Mortgages, Finance and Economics - Quality Loans from Dan Hartman

Using USDA mortgages in New London County, Connecticut to get your $8000 tax credit

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Fri, 21 Aug 2009 10:30:21 -0500

102 days.

That's all the time that is left to take advantage of the unprecendented opportunity the first-time homebuyer tax credit represents. With that in mind, it's more important than ever to understand the expectations one should have going into the home buying process, especially when using government financing programs, such as the USDA Guaranteed Rural Housing program. This program is perfect for home buyers whose income has prevented them from saving for a big down payment, however, if you aren't adequately prepared starting the process, you may be unable to close on time. The program provides 100% financing for homes priced up to $280,600. Here's where to start.

Your Income

The USDA mortgage program is income restricted. This means that if you earn too much money, you may not be eligible for the program. The idea behind this restriction is that families earning more should be able to save for a down payment on a conventional or FHA mortgage, and do no require the extra assistance available with the USDA program. In New London county, family income is limited to $95,450 for families with 1-4 household members, and to $126,000 for families with 5-8 members, however, there is more to these figures than you might think.

First, the USDA program looks at the income of all household members, not just those who will be borrowers on the loan. I recently looked at a sceario where a husband and wife wished to purchase a home together, but the wife was ineligible to be a borrower due to a recent chapter 7 bankruptcy. For other mortgage programs, I wouldn't even ask for her income documentation, but because we were considering a USDA mortgage, I had to. The guaranteed rural housing program uses the income of all household members to determine program eligibility, but looks only at the borrower's income for mortgage qualification and for debt-to-income ratios. One of my colleagues recently had to change a loan from USDA to FHA when the borrower got married (surprise!) during the process, thereby increasing her household income beyond the area limit.

There is a brighter side to this income limit, too. USDA does offer several exemptions to this limit, meaning that borrowers can reduce their income for qualifying purposes in some instances. Borrowers with children, and specifically, with childcare expenses, can deduct those expenses from income when calculating qualifying income.

Your Savings

USDA mortgages offer 0% down payment financing because they are specifically designed with low-income buyers in mind. This means that they look very closely at availability of funds in savings, and they expect a full disclosure of those amounts. It also means that those buyers who have accumulated money in savings may not be allowed to use the USDA program. For this purpose, money in checking, savings, CDs and money market accounts is considered available for down payment. Money in IRAs, 401(k)s and other retirement accounts is usually not considered. If you have more than 5% of the purchase price of the home in savings, you may be asked to make a down payment or forced to use a different loan program, like FHA.

That said, just because this is a 100% financing program reserved for buyers with little savings doesn't mean you can buy a home with NO money whatsoever. Even if you get a seller concession for closing costs, or if the home appraises higher than the purchase price and you roll closing costs into the loan, you will still need money for a home inspection, appraisal, and your first year's homeowner's insurance. Also, bear in mind that few sellers will take their homes off of the market for you without a deposit, so you will need money in that regard, too. At a minimum, you should have at least $2-3000 set aside before starting the process.

The Home You Buy

Beyond your qualifications, the property you purchase must also be qualified. USDA financing limits properties based on their location, their condition, and their type. One relief with USDA mortgages is that they are exempt from the Home Valuation Code of Conduct (HVCC) that is causing so many challenges for other mortgage types.

In New London County, much of the county is eligible for USDA financing, however several are not. The USDA Guaranteed Rural Housing program is intended to support ownership of properties in more rural areas, hence its name. With this intent in mind, USDA restricts the program from use in Norwich, Taftville, New London, Groton, Stonington, and a few other communities in New London County. Unfortunately, if you're hoping to purchase in one of these communities, you will have to select another loan option.

Properties purchased with USDA guaranteed funds, must also provide a safe housing option for their purchasers. Properties in disrepair are generally ineligible for funancing with USDA guaranteed funds, as are properties with external environmental concerns, such as proximity to a gas station, a chemical plant, or high tension wires, for example. Help is available for some properties needing repairs, though, as it is possible to borrow extra money to repair concerns, so long as the property is worth at least the amount of money borrowed. Properties with peeling paint, plumbing or heating repairs, or other updates needed may still qualify if a plan is presented to address the problems.

USDA financing is also limited based on property type. The Guaranteed Rural Housing program may only be used to purchase single family homes and condominiums. USDA does offer financing for 2-, 3- and 4-family homes through its Direct financing program administrered by its Norwich office.

Finding the Right Loan

Ultimately, the USDA mortgage program is a very safe program with provides excellent opportunities for many buyers, but it isn't for everyone. It's credit history requirements are comparable to FHA requirements, meaning that buyers unqualified for FHA financing due to poor credit history will also be unable to get USDA financing. For the right buyer, though, it presents a great oportunity to get a home now and take advantage of the unprecedented opportunity represented by the $8000 tax credit.

It is important to remember that the clock is ticking. Bearing in mind that it takes between 30-45 days to close a mortgage, and an additional 30-45 days or more to find the right house, there is no time like NOW to get the process started by setting an appointment with your mortgage advisor. If you haven't started already, you have very little time left!

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and can be reached by commenting on this post, or by phone at (401) 263-8655. Dan also serves as an Adjunct Professor of Finance at Roger Williams University and the University of New Haven.

New Green Shoots? How About Significant Improvements to FHA Condo Guidelines!!!

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 10 Aug 2009 19:16:40 -0500

Washington's buzzword last month was "green shoots" to suggest tiny indications of improvements to the economy and financial markets. After 2 years of lender closures and program cuts, this fall we may just start seeing some green shoots in mortgages, as well.

Mortgage financing on condominium properties has been a sore point for mortgage and real estate professionals this year due to the intensified scrutiny these properties receive from underwriting, and the often-frustrating guideline variations from one lender to the next. Perhaps most challenging for the mortgage professional is that we are unable to provide our clients with assurance that the condo has been accepted, as most underwriters wait to evaluate the condominium information until all other aspects of the loan have been approved. Much of this difficulty comes from significant variances in guideline application from one lender to another and from one underwriter to another. While, the changes to follow relate to FHA mortgages, conventional loans haven't been easy either.

