Why are FHA loans taking so long? Conventional loans used to take 2 to 3 weeks, now I'm waiting for 45 days minimum. Well Ladies and Gents, the world has changed once again. Conventional loans for purchases have gone by the wayside for the most part because they are affected by the "soft market" status that appears on the appraisal. With that moniker the guidelines changed and the maximum Loan To Value is reduced by 5%. So in a matter of months everyone wanted/needed to to FHA since this 5% reduction in LTV doesn't exist in FHA. Ok, Ok so everyone wants one, the big boy banks should have seen this coming right? Wrong. Here in the Coachella Valley there is only one bank that is fully staffed for FHA with a DE underwriter (FHA) Funder, and Processor. Franklin Loan Center is the only bank in town that can process and fund a FHA loan in under 30 days. All the major banks (Countrywide, Chase, Wells Fargo, B of A, Indymac, Wachovia, Etc.) have centrally located processing, funding and underwriting. This is a move that helps them control their process, and efficiency, as well it lets them cut down on their overhead. Here's the kicker, none of them are "centrally located" here in the valley. They all have to send their applications to a different city, sometimes a different state. We don't. On top of that, they are vastly understaffed for the volume they are doing. We can handle the amount we are receiving, and becuase we can set priority of loan aps, we can push it through. Ask your loan officer at a major bank if they can deliver in under 30 days? Not happening. They may say yes, but you'll still be waiting for an answer on day 45. It just the way the market is. Sure it will change again, but can you afford to wait until it does?
For those of you that don't quite understand the impact of today's announcement please read on:
What does "Conforming" mean?
First of all, let me briefly explain what "conforming" means. "Conforming" is the term used to describe loans that meet all the Fannie Mae and Freddie Mac guidelines. One of the major guidelines that have caused lack of liquidity in the market is the loan size guideline. It is currently at $417,000. For those of us in the valley most homes are priced much higher than that and the loan required to purchase these homes is higher than $417,000.
What was the mortgage market like before and after August 2007?
In recent years the pricing between a conforming and a non conforming loan were similar, and at times the conforming pricing was much better. As of August this changed drastically. If the loan doesn't meet Fannie Mae or Freddie Mac guidelines today the interest rate is much higher. For purchases and refinances this has put a huge dent in the side of our business. Less people qualify for a purchase and can't buy, or are waiting on the sidelines before they jump back in. In terms of a refinance this is huge because some borrowers who were planning to get out of their ARM's and into a Fixed rate loan haven't been able to do so since August.
What was the announcement?
As a part of the Economic Stimulus package proposed by the Administration and passed in the House yesterday the FHA is taking on a larger role in an effort to help the housing market. The major announcement within this package is that the maximum conforming loan size of $417,000 will be raised. The exact number at this time isn't known but according the AP the number will be around $625,000.
What does this all mean?
This should cause an immediate reduction in interest rates for loans up to $625,000 because they can now be purchased by Fannie Mae and Freddie Mac on the secondary market and are considered less risky to loan originators and mortgage banks. The loan limit should be raised somewhere in the middle to end of February.
Get your buyers pre-approved before shopping and when the rates come down we'll lock it in.
Rest assured ladies and gents that the real estate market is not sinking. I may be an optimist, but as we all know Real Estate is cyclical. The corrections of late will allow us to move higher in the future. The analogy that the housing market is more like an Oil Tanker than the Titanic is fairly accurate given the above statement. The market corrects it self and although it may not turn on a dime it will turn eventually. Slower than most in our line of work would prefer, but it isn't a sinking ship. The housing market always comes back. People will always need a home, even in the worst market in 30 years. Also, the investors will come back. They always do. It's a capitalist market and when we reach the bottom, greed takes over. Investors and Joe and Sally Homebuyer will see that it's time to buy and the Tanker will begin to move away from the downslope and return to it's beautiful and powerful upslope. Mortgage rates are at the lowest they've been in 2 years, so if you have a buyer on the fence now is the time.
Short Term - I have been monitoring the pricing for Courntrywide and Bank of America closely since their announcment last week. Countrywide is notorious for being a hair more expensive with their mortgage products. As of this morning the pricing for their 1st lien mortgages were identical.
Long Term - Bank of America's purchase of Countrywide will certainly change the landscape of mortgage lending. This will probably be the first in a series of acquisitions among banks. Look for more of these deals to come down the pipe when the credit markets open up and banks can borrow more money to finance their acquisitions. The first such deal after this one will probably be an acquisition of Wamu by Chase.
President Bush Announces Industry Agreement to Freeze Sub-Prime Mortgage Rates
Following weeks of talks with Treasury Department officials, mortgage lenders and Wall Street firms, President Bush announced today an agreement to freeze interest rates for up to five years for some borrowers with sub-prime loans.
What you need to know about the agreement:
The agreement will allow distressed borrowers who are current on their sub-prime loan payments to keep their low introductory rates
The rate freeze will apply to loans taken out between January 1, 2005, and July 30, 2007, and scheduled to rise in 2008 and 2009
The rate freeze will exclude the following groups:
Borrowers who are delinquent on payments
Borrowers whose introductory rates expire before January 1, 2008
Borrowers who mortgage companies determine have sufficient income to pay the higher rates
As of today the Canadian dollar has made a rebound in the last few months and is once again more valuable than the American dollar. After the first of the year I'd expect to see Canadians coming down to the valley to take advantage of the weaker dollar and low prices of homes to buy, buy, buy. There are a limited number of banks that accept international borrowers and I have access to the best rates offered. If you have an international borrwer that is having trouble getting qualified please give me a call. I can either get them qualified or quickly tell you to not waste your time. There are restrictions on LTV and credit reports that most brokers aren't familiar with.
A realtor usually has the most personal relationship with a borrower and will get asked many questions about mortgages. What makes it confusing is when there are multiple terms for the same thing. I want to quickly review some of the basics, but also explain where different companies call the same documentation types different things.
"FULL DOC"
Employees of a company need to provide there two most recent paycheck stubs, and previous year's W-2 form. If there are any problems with these documents (such as the Year To Date data on the pay stub doesn't include year end bonus) then the lender may ask for the previous year's tax returns. They will also need to provide phone number to employer's human resources dept. to verify employment. Sometimes assets are verified if declared, sometimes not. If the borrower needs to verify assets then the most recent monthly statement showing the ending balance is required.
Self-employed borrowers need to provide one of the following 1) CPA letter verifying the borrower declares self employment and that the CPA did their previous tax returns or 2) Business License. They will also need to include with either of the above their previous years tax returns with all schedules. For assets the same as above applies.
Note- Most self employed borrowers choose to go with a stated income documentation program (below) since they declare lots of tax deductions through their business for their year end filing. This is why for "Full Doc" the lender wants to see all the schedules along with the tax return. Schedule c is the net income for the business and that is the number the lender will use, not the gross income before deductions.
"ALT DOC"
Alt Doc usually refers to a small variation of Full Doc, not including 12 months bank statements. The variations are small like only using one pay stub. This variation is not very forgiving. Because of the minor variation the lender usually gives the same pricing, or slightly higher. The difference in pricing will usually not be noticed by the borrower. Usually with Alt Doc assets are declared and verified as above.
"SIVA"
SIVA is an acronym for Stated Income Verified Assets. Most companies refer to this documentation type with a different title. This is where it can get a little confusing since different companies call it different things. At Countrywide it's called "Reduced Doc." With this documentation a borrower may declare their income higher than provable on paper, but then they must prove that they have liquid assets such as an IRA, 401k, or savings by providing the most recent monthly statement with an ending balance, the same as above.
Why would someone do this? There are many reasons but the most common is that their debt ratio is too high to qualify under full doc pricing, but they know they make more money than they can prove. Example: A self employed borrower makes $300,000 a year for his business but takes a lot of tax deductions and therefore can only prove $50,000 in income on his tax returns. He makes the full $300,000 but can't prove it. He can declare his income at $300,000 to qualify for the loan.
Note- There is a lot of talk in the media currently of "Reduced Doc" loans. They are not referring to just this type of documentation, however it is included in the umbrella term "Reduced Doc."
"SISA"
SISA is an acronym for Stated Income State Assets. This is where a borrower can state or declare income higher than provable and declare assets higher than provable. A borrower only needs to provide a phone number to verify employment plus a CPA Letter or Business license. They don't need to provide any documents for income or assets. These are the riskiest types of loans when declared SISA at the beginning of the application process, and the pricing will be much higher.
Note- SISA is the most confusing documentation because you can get "Full Doc" pricing for a "SISA" loan. How is that possible? Well, most lenders today have Automated Underwriting Systems that take a full application into consideration in approving the loan up front. That approval is subject to meeting certain "conditions." If the credit history and score are good enough (usually 720 or above) and other factors about the property are in line such as low Loan To Value Ratio, then the borrower will get approved for a SISA loan but given Full Doc pricing. At Bank of America it's called "Rapid Plus" and Countrywide it's called "Fast & Easy." Other banks such as Chase, Wells Fargo, and Wamu have the same programs. The trick is to know what the trigger points and thresholds are of the automated underwriting systems to accept an application for this documentation type. That's where your loan officer can be very valuable. Call me with any questions. 760-779-8135
****** These are just some of the most common documentation types and is not a full list or definition****
Some initial reports are coming in through the media that there will be a sub prime bail out by banks. As I hear more and more about this there is a huge void when it comes to details about who is going to be bailed out and who isn't. The description of how they will differentiate borrowers is that every borrower who is in an adjustable sub prime loan will fit into one of three boxes 1) Borrowers who can make the payment after the adjustment 2) Borrowers who can't make the payment even before the adjustment and 3) Borrowers who can make the pre-adjusted payment but not the post-adjusted payment. It is the borrowers who are in box 3 that will be "bailed out" with a sub prime "freeze." Supposedly it is the borrowers that can afford the teaser rate and not the adjusted rate that can have their loans frozen on the teaser rate. I want to be very clear that this is just preliminary information and is not fact. There is a huge controversy over this because it is unprecedented. It could have some short term positive effects, but some major long term effects. It also sends the wrong message to borrowers. It may be indirectly assigning blame as the bailout candidates could be seen as victims. It could be opening up a proverbial can of worms and where the intentions are good there are harmful reactions and repercussions
Andrew Wardwell
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