In states where you don’t have to go to court, the rate is around 2% right now, but in the court-involved states, the rate is still high since it takes two to four years,” says Newport.

Smith says about two million foreclosures still need to work their way through the system.

“They are going to be with us for awhile, but there are government programs trying to slow that and as home prices continue to rise, that will also bring people out from underwater and help prevent more defaults.”

Lending Practices

Long gone are the days of easy lending that allowed prospective homebuyers with bad credit and shaky financials to qualify for a mortgage. These subprime loans carried higher interest rates than normal loans because the lender was taking on more risk. According to reports, close to half of the loans issued in 2006 were subprime, and when the economy took a hit and people started losing their jobs, home prices dropped and homeowners started defaulting en masse.

In the years following the bursting of the bubble, the credit markets essentially froze as banks became more risk adverse after getting burned by loose mortgage practices.

“We’ve experienced a near full reboot of mortgage lending standards, back to those commonly seen in the ‘70s and considerable portions of the ‘80s and ‘90s,” says Gumbinger. He says lending practices loosened around 2006 as home prices seemed to be on an endless rise. “Rising prices means that the risk of making a loan to even a poor-quality borrower diminishes over time. When sales slumped due to higher rates in 2006 and ARM resets drove up costs, there was nothing left to keep the price bubble inflated, and when it popped and prices fell, losses spread like wildfire.”

According to Smith, currently 55% of homebuyers qualifying for a mortgage have a FICO score higher than 740. In normal conditions, that number is closer to 40%. “Standards are still too tight for a normal market. If banks loosened up we could probably see an increase of half of million home sales a year and that would significantly help the market.”

The housing market’s strong expansion from 2000-2006 caught Wall Street’s eye and financial institutions created new mortgage instruments, including mortgage-backed securities, to help get a cut of the action. Exotic new loans that extended beyond the normal 30-year term were also introduced.

“The loans that got us in the most trouble aren’t very common today,” says Kolk. “You don’t really see loans longer than 30 years or interest-only loans.”

Where We Go From Here

Housing experts and financial institutions are keeping a close watch on looming legislation regarding lending practices that will set the tone for future market activity.

“Legislators are in the process of debating the financial risks for different types of mortgages and how they can protect consumers without getting too involved in the normal activity of the housing market,” says Kolko.

In January, the Consumer Financial Protection Bureau issued regulations detailing how lenders must ensure consumers can afford any loans by verifying their income, employment, and total debt — which cannot exceed 43% of income.

The future of government-sponsored enterprise’s like Fannie Mae and Freddie Mac remain murky. The government has mulled shutting down tor trimming back the companies, but exactly how to reshape them has proved difficult.

“Without them, what comes next?” asks Gumbinger. “There’s no way to know at present what the mortgage markets of the future will be, and that will determine to a large degree what kinds of financing are available, to whom, and at what sorts of terms, conditions and costs. It is access to mortgage money, although not necessarily always price, which can drive the housing market.”


FHA puts new limits on reverse mortgage program for seniors

Limits on the amounts they can draw down, higher insurance fees and rigorous financial vetting of applicants are likely to make fewer seniors eligible for reverse mortgages.


New limits on reverse mortgagesFred Thompson, the former Tennessee senator, is one of the TV pitchmen who aggressively hawk the FHA’s insured reverse-mortgage program for seniors. (Gerald Herbert, Associated Press / April 13, 2007)
By Kenneth R. HarneySeptember 13, 2013

LA Times

WASHINGTON — For homeowners who were looking to the federal government’s reverse mortgage program to supply lots of cash for their retirement years, here’s a heads-up: The pipeline just got narrower.

Pressed by Congress to slash losses, the Federal Housing Administration recently outlined a series of steps designed to limit the maximum amounts that seniors can draw down on their homes and to make qualifying for a reverse mortgage tougher.

Starting in January, applicants for FHA-backed reverse mortgages for the first time will have to qualify under comprehensive new “financial assessments” — covering credit history, household cash flow and debt levels — to make sure they have the “capacity and willingness” to meet their financial obligations under the terms of the loan. At the same time, they may also be required to set aside sizable portions of their drawdowns to handle property taxes and hazard insurance for years to come. As early as next month, some applicants will also be required to pay substantially higher FHA insurance premiums if they pull out hefty amounts upfront at closing.

Reverse mortgages are limited to homeowners 62 and older, and allow them to use the equity in their properties to provide funds for their retirement years. Borrowers need not repay their principal balances — plus compounded interest charges — until they move from the home, sell it or die.

The FHA’s insured reverse-mortgage program, which is hawked aggressively by TV pitchmen including former Tennessee Sen. Fred Thompson and actors Henry “the Fonz” Winkler and Robert Wagner, dominates the field. But losses to the FHA’s insurance funds caused by reverse mortgages have mounted in recent years and could trigger a nearly $1-billion bailout by the Treasury. The FHA hopes to avoid that, however. The newly imposed eligibility and drawdown rules are intended to cut losses and help achieve greater financial stability for the program, according to Carol J. Galante, the FHA’s commissioner.

Limits on the amounts that seniors can draw down, higher mortgage insurance fees and rigorous financial vetting of applicants are worrying some lenders and brokers active in the program. They estimate that the maximum drawdowns seniors can obtain will be reduced about 15% compared with the standard version of the program that has now been phased out.

Borrowers who take more than 60% of the maximum amounts available to them upfront will also pay substantially higher insurance premiums. The changes are likely to reduce the attractiveness of reverse mortgages to large numbers of seniors, according to some industry specialists.

Matt Neumeyer, owner of Premier Reverse Mortgage in Atlanta, estimates that as many as 40% of previously eligible borrowers will look at the reduced limits, the new financial assessments and higher fees and say “No thanks.”

“You’re offering me less on my house for a whole lot more hassle” — that’s how clients will see it, Neumeyer said in an interview. “A lot of people are going to balk.”

He offered this example of how the reductions would work. For a 70-year-old owner with a $200,000 house, the standard version of the program would have offered a total “principal limit” — the amount available to the borrower — of $132,600. Under the revised program, that will be cut nearly $20,000 to $112,800, provided that the applicant can make it through the financial assessment hoops. And if the borrower wants to pull down more than 60% of what’s available, he or she will get hit by higher mortgage insurance premiums. Add in the set-asides for future property taxes and hazard insurance that may be subtracted from the initial drawdown of funds, Neumeyer said, and many borrowers will look at either selling their home or obtaining a home equity line of credit.

Deborah Nance, a reverse mortgage specialist with iReverse Home Loans in the Los Angeles-Riverside market area, agrees that fewer seniors will qualify for FHA reverse mortgages but believes that they will be predominantly borrowers with lower incomes, higher household debt loads and more marginal credit histories — “the needy people” who previously would have taken the maximum lump-sum drawdown to pay off mortgages and other obligations but now will be prevented.

Nonetheless, she said in an interview, “we’ll still be able to help a lot of people.”

Cristina Martin Firvida, director of financial security and consumer affairs for AARP, the seniors lobby, said although she understands that the FHA must cut losses, inevitably “the changes … will bar access to reverse mortgages for many.”