On one loan I closed recently, we initially locked the loan with one lender, but never submitted it to them when it became apparent the property would fail condo approval there due to one other unit owner's delinquent dues. It was submitted to a second lender, but rejected there due to the seller's profit - he had acquired it a little under a year earlier, and, after a total rehab of the property, was projected to make $20,000 or about 15% which the underwriter thought was too much. The most aggravating part of that rejection was that the same lender had just closed a nearly identical transaction for a different seller represented by our seller's agent, but we couldn't use that transaction for leverage because adding ours would have put the lender over the maximum 10% concentration in the condo complex that FHA allows. A third lender finally approved and closed it, but not before a 2nd appraisal was done on which the appraiser, who is registered with FHA, stated that he was unable to judge whether or not the property met FHA approval guidelines.

Obviously, if anything could have gone wrong, it did on that transaction, but many of the problems stem from uneven application of FHA guidelines. Well, FHA will be changing those guidelines this fall, and it appears that the changes are largely positive, and include relaxation of requirements on commercial space in the complex, minimum number of units, percentage insured by FHA, and more. The existing processes for approval will be eliminated, and replaced by two simpler processes, one through HUD, and another at the Direct Endorsement Lender level. Here are a few of the highlights:

Minimum units in complex reduced to 2
Up to 25% of space in complex may have commercial use
No more than 15% of unit owners may be in arrears on association fees
Phasing is permitted
30% of properties in complex may be financed by FHA-insured loans

Several of these changes will be game changing. Providence experienced a large wave of condo conversions in the first half of this decade, as owners turned 2-4 unit properties into 2 or 3 condominium units. Previously, these properties were downright unfinanceable for buyers needing FHA financing. Not any more. The adjustment to a straight 30% limit on FHA-insured properties is also quite significant, as it will allow larger complexes more financing flexibility.

According to information from HUD, these guidelines will go into place October 1st of this year, however, if history is any indicator, adoption and adherence by different banks will be varied. Because the HUD guidelines provide only a minimum property requirement, it is likely that many lenders will apply their own "underwriting overlays" which will allow them to be more restrictive than the rules would otherwise allow. This is one of the areas I am happiest about being a broker; while we do have a lot more work to do to understand differences in underwriting requirements from one lender to the next, this knowledge helps us close loans that no one else can.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an Adjunct Professor of Finance for Roger Williams University and the University of New Haven. He can be reached by phone at (401) 263-8655, or by commenting on this article.

Mortgage Disclosure Improvement Act, or why I'm working late tonight

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Tue, 28 Jul 2009 16:57:35 -0500

Good evening! I wanted to post a quick note tonight to let you all know what I’ve been working on for most of this working week so far. The Mortgage Disclosure Improvement Act, or MDIA, was enacted as a rider to one of the many stimulus-related bills that have cleared congress this year, and will be implemented on July 30th. The act brings with it significant changes to disclosure paperwork that are intended to make consumer choice among mortgage sources more competitive, and, for the most part it should succeed there. It also contains certain procedural changes that will have a significant effect on timing of most future transactions.

Specifically, MDIA requires that borrowers not be charged any loan-related fees other than a credit report fee until they have received truth-in-lending disclosures for the mortgage. This is a positive change, as I know I have lost loans in the past to other lenders who were charging more, but not disclosing it, because those borrowers felt obligated by rate lock or appraisal fees they had paid in advance. That won’t be happening any more.

Under MDIA, it is unlikely that any lender will order an appraisal service until this disclosure requirement has been met. At present, infrastructure exists to allow that obligation to be met in 3-4 business days, but this will add more time to each homebuyer’s commitment process. Because of this, I am recommending that offers subject to financing be written with a minimum of 30 days to commitment and 45 days to closing. It is my hope that this will allow us to continue to deliver on-time commitments and closings whenever possible.

MDIA also contains provisions for re-disclosure in the event of a change in loan terms outside tolerances. This could affect closing scheduling, but I anticipate this component of the change to be of significantly smaller impact to day-to-day operations than the appraisal component.

Thus, I have been quite busy this week assuring my clients their loans will be safe through this transition. I thank you for your patience through this, and for your continued support. Please don’t hesitate to contact me should you have any questions about this, or anything else going on in mortgage land.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor of Finance with the University of New Haven and Roger Williams University. He can be reached by commenting on this article, or by cell at (401) 263-8655.

Top Rated on Angie's List!

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Tue, 07 Jul 2009 16:50:23 -0500

I have to admit I've been a little too busy lately to blog about everything, or do everything that I wanted to do, from a marketing perspective. I finally had a chance to catch up on a recent post about our services from a user on Angie's List. I'm pleased to say he was very happy with the service received on his FHA 203k rehab loan, and said, "We closed on time and under budget, We couldn't be happier with Dan Hartman."

Because we now had a review on Angie's List, I was able to set up a company account and provide some basic details about Province Mortgage Associates. I like the idea of a review system where consumers get final, public say about their experiences. It keeps everyone on their toes to deliver the best experience possible.

After setting up our basic account there, I looked at the consumer side of things, and found that we are actually the top listed mortgage company in Rhode Island. Hopefully the positive feedback will continue to flow!

Volunteering at WaterFire - How I spent my weekend

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Tue, 16 Jun 2009 23:23:56 -0500

This Saturday, after spending most of my day in New Hampshire at a school board meeting (I serve on the board of a private school there - more on that at another time, perhaps), I zipped back to Providence to volunteer again, this time at a Providence institution, WaterFire. I'm the co-chair of the Greater Providence Chamber of Commerce's Ambassadors, and for our spring / summer service event, we assembled a crew of over 20 ambassadors and friends to serve as ambassadors to WaterFire, staffing Ribbons of Light booths.

