FHA Making Significant Program Changes to Support Financing

By Daniel Duffield

The commissioner for the Federal Housing Administration (FHA), Carol Galante, announced several substantial alterations to FHA qualifications, processing, and expenses, in an attempt to strengthen the organization’s finances in the Mutual Mortgage Insurance Fund (MMI Fund) to continue providing loan financing in the future.

Changes to HECM Reverse Mortgages

The announcement today provided details for plans to combine the FHA Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) with the Saver Fixed-Rate HECM. HECM, more commonly known as a reverse mortgage, is a loan product exclusively available to homeowners age 62 and up. The Standard Fixed-Rate HECM loan product comprises an overwhelming majority of the loans guaranteed by the FHA HECM program, although it places a major strain on the funds of the MMI Fund. In order to continue offering this program in the foreseeable future, the FHA plans to adjust its policies to enhance its own sustainability by making the HECM Fixed-Rate Saver the sole option for fixed-rate reverse mortgages. This Saver variant of HECM provides much-reduced closing costs for qualified borrowers, although it limits the amount of funds that borrowers can obtain and thus reduces the risks presented to the MMI Fund. This change will take effect for all FHA case numbers designated on or following April 1, 2013.

Additional Changes

Other changes which have been discussed that will be officially announced in the upcoming days include:

·         MIP Increases

Annual mortgage insurance premiums (MIP) are set to increase by 10 basis points, or 0.10% of the loan amount, with the new changes. For jumbo mortgages with principle balances exceeding $625,000, these MIP fees will increase by 5 basis points, or 0.05% of the loan amount, bringing these fees to the maximum limit as enforced by Congress. However, these fee increases will not affect certain streamline refinance transactions.

·         MIP Cancellation

The FHA is planning to reverse the existing policy in place regarding the cancellation of MIP on mortgages that reach a loan-to-value (LTV) ratio of 78%. Since the FHA assumes a significant risk in guaranteeing 100% of the outstanding mortgage balance for the entire duration of the loan, homeowners will now be required to continue paying mortgage insurance fees over this whole period. According to the FHA’s Office of Risk Management and Regulatory Affairs, the MMI Fund has taken estimated billions of dollars foregone in revenue from MIP premiums during 2010 to 2012 as a result of current cancellation regulations.

·         Manual Underwriting

The Federal Housing Administration will now mandate that lenders manually underwrite loans for borrowers with a credit score of 620 or below and with a debt-to-income (DTI) ratio that exceeds 43%. Lenders must document any compensating factors that make up for these large risks when the guidelines are exceeded, utilizing standard FHA manual underwriting and compensating factor regulations.

·         Minimum Down Payments for Jumbo Loans

The FHA will recommend the increasing of minimum down payments for jumbo loans from the current 3.5% minimum to 5%, a proposal which will be published within the Federal Register within the next several days.

·         FHA Qualification after Foreclosure

The Federal Housing Administration will henceforth attempt to dispel some of the myths regarding borrower approval after previous foreclosures, enforcing the requirements that borrowers must meet in addition to merely satisfying the waiting period of three years. This comes as the result of several lenders inaccurately promising FHA approval and automatic qualification after the seasoning period of the foreclosure has passed.

·         Housing Counseling

In the Annual Report to Congress, the FHA has disclosed its commitment to the establishment of a new housing counseling initiative that would be applicable to numerous borrower classifications, including borrowers who previously underwent foreclosure.

Home Sales Decline in the Face of Decreasing U.S. Inventory

By Daniel Duffield

To the surprise of many experts, sales of U.S. existing homes declined in December 2012 as a result of the decreasing home supply, highlighting the obstacles facing the housing industry on the road to recovery after the burst of the housing market bubble. This trend somewhat tarnishes the statistics which have shown the housing market to be at its strongest since 2007.

According to figures of the National Association of Realtors (NAR) presented in Washington, home purchases decreased 1% in December, falling to an annual rate of 4.94 million. While this constitutes the second highest recorded figure since November 2009, this decline has caused some anxiety about the future of housing recovery, especially considering the expectations of 79 economists surveyed by Bloomberg, who anticipated a rise to a 5.1 million rate.

The standard drop in supply during this time of year and rising demand caused by exceptionally low interest rates, a strong job market, and household growth, risk a scarce inventory, which could result in higher home prices. The median value of existing homes rose 6.3% during 2012, the highest increase since 2005.

Regional Manufacturing

In addition to these statistics, another report from the Federal Reserve Bank of Richmond demonstrated that its manufacturing index declined from 5 in December to minus 12, reaching the lowest level since July. For this index, measurements below zero indicate contraction.

Furthermore, real-estate agents have reported that the U.S. saw a total of 4.65 million home sales during 2012, rising a considerable 9.2% from the 4.26 million sales in 2011 to the highest levels since 2007 and increasing the most substantially since 2004. In 2005, the housing market sales peaked at 7.08 million, but sharply fell to a 13-year low in 2008 at 4.11 million.

Rising Home Prices

The median home price for existing homes increased to $176,600 during 2012, rising 6.3% from 2011 statistics and comprising the largest year-over-year growth since the 12.1% increase in 2005.

Estimates of existing homes sales for December in the Bloomberg survey fluctuated between 4.89 million and 5.25 million. November’s rate was revised to 4.99 million from the previously related 5.04 million.

In the real estate market, the supply of previously owned homes decreased to 1.82 million, the lowest figure since January 2001, according to today’s data. Supply typically falls during the winter and begins to gain toward the middle of the year before the beginning of the new school year, according to agents from the group.

If families decide to delay on home sales this year until recovery is more certain, the lack of supply could disturb the current real estate market, said Lawrence Yun, NAR chief economist, during a news conference today in which the statistics were disclosed.

Yun stated that this inventory represents a legitimate concern for 2013, caused by rising home prices.

Inventory Decline

At the present pace, home sales would require 4.4 months to sell the remaining inventory of U.S. houses on the market, the least amount of time since May 2005, decreasing from 4.8 months at the end of November.

For existing family homes, sales declined 1.4% in December, reaching an annual rate of 4.35 million. Condominium purchases and cooperatives rose 1.7% to a pace of 590,000, reaching the highest peak since November 2009.

In terms of regional trends, demand dropped in two of the four regions last month, declining most in the Midwest significantly at a 5.9% drop. Home purchases fell 3% in the South, while rising 5.1% and 3.2% in the West and Northeast respectively.

Outlook for 2013

Analysts expect that the market will continue to regain former strength during 2013. Existing home sales are predicted to rise approximately 7.2% to 4.98 million this year, reaching the highest levels since 2007, according to economists and housing analysts surveyed by Bloomberg. Likewise, these analysts expected prices to gain 3.3% following the estimated 4.5% increase in 2012.

According to Stuart Miller, chief executive officer of Lennar Corp. (LEN), the largest homebuilder by market value in the U.S., “After seven years of navigating an unprecedented market downturn, we finally saw stabilization and recovery in 2012.” Smith added that, “while there have been and still are economic and political uncertainties ahead, we feel that this housing recovery is fundamentally based and driven by a long-term demographic need for housing. 2012, therefore, we believe is just the beginning of the recovery.”

Top 10 States for HARP Refinances

By Daniel Duffield

Since its update in 2011, the Home Affordable Refinance Program (HARP) has provided numerous U.S. citizens with access to refinance loans that would otherwise be unattainable due to the widespread loss of equity caused by the burst of the U.S. housing bubble. Without this program, these underwater homeowners would be otherwise unable to obtain the currently low mortgage rates and thereby significantly reduce their monthly mortgage payments.

However, as with all trends within real estate, the effects of HARP have differed across different states. While HARP has been more beneficial in some states, others have found minimal use for this refinance program. As one might expect, the states most affected by the downturn of the housing market subsequently made the most use of HARP and had the most HARP applications.

Popular States for HARP Refinance Applications

In 2011, the federal government released an update to HARP, titled HARP 2.0, which significantly expanded the pool of borrowers eligible for a HARP refinance. Primarily, this was the result of loosened loan-to-value ratio (LTV) requirements; while the original HARP capped LTV at 125%, HARP 2.0 entirely removed this maximum limit, allowing borrowers to refinance with unlimited LTV. Borrowers located in states most affected by the decline of the U.S real estate market who previously were too underwater to refinance then found themselves able to obtain the advantageous HARP refinance loan, greatly lowering the overall costs of their home mortgages.

Taking into account the sharpest drops in home prices, as well as state population, one might not be surprised at the results of the survey which showed the percentages of HARP refinances from state to state.

The top 10 states for HARP refinance applications are:

1. California (18.39%)
2. Florida (15.66%)
3. Arizona (7.16%)
4. Georgia (6.31%)
5. Illinois (4.79%)
6. Michigan (4.62%)
7. Nevada (3.61%)
8. Virginia (3.37%)
9. Maryland (3.14%)
10. Washington (2.94%)

As mentioned, it may not be all that surprising that California tops the list, considering not only its population but the effects of the real estate decline. With larger cities such as San Diego, Los Angeles, and Sacramento taking significant losses as a result of the downturn, as well as smaller cities including Fresno, Stockton, and San Bernardino, California has seen a large portion of HARP refinances and may continue to do so if HARP 3.0 ever comes to fruition.

Readers should note that this list solely takes into account HARP applications, rather than HARP refinances that are fully completed. Due to the qualifications of the HARP program, many applicants do not qualify or have issues receiving approval, especially those with LTV’s exceeding 125%. Although HARP 2.0 removed these requirements, many lenders still cap LTV at this figure and will not finance HARP loans with these high LTV ratios, especially among the larger lenders.

On the other hand, some states were barely affected by the housing downturn and saw very minimal applications for HARP 2.0. For instance, North Dakota saw the fewest of these states, with only 0.01% of all HARP refinance applications being requested in this state. In addition to population factors, North Dakota was largely unaffected by the housing market bubble burst, showing steady gains within the past decade. Due to not losing equity, homeowners have had little reason to consider a HARP refinance loan.

Consumer Regulator Toughens Mortgage Restrictions for Banks

By Daniel Duffield

The consumer regulator for the federal government issued a statement on Thursday that banks will be given stricter rules for mortgage lending when assessing borrowers’ ability to repay home mortgages, in an attempt to avoid the loose regulations to which the recession was partially attributable.

With new restrictions, banks will be forced to verify borrowers’ income, debt, and employment.

The Consumer Financial Protection Bureau (CFPB) stated that its new requirements would also shield borrowers from irresponsible lending practices by giving incentives for lenders providing safer, lower-price loan products, primarily less legal accountability.

The mortgage industry, which has spent billions within the past year in litigations regarding falsified loan documents and aggressive lending to borrowers who were unable to afford their mortgages, will now reward safer lending and those issuing “qualified mortgages.”

According to Richard Cordray, the director of the CFPB, lenders should not enable borrowers to acquire mortgage loans for home purchases that they will be unable to repay.

With this reform, financial watchdogs intend to breathe new life into the house financing market and stimulate the industry, which as of late has been lethargic in the wake of the credit crisis and the new restrictions on bank action.

Lenders and consumer organizations have anticipated these new guidelines, which have been among the most hotly debated updates since the 2010 Dodd-Frank financial reform law.

Many analysts had been apprehensive regarding the new definitions of a “qualified mortgage,” fearing that this would narrow the type of loans currently available. However, mortgage bankers have expressed satisfaction with these updates and specifically remarked about the advantages of the legal protection provided for those issuing these safer mortgages.

According to a statement from Debra Still, chairman of the Mortgage Bankers Association (MBA), this new outlook will incentivize the extension of more sustainable mortgage credit to qualified borrowers without having to worry about future litigation or penalties. 

While some consumers questioned whether the rules provided too much protection for lenders, the general consensus was a welcoming of these changes. Mike Calhoun, president of the Center for Responsible Lending, commented that these updates give a “reasonable approach to mortgage lending,” adding that such changes will facilitate a more competitive and invigorated housing recovery.

Safer Guidelines for Lenders

Essentially, Dodd-Frank regulators designed a new category of “qualified mortgages” that would automatically comply with all ability-to-repay requirements. This regulation was first created by the Federal Reserve, and then passed on to the consumer bureau in July 2011.

The CFPB stated that these “qualified mortgages” would include those with no risky aspects, such as interest-only mortgages or balloon payments, and include no fees that constitute more than 3% of the loan amount, making them more affordable. Additionally, these loans could only be issued to borrowers with debt-to-income ratios (DTI) of 43% or less. As previously indicated, these loans would include provisions with extra safeguards for lenders willing to issue these types of mortgages.

While bank groups had supported the redefinition of these mortgages to all qualified loans, thereby removing some of consumer rights to litigation on mortgages that they could repay, consumer groups advocated just the opposite: less protection for banks and lenders from consumer lawsuits. 

With these new guidelines, most protection would be delegated to cheaper, qualified mortgages, since, according to the bureau, these prime loans would be assigned to less-risky consumers with decent credit histories.

In contrast, more expensive mortgages would get less protection, as lenders would be expected to verify that their income was adequate. Borrowers could, however, pursue litigation if they prove that they could not afford the mortgage along with other living expenses.

Availability of Credit

While the reception has generally been favorable, some lawmakers and lenders were anxious that strict rules would worsen the credit crisis that has afflicted the mortgage market and delayed the both the real estate and economic recovery in the U.S. Despite these fears, the CFPB addressed these concerns by creating the rules that facilitated a smooth transition that would not disrupt the current trends in credit.

Moreover, these rules initiated a new category of loans that would temporarily be regarded as qualified. These loans could be granted to borrowers with DTI ratios greater than 43%, provided they satisfied the underwriting guidelines of Fannie Mae, Freddie Mac, or one of the other U.S. government housing agencies such as the Federal Housing Administration (FHA).

According to the CFPB, banks will be given until January 2014 to make the appropriate adjustments in complying with these new standards.

Looking Ahead: Housing Recovery Sluggishness Anticipated for 2013

Examining the Recent Housing Market and Upcoming Housing Trends in 2013

By Daniel Duffield

Concluding the 2012 calendar year, home prices have been growing at the most rapid pace since 2005, before the burst of the housing market bubble at the turn of the decade. With the housing market gaining strength, indicated by increased construction starts, increasing home purchases, and a noticeable decline in mortgage delinquencies, many would expect 2013 to be a prosperous and progressive year for U.S. real estate. While apprehension over the debt-crisis and the previously unresolved fiscal cliff diminished this optimism temporarily, confidence has returned now that the issue has been resolved. However, despite these positive indications of growth for U.S. housing, experts believe that the recovery of the housing market will slow down during 2013.

According to analysts at Fitch Ratings, a combination of the historically low mortgage rates, declining inventory of homes for sale (as a result of either fewer foreclosures being processed or the large amount of underwater borrowers who are unable to sell their properties), and weak levels of new home construction have created a dynamic of affordability that has boosted home demand. However, these analysts contend that these factors have contributed to a market in which the weaknesses, which would normally hinder housing price growth, have been artificially corrected, including high unemployment and weak growth in terms of wages.

Basically, Fitch argues that housing prices remain overestimated, despite the U.S. housing bubble burst, and that price growth has been artificially spurred by numerous factors that are subject to change. While an increasing number of homes move toward foreclosure, especially in states that mandate a judicial process for foreclosure which has delayed these proceedings, the housing inventory is predicted to grow, expanding more in some regions than others.

Additionally, mortgage rates may finally be set to increase this year. In a recent meeting, members of the Federal Reserve Open Market Committee (FOMC) commented that now may be the time to “slow or to stop purchases [of assets including mortgage-backed securities] well before the end of 2013.” As a result, interest rates would rise, reducing home affordability.

Despite these bleak concerns about the future of U.S. housing, Fitch analysts conceded that pricing recovery will be largely contingent on local markets. Despite this, several other voices have arisen in agreement with this negative outlook.

According to Stan Humphries, chief economist for Zillow, the rise in pricing for many housing markets can be attributable to a sparse housing inventory due to a large amount of negative equity. Humphries argues that these circumstances will shift once borrowers rise from negative equity and the market begins to flow naturally.

While the home value index calculated by Zillow demonstrated an annual increase for November of 5.2%, Humphries anticipates a minor increase this year, only amounting to 2.5%, citing a rise in employment, a rise in rent prices, growth of household formation, and what amounts to “a five-year hiatus” with respect to home building.

Regardless of these predictions, supply and demand will dictate the course of home prices as usual, although even these cannot be anticipated in the coming year, with too many complicated factors and facets to be interpreted accurately.