WaterFire is a Providence institution, was first lit for First Night 1994, and was so wildly popular that supporters rallied to make it an ongoing event. Since then, creator Barnaby Evans and his team of staff and volunteers have labored tirelessly to keep the organization running, gathering donations of time and efforts from individuals, business, and the city. It seemed appropriate to give one evening to assist in the same work.

I was proud of the group we brought, and I believe we were quite successful in achieving our goal of helping in fundraising efforts. This weekend's event was especially important because the United States Conference of Mayors was in town. It was quite an experience welcoming such an illustrious group to Providence, along with the 5000-plus other attendees, and I look forward to participating again!

Mortgage-Backed Securities Losing their Stigma - What we can learn from the current Mortgage - Treasury Spread

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 15 Jun 2009 13:13:45 -0500

Is there a light at the end of the tunnel? Investors may be suggesting so with the recent surge in the Dow Jones Industrial Average from its March low below 7000 to a recent peak over 8700. Still, some doubt should exist considering the recent economic data hasn't so much indicated the United States economy is getting better, rather that the economy is worsening at a slower pace. Still there is one area, very close to the epicenter of the economy's troubles, that suggests recent changes are achieving their desired results.

In the 18 months leading up to December, 2008, the spread between 30-year mortgage rates and the benchmark 10-year treasury note rose steadily, reaching a peak at over 3%. This was a period of unprecedented worry over asset quality, as years of declining credit standards were exposed in massive defaults, especially among sub-prime adjustable rate mortgages. These loans had been given at lower standards for credit history or income documentation, and often at higher loan-to-value ratios than conventional mortgages.

As this played out, mortgage lenders introduced a seemingly endless series of guideline updates intended to improve the quality of newly originated mortgages, ranging from adding "declining markets" requirements, and increasing required down payments, to outright program elimination. In addition, mortgage vendors, such as mortgage insurance companies, have tightened their requirements, further reducing mortgage availability. While one result of this is that more borrowers are being turned down for mortgages, the market is recognizing these efforts, and the result can be seen in the current Mortgage - Treasury Spread.

As of June 11th, 2009, the Mortgage - Treasury spread stood at 1.73%, meaning investors required a rate 1.73% higher to justify investing in riskier mortgage assets rather than safer US government securities. The 10-week moving average fell to 1.68%, approaching the historical equilibrium around 1.5% that had stood until the watershed revelations of July, 2007.

The spread briefly reached 1.24% at the end of May, as a surge in Treasury rates had not yet caught up to mortgage pricing.

Several factors preclude the spread returning to the 1.5% level permanently, although it is possible it could settle near this level. The 1.5% level came about in part due to a massive increase in the quantity of assets seeking investments; mortgages replaced stock and treasury investments due to stock volatility and low returns on treasuries. The current economic crisis has erased much of the wealth associated with that period, permanently affecting demand. Addtionally, stocks have presented attractive opportunities of late. However, Treasuries are becoming less desirable compared to other assets due to their increased supply.

In coming months, it is important to be mindful of housing statistics, in particular, to gauge the success of the economic turnaround. Existing Home Sales figures will provide insight into the absorbtion of properties, especially foreclosed properties, into the market. Of particular note is data regarding the supply of existing homes. Until this supply subsides, home-price stabilization cannot be expected to occur. Also important is employment data, as another wave of foreclosures could easily follow from the 6 million or more jobs already lost since the beginning of the recession. If this happens, the Mortgage-Treasury Spread could easily widen. While inflation will be a significant focus of the Federal Reserve, it is not expected to meaningfully impact the Mortgage-Treasury Spread, as inflation impacts both types almost equally. Of note, though is one recent article suggesting that the Fed is facilitating Treasury purchases by buying mortgage-backed securities. This could be dangerous if the Fed is unable to continue and other buyers remain unwilling to participate in the market.

One final thought that has seen little press lately, but likely will in the near future, is the question of duration for new mortgage-backed securities. Duration of a financial asset is the average amount of time in which the investor will receive the proceeds of the investment, and provides a measure of the risk faced on that investment as interest rates change. Essentially, the longer the asset's duration, the greater the risk it faces in a rising rate environment. While most mortgages have either a 15- or 30-year term, their duration is much shorter due to the amortized nature of the loans, and due to natural events such as refinancing or home sale which cause loans to be prepaid.

Several factors in the current environment are likely to cause a shift in expected mortgage duration. Specifically, recent home-price depreciation will extend duration, as homeowners will be less likely to sell or refinance should they have insufficient equity. Second, newly written mortgages at historically low interest rates are less likely to be refinanced in the future, which had been a significant historical factor in shorter mortgage duration. Offsetting these is a possible cultural shift towards debt aversion which may lead homeowners to pay down existing debt more rapidly.

Mortgage risk relative to Treasury risk has decreased significantly in the last 6 months, however, the outlook for the market is still not as clear as investors would like it to be. The continued recovery could be threatened, should market factors impact demand for home purchases. Perhaps the most important news will come shortly, with the Federal Reserve's June meeting. For now, while it is clear that mortgage risk has normalized, whether it will stabilize at this level is anyone's guess.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an Adjunct Professor of Finance at the University of New Haven and Roger Williams University. Dan can be reached by commenting on this article, or by phone at (401) 263-8655.

From the Mailbag - FHA gift money

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Thu, 21 May 2009 10:59:19 -0500

I got this message from a reader here on Activerain, and thought I'd share the answer.

Subject: FHA Gift Money (Sent via Activerain)

Dan, My wife and I are in the process of buying a house. During the FHA preapproval process we noticed that we possibly were going to need a little help monitarily. Mywife's parents were more than happy to help us out. The only catch and this is my problem, is that the money that they gave us was cash and is considered "matress money," as it was never in the bank. We have filled out a gift letter, but our lender is stating that we are going to need more proof of the origionation of the funds. It is only $2400. Is there anything that you can suggest that may help us?

Thank you,

A reader

Here is my response:

Hi, reader,

Thanks for your email.

There are 3 basic requirements of gifts for FHA loans:

Giver must verify ability to give funds (bank statement, etc.)

Gift letter must show money is given as gift

Receiver must verify receipt of funds (bank statement)

It sounds like you’re getting tripped up on #1, but the rest are ok. It’s not necessary that the actual money given be money in a bank, if the givers have other funds in the bank they’d be able to show as available to give. For example, if her parents have $2400 in the bank and $2400 in mattress money, they could show the bank money as proof of the source of funds. Whether they give you the money from the bank, or the money from the mattress makes no difference. Is that a possibility?

Alternately, you might look to have someone else act as the giver if they are able to show those funds available, and are willing to sign the gift form. Take a moment to consider if you have other relatives or friends who may be able to act in that capacity.

If you have questions for Dan Hartman, please contact me through my profile page, or leave a comment here. Thanks again for reading!

FHA is great, but don't forget conventional options, too!

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 11 May 2009 17:55:13 -0500

I know that FHA, and other government products, have been all the rage lately due to difficulty in getting conventional loans and conventional mortgage insurance, but I think that a lot of mortgage originators have forgotten that there are still good conventional loans available without the high down payments frequently associated with them. For cost conscious borrowers, this can be especially important, as conventional loans do not require the high upfront mortgage insurance or guarantee premiums associated with government programs.

In most areas, well qualified first time homeowners can get financing at as high as 97% of the purchase price of their new home. While monthly mortgage insurance with this option is a little bit more expensive than FHA monthly mortgage insurance, the savings of 1.75% of the loan amount in upfront mortgage insurance premium is significant. For areas that don’t allow 97% financing, 95% financing is still available with conventional loans.

Interest rates for conventional loans like this are comparable to FHA for most situations, especially when making a down payment of 5% or more. The big difference is credit requirements. FHA requires only a 620 credit score, while getting the best rate on a conventional loan requires a score of 740 or higher. There are some differences in appraisal and income requirements, so make sure you know your score and that you’re getting all the options available.

If you would like a second opinion on your financing, you can reach me any time at (401) 263-8655.

Are the new Fannie Mae and Freddie Mac "Refi Plus" programs working?

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 27 Apr 2009 18:16:26 -0500

It's been about 3 weeks now since Fannie Mae and Freddie Mac rolled out their "streamline" refinance programs they had first discussed at the beginning of February. These programs are intended to make refinancing to today's rates easier for homeowners by lowering documentation and credit requirements, and by allowing refinancing at higher loan-to-value ratios than are permitted under normal guidelines. Some key benefits of this program for current homeowners include:

Refinance at up to 95% (soon to be 105%) without PMI

This is big for those who originally had 20% equity as they are practically guaranteed no PMI

Reduced appraisal requirements

Drive-by appraisals and Automated Valuations (AVMs) are very common

Many rates under 5%

Actual rates depend on exact qualifications, but there are some truly low rates out there

These benefits help open up the possibility of a refinance that makes sense for many borrowers who have been on the sidelines, tantalized by low rates, but frustrated with declining home values. Unfortunately, there are many borrowers who are not yet eligible for this program; fortunately, there are new options being opened up shortly that may increase the usefullness of this program, including:

Options to port a homeowner's existing (usually lower-cost) PMI certificate to a new loan

PMI has become very expensive in 2009 due to risks faced by issuers, but keeping old PMI saves big

105% options

For those who can't refinance at 95%, a few banks are already offering 105% and more will follow

This program is limited, though. First, to even qualify for consideration, a borrower's loan has to be securitized or owned by Fannie Mae and Freddie Mac. There are simple websites established by these government-sponsored entities that allow borrowers to look up their loans; alternately this can also be accomplished by their mortgage advisor.

The Office of Federal Housing Entity Oversight (OFHEO) which is operating Fannie and Freddie right now made a significant error in allowing its charges to design their own programs. This has led to significant discrepancies in the two programs, most notably that Fannie loans can close anywhere, while Freddie loans may only close at the existing loan servicer. This can lead to a lot of confusion for borrowers trying to make their situations a little easier in these difficult times.

In spite of the promise of this program, this option does not approach the elegent simplicity of the FHA streamline refinance. Under that program, FHA assumes that since it is already going to be paying out on insurance in the event of default, why not make it easier for borrowers to make their payments by giving them access to lower rates without having to go through an appraisal, or document income. This can even work for borrowers who have lost income and might not otherwise qualify; when income is recduced to an unemployment check, saving a couple hundred dollars per month on the mortgage goes a long way.

From what I've seen in new applications so far, it's looking a little better than the infamous "HOPE for Homeowners" program (which is still working on funding its 2nd loan), but not much. Many borrowers who haven't already refinanced owe significantly more than 95% on their homes due to recent depreciation. Hopefully the upcoming changes will allow this program to truly accomplish its goals, but if not, it may be back to the drawing board at OFHEO.

Dan Hartman is a Senior Mortage Advisor at Province Mortgage Associates, and serves as an Adjunct Professor of Finance at Roger Williams University and the University of New Haven. You can reach Dan by commenting on this article, or by phone at (401) 263-8655.

Bowling for Finance and Entrepreneurship Education

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 06 Apr 2009 10:51:21 -0500

Yesterday, I took part in Rhode Island Junior Achievement's 25th Annual Achieve-A-Bowl, a fund-raising event that has collected over $80,000 this year to support Junior Achievement's in-school education programs. I think this is a very important charity to support right now due to the obvious deficit of Finance and Economics education in our school systems. Considering that 34% of respondents to a survey conducted by Bankrate.com didn't know what type of mortgage they had, I fell it is very important to support anything that will increase financial literacy.

Participating in the event was a blast. I bowled on a team consisting of several members of my BNI chapter, CitiBiz BNI, along with 9 other members. In spite of the beautiful weather outside, we stayed on for three strings. I was a little disappointed with my results in the first string, as I finished at a very unexciting 93. In the second string, however, I turned up the heat a little

(I know it's a bit tough to read, but that does say 175) and produced my best game ever at 175. In the 3rd game, I proved that it hadn't been a fluke, rolling another 175.

I think I also proved that cell phone pictures, in general, are bad. As if to further highlight that, I also shot some video of the event, yes, also on the cell phone.

In all, it was a great event in support of a fantastic cause. If you haven't already contributed and you're interested, I think my online donation page will be live for a little while longer. Thanks again to all who sponsored me for this event. It was a blast participating, and I look forward to doing it again.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an adjunct Professor of Finance with Roger Williams University and the University of New Haven. He can be reached by commenting on this article, or by phone at (401) 263-8655.

What's new in the mortgage market? Keeping up on recent changes

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 30 Mar 2009 11:26:45 -0500

Good morning!

It’s been a little while since I had the opportunity to write, and I wanted to pass along a bit of information about what is going on in the financing market. There have been some changes recently that need to be considered, so I’d like to take a few minutes to run through them. If you have questions about any of these in particular, please don’t hesitate to call me.

FICO Updates

Over the past two months, many individual lenders have set credit score requirements that differ significantly from traditionally accepted criteria. At present, a 620 credit score is required for all loans, and, although very limited opportunities exist for borrowers with no credit whatsoever, additional loan charges related to those situations can be prohibitive. FHA, USDA, Fannie Mae, and Freddie Mac loan programs now require a 620 credit score for all borrowers and coborrowers, and most borrowers with scores below 720 are finding that FHA is the most attractive program due to Fannie Mae and Freddie Mac surcharges for lower scores.

Condo Updates

If you haven’t run into a condo in a while, be thankful, because risk aversion from banks has made the process quite a bit more challenging than it used to be. There are a limited number of projects that are already approved by Fannie, Freddie, or FHA which, fortunately, allow exemption to the majority of new stipulations. Other projects will require full review of recorded copies of all condo documentation. If you have a listing, I’d be happy to review it for you to ensure a reasonable process experience for the buyers. I recently had to decline a borrower with a 790 credit score putting 50% down because the condo didn’t conform, so please make sure upfront to save later challenges. For additional information about condo financing, see part I and part II of my earlier article about the process of condominium financing.

Converting current primary residence into investment

Because of the current market environment, many buyers are acting to take advantage of low prices available to buyers, while holding onto their existing homes to wait for a better opportunity to sell. This can backfire if the buyer isn’t able to carry both mortgage payments, as banks will not accept rental income on the newly rented property without an appraisal showing the client has 25% or more equity in the property that will be rented. There are some exceptions to this, though, so don't hesitate to call to see if a particular scenario might qualify.

Super-conforming limits

Many lenders have adopted HUD guidelines for homes in “High-cost” counties which allow loans in excess of $417,000, sometimes up to $729,750, to be considered conforming loans instead of jumbo. This can represent a significant savings for buyers in this category. Call me to check your listings to see if they are eligible.

Modification and Streamline Refinance enhancements

Fannie Mae and Freddie Mac have announced updates to guidelines for loan modification or streamline refinancing that should be a great help to stabilizing homeownership. These guidelines will make refinancing more feasible for borrwers whose homes have declined in value, as borrowers not currently paying PMI will be able to avoid PMI on new loans aswell. Additionally, borrwers who are struggling with their existing loans may qualify for super-sized savings through special loan modification programs requiring lenders to reduce payments to 31% of a borrower's gross monthly income.

FHA 90-day rule: doesn’t apply to VA

In what should be a big help to flippers, we’ve discovered that the FHA 90-day rule that requires non-bank sellers to hold properties a minimum of 90 days does not apply to buyers using VA financing. Flippers should offer incentives to attract military veterans for quickest sale to take advantage of this.

I hope these updates help! Please give me a call if you have a question on any of these changes, or any other challenges you’re encountering. Lastly, I did want to share that I will be participating in Rhode Island Junior Achievement’s 25th Annual Achieve-a-Bowl next weekend. Junior Achievement provides economic, financial, and business education in schools. If you’d like to support this, I would appreciate your help. You may also contact me directly to assist, and thank you!

Thanks again for the opportunity to serve your financing needs. I look forward to speaking with you soon!

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an Adjunct Professor of Finance with Roger Williams University and the University of New Haven. He can be reached by phone at (401) 263-8655, or by commenting on this blog entry.

Mortgage - Treasury Spread Closes as Homebuyer Incentives Suggest Home Prices May Stabilize

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Thu, 12 Mar 2009 16:03:37 -0500

February was a significant month for the mortgage and real estate markets, as a massive bailout package was signed into law, and further talk of foreclosure prevention efforts at the federal level reassured mortgage investors of the safety of their investments. An $8000 tax credit for first-time homebuyers sparked hope for increased home sales in 2009, both for starter homes and condominiums, as well as for so called "move-up" homes needed by those current homeowners able to sell into the current market and purchase significantly discounted replacement homes.

Entering March, the Mortgage - Treasury spread reached its lowest point since June, 2008, closing at 2.09%. The spread was last at that level June 5th, 2008 when it closed at 2.06%. The 10-week moving average spread closed February at 2.50%, reflecting the significantly higher spread in effect throughout December and January. The Mortgage-Treasury spread is a measure of the relative risk of investment in mortgage securities compared with investment

March will likely be dominated by further market absorbtion of recent events, especially the new Making Home Affordable plan recently introduced by the White House and several major mortgage agencies. This program should provide further support to the housing market and to the value of existing mortgage securities. As the rate of foreclosures is reduced, housing inventory should gradually decline, providing some stability to home prices. Should this trend continue, it is possible the mortgage - treasury spread could stabilize near current levels.

Other factors that will be of impact in March include the potential for further fed intervention in mortgage and treasury markets. The Fed's $500 billion program to stabilize the mortgage secondary market, announced in December, is intended to boost confidence in the mortgage backed security market that is at the core of current economic challenges. This investment has been successful, as the Mortgage - Treasury spread has declined by a full percentage point since that program's announcement in December. In January, the Fed announced it would be closely monitoring treasury rates and might intervene if conditions required. Thus far, they haven't.

Also, it is anticipated that home purchases spurred by the aforementioned first time homebuyer credit will begin to have an affect on the market, providing some degree of stability to real estate prices. Remember that a significant degree of mortgage risk comes from concern that homeowners might be unable to sell their homes if circumstances demanded. As the purchase market picks up in the spring, expect to see further support for the current reduced Mortgage-Treasury spread. Rhode Island and Massachusetts have recently seen a decrease in foreclosures; it is possible this may spread.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor with the University of New Haven and Roger Williams University. He can be reached at (401) 263-8655 or by leaving a comment on this article.

Economic Stimulus Act Signed Into Law - What does it mean for homebuyers?

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Tue, 17 Feb 2009 12:02:39 -0600

As I write this, the president is poised to sign the American Recovery and Reinvestment Act of 2009, better known as the $787 billion Economic Stimulus Plan. There has been much speculation about what this plan might do for housing, real estate, homebuyers, and mortgages, ranging from 2.99% to 4.5% mortgage rates, $15,000 tax credits, and more, but when the dust settles and the plan is signed into law, the final effect will be quite different.

The most important thing the finaliztion of this plan will accomplish is it will end that speculation. Over the past few weeks, I have spoken with dozens of homebuyers, realtors, financial planners, and fellow mortgage advisors about the economic situation and the stimulus ideas, and the overwhelming consensus was this: "I'm not doing anything until I see what comes out of the package."

This is exactly why finaliztion of the package is important: not because the package might contain some magic bullet that will stop foreclosures, recapitalize banks and restore Amercans' faith in the financial system; rather because finalizing it puts an end to further guesswork regarding its contents.

So what does the package contain for the average homebuyer?

$8000.

Section 1006 (page 54 of the conference report) describes changes to Section 36 of the Internal Revenue Code modifying the previous homebuyer credit that had been enacted in October of 2008. Specifically, the following important changes have been made:

Credit has been increased: the original credit was limited to $7500 or 10% of the home's purchase price; this has been upped to $8000 or 10%.
Credit no longer requires repayment: a significant criticism of the original 2008 credit was its repayment requirement, as those taking the credit would be required to repay it over 15 years. That has been addressed in the new law so that repayment is now required only if the home is sold within the first 3 years.
Credit is now allowable for buyers using "revenue bond" funded mortgages: many state and local entities offer first-time homebuyer mortgage programs that sometimes offer terms more favorable than government or conventional mortgages. Previously those buyers had been prohibited from accepting the credit, however they may now claim it.
Time to purchase extended: the original credit was due to expire June 30th; the revision extends that to November 30th

Meanwhile, many components follow the original wording instituted last fall, specifically:

Credit is refundable: this means that a homebuyer who would otherwise owe no tax may still claim this credit and receive it as part of a tax refund
Credit is for first-time homebuyers only: sorry, move-up buyers, but you won't receive this credit; do expect many more first-time homebuyers to be looking at your house, which should help you sell more quickly, if you're priced correctly
Credit is income-limited: the legistlature didn't see fit to modify the terms of this program to allow all homebuyers to benefit, only those who haven't owned in the past 3 years

Finally, certain components are still somewhat unclear:

Credit may be retroactively claimed: the prior credit offered the option to claim as if the purchase took place 12/31/2008 even if it closed in the early parts of 2009. The final bill's language appears to replace this paragraph (page 122, Stat 2981, section 36 subsection g) with something unrelated, which may mean buyers will need to wait until 2010 to claim the credit. UPDATE - As of 12 March, I have received confirmation that this credit may be claimed as if the home purchase took place in 2008, allowing buyers to get quicker access to the credit.

Overall, this program does a lot to change current programs by making them significantly more attractive to homebuyers. The removal of repayment requirement makes the credit much more attractive than the previous offer that had been made. The other changes are more semantic than meaningful, but the most significant thing accomplished by enactment of the bill is this:

Clarity

At least now, we can stop guessing, and start working towards improving the housing market.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, Inc, and has worked in the mortgage industry for over 9 years. A 2005 MBA graduate of Clark University, Dan also serves as an Adjunct Professor of Finance for the University of New Haven and Roger Williams University.

Mortgage - Treasury Spread closes sharply in January - is Fed buying bringing stability?

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Thu, 12 Feb 2009 10:19:12 -0600

In a month which saw the lowest 30-year fixed rates on record, it isn't surprising that the massive groundswell of refinancing we experienced happened. Its consequences could also be seen as quite predictable: lenders, fresh from laying off thousands of employees in 2008, saw their operations grind to a halt as they received an onslaught of mortgage applications. The reprecussions to market interest rates were rather more cryptic, though. By the end of January, the Mortgage-Treasury Spread had closed to its tightest range since September, 2008, closing the month at 2.28%.

The 10-week moving average stayed relatively level at 2.78%, bouyed by much broader weekly spreads in December and early January.

The Mortgage-Treasury Spread is a measurment reflective of the relative perceived risk between mortgage securities and U.S. Treasury securities. A higher spread indicates investors fear mortgages are more likely to default, while a lower spread is suggestive of mortgage-market stability. Until July, 2007, the spread had experienced an unprecedented period of stability in the 1.4% to 1.6% range, but concerns stemming from the current crisis in confidence for mortgage assets has pushed that spread as high as 3.12% in December of 2008.

Moving into February, there are a number of factors that should put pressure on the Mortgage - Treasury spread, but only two of real significance. The US Treasury will be embarking on a massive borrowing campaign in order to fund the continuing bailout and economic stimulus efforts, and is expecting to sell over $400 billion in new securities. Ordinarily, such an increase in supply (when the Treasury borrows, it sells Treasury bonds, bills and notes, effectively increasing the quantity of such instruments in the marketplace), would have a significant effect on treasury iterest rates, as investors begin to require a higher return in order to justify their investment.

Offsetting that is the promise from the Federal Reserve to take an active role in controlling treasury rates by buying long-dated securities. The Fed alluded to this possibility in its January 28th announcement, saying that it would be closely watching markets for these securities, and would intervene by buying securities if rates became too high.

How does the Fed intend to do this?

Already, Fed Chair Benjamin Bernanke has injected nearly $2 Trillion into asset markets in recent months, to the point where the Fed's ability to invest further is limited by lack of available funds. Of course, the Federal Reserve controls the world largest source of funding, its own printing presses. Essentially, any further market action by the Fed is likely to be accompanied by a significant increase in the quantity of US currency in circulation as the angecy uses inflation to control interest rates. Will it work?

Only time will tell.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and has over 9 years experience in mortgage lending. A 2005 MBA graduate of Clark University's Graduate School of Managment, Dan also serves as an Adjunct Professor of Finance at the University of New Haven and Roger Williams University.

Builders converge, but does their idea make sense?

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Wed, 14 Jan 2009 21:59:53 -0600

I attended a presentation yesterday regarding the possible solutions to the real estate problems currently facing Rhode Island, and, one of the things I learned about was a proposal by the National Association of Home Builders to stimulate home sales by artificially lowering 30-year mortgage rates to 2.99% for a 6 month period and to 3.99% for an additional 6-month period.

I was interested in the concept, so I did some additional research looking for news articles related to this.

I found one such article on the association website of the magazine of the landscaping industry. The two primary proposals offered by the association, interest rate lowering and augmentation of homebuyer credits, appear to miss the core of the current real estate market, and, if anything, they could cause additional harm.

Suppose you are a potential homebuyer, and you hear about a proposal to make your buying costs even lower. Are you going to make your move now, or wait and see if things get better?

Well, the bottom line is that home buying costs are at their lowest point in roughly 10 years, as historically low interest rates around 5% mean that home prices around 2003 levels feel like 1999 levels to buyers. Rather than pushing to make this scenario even more attractive, instead builders should be using their influence to inform the public that the situation is already phenomenal.

The other concern I have with the builders’ proposal is that it only partly addresses the true problem – jobs. The real reason I believe first time homebuyers are reluctant to proceed is the fear that they might not have a job to be able to pay the loan 6 months from now. The builders suggest that their proposal will create 539,000 jobs, but that is based on the fallacious assumption that buyers are looking for cheaper housing.

Rather, I believe that our economy needs investment in areas where supply is not already glutted. Here in Rhode Island, we have 164 bridges that have been classified as “Structurally Deficient”, 61 of which have required weight restrictions to remain in operation. Rather than stimulating home building, which is of dubious need, considering current inventory levels, building bridges can help the entire economy. A nice start would be improvements to the Pawtucket River Bridge so that large trucks no longer have to detour along I-295.

One thing I do agree with is a suggestion made by the panelist at yesterday's presentation: do, or do not, but decide. It is important that leadership make a decision to implement or reject this proposal quickly, not because time is of the essence in its initiation, but because failure to announce a decision could cause further vacillation on the part of already confused homebuyers.

Mortgage - Treasury Spread Remains Near Peak for December 2008; Fed Action Awaited

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Fri, 02 Jan 2009 14:53:25 -0600

The Mortgage-Treasury Spread remained near its highest ever level in December, as investors retreaed into the safest available investments to close 2008. Treasury instruments of all maturities saw one of the biggest demand spikes in their history, a sign that risk tolerance was negligible this month. Throughout the month of December, the spread remained largely unchanged from its December 4th level, closing the year at 2.86%. This is down slightly from the December 4th spread at 2.96% The historic low treasury yields reached in December are instrumental to the high spread, as mortgage rates dropped through the month to historically low levels.

The 10-week moving average spread soared to 2.79% from 2.58%.

The Mortgage-Treasury Spread measures the relative risk between mortgage securities and comparable treasury securities. Prior to July 2007, it had enjoyed an extended period of stability slightly above 1.5%, but troubles in the mortgage market have caused it to increase dramatically since then. Oddly, while negative news about mortgages and mortgage lenders began to slow in the latter part of 2008, increases to the spread did not.

Significant news this month includes Treasury Secretary Paulson's denial of a Treasury plan to pursue a 4.5% interest rate for fixed mortgages, a significant setback to many who thought mortgage rates could easily fall further. In its discussion of an unprecedented rate action December 16th, the Federal Reserve Open Market Committee annouced it would begin active participation in mortgage markets, including purchase of mortgage-backed securities beginning in January. Its announcement of this purchase led to tightening of the Mortgage-Treasury spread in mid December, and the result is likely to be further improvement in the spread later this winter as the Fed's demand for these securities replaces demand that is missing from other sectors.

Recent employment data was also encouraging, as fewer than expected applied for first time unemployment benefits. This reduction may be related to the timing of layoffs around the holidays, however if it forms a trend it could be beneficial.

Mortgage rates are at their lowest levels ever, yet mortgage availability is still significantly limited due to reductions in home market values and the increase in credit requirements. Many homeowners applying for refinances at historically low rates are being turned away due to limited equity or due to credit worries. The mortgage market will remain slow as long as Wall Street investors prefer security to higher returns as has been the case the past few weeks. One possible bright spot: as of this writing, the Dow Jones Industrial Average is approaching 9000 on the back of 3 straight days of increases, suggesting investors are aware better yields are available.

2008 Recap, 2009 Preview and a Green Mortgage? Sure, let's put it all in one post

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Wed, 24 Dec 2008 10:16:22 -0600

2008 has been a year in which many new ideas have arisen, but also one in which old ideas have returned, especially that of “being green”. As we saw gas prices soar past $3.50 per gallon, I think that all of us made an effort to drive a little less, or recycle a little more.

At Province Mortgage Associates, we’ve worked to partner with national lenders offering green closings. With these banks, most of the closing forms are done electronically. Even the borrowers' copies of these documents are available digitally, saving hundreds of pages of paper.

To show my appreciation for my clients' business and referrals this year, I had reusable shopping bags made for my closed clients and referral sources (see picture!). They hold as much as 4 plastic bags, can be reused hundreds of times, and save money, as stores like Stop & Shop and Whole Foods give credits for reuse of bags. I hope everyone who got them will get years of use from them!

2008 – Year In Review – What Will 2009 Bring?

2008 will be remembered for decades as a year of major financial upheaval. All of us have lost something, whether it is a job, value in our home or 401(k), or just faith in the system, but we are beginning to turn the corner. While prices are down, the number of homes sold is up. The stock market has stabilized at its current level, and the government is making an effort to grow jobs. Mortgage rates are at their lowest level ever.

For 2009, I expect further stabilization in financial markets. We’re running out of possible bad news, and, with the exception of a small number of negative amortization mortgages, nearly everything that can go wrong has, leaving only the task of cleaning it all up to next year. Expect to see home prices remain depressed, although further decreases are likely to be slight, and many areas could see appreciation start in late 2009 to 2010. If financing options for home rehabbers improve, this could happen quicker.

We are seeing more refinances now as rates approach 5% for many 30-year fixed mortgages. Here’s an example of what that does to monthly payments for certain circumstances:

If you owe and are paying 6.5% 7.5% P& I pmt. at 5% would be:

$150,000 $948.10 $1048.82 $805.23

$200,000 $1264.14 $1398.43 $1072.64

$300,000 $1896.20 $2097.64 $1610.46

Like what you see? Call me at (401) 263-8655 for your personalized quote. Again, thank all of you for your support this year, whether it has come through personal business, referrals, or moral support. I can’t continue what I’m doing without you, and I look forward to helping you for years into the future. Best wishes for a great 2009!

Dan Hartman

Senior Mortgage Advisor, MBA

Province Mortgage Associates

Why You Should Talk to Your Creditors

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 15 Dec 2008 13:50:10 -0600

One night last week, I got home bright and early at 8:00 PM after a busy day of networking and loan applications. I opened my mail, and near about flipped. There on my credit card statement it said:

“11/xx Late Fee: $39.00”

People who know me well will tell you that I’m not a person who gets terribly angry, but after I read that, I have to admit that I didn’t really want to talk to anyone, and I certainly didn’t feel like addressing the problem.

So I did what a lot of people will do – I set it aside for a while.

Two days later, when I’d cooled down a little, I picked that statement back up, and I looked through my checkbook register for clues. Sure enough, 12 days before they hit me with that late fee, there was a check written out to the credit card company.

Knowing they weren’t out to get me, I picked up the phone and called, and 3 minutes later, my payment was up-to-date, and they had waived the late fee.

Seems pretty easy, huh? But millions of credit card owners each year don’t make this connection, and don’t make that call to their credit card company when something goes wrong. Success such as I had certainly isn’t a guarantee when calling your creditors, but it happens more often than you would think.

On-time payments are considered to be the most important factor in a good credit score, but almost just as important is communication. Communication is the key to keeping minor mishaps from becoming major problems. I said earlier that I set aside the credit card bill, but I picked it up 2 days later. Many who get into trouble with their bills forget that aspect, and find it harder and harder to catch up.

Remember – a 3-minute phone call can save you 3 years of interest payments!

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor with the University of New Haven and Roger Williams University.

Buying a foreclosed home? Look out for these property pitfalls

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 08 Dec 2008 14:50:25 -0600

Today's buzzword in buying a reasonably priced home is "foreclosure". Foreclosed homes sell anywhere from 20%-60% lower than non-foreclosed homes, making their pricing much more attractive, but there are hurdles to overcome, especially when it comes to property condition. Even though the home is foreclosed, it still must meet the requirements of new financing. I've been working with foreclosed homes for more than 40% of my buyers lately, so I wanted to review a few of the problems we've encountered, and how to avoid them.

To lend on a property, each type of mortgage will have its own requirements as to what inspections must be performed, and what degree of information must be provided by the appraiser. In general, I have found that many appraisers are leaning more towards an FHA-level inspection for all properties, as underwriters have become more conservative. As a result, what is discussed here will be consistent with FHA requirements.

Plumbing

If you had to review all the MLS listings for the past 12 months for trends in new information, one of the phrases you'll find increased in frequency the most is "copper missing". As wave after wave of homes has been foreclosed, enterprising thieves have made an industry of removing thousands of dollars in copper plumbing from homes, and turning it into fifty or one hundred dollars in scrap. Homes without functional plumbing systems due to vandalism will not qualify for normal financing at present.

Also important in regards to plumbing is the functionality of every present item. That is to say, if a particular fixture is in place, it should work. Most good appraisers will test this by running sinks, flushing toilets, or more. A concern at this time of year is winterization, as many homes are shut down over the winter to lower upkeep costs. Most appraisers will require the home to be operable at time of inspection, with flowing water.

Heating

What's the one thing you couldn't live without in winter in New England? A heating system! Because of this, banks will require homes in cold areas to have a functional heating system that has been checked by an appraiser prior to closing. Typically, an appraiser will adjust the home's thermostat so that it trips, and then verify that the system does turn on. A non-working heating system is a quick way homes can be rejected for financing.

Flooring

The vast majority of the time, an appraiser's eyes won't stay focused on the floor of a home for more than a few seconds, as most homes floors are in perfectly acceptable condition. Whether a floor is hardwood or carpet, tile or linoleum, a considerable proportion of homeowners have maintained their floors well. Every once in a while, though, we do find a problem.

When it comes to flooring, it need not be in perfect condition to pass, but there should be some degree of life left.

For hardwood flooring, it is OK for the finish to be dull, even for some limited scuffing. Missing floorboards or other serious problems can be sighted as deficient condition.

For pergo and other tile-like flooring systems, all tiles should be in place and secure. If any of the sub-floor is exposed, this can be ground to delay financing of the home.

For carpet, the carpet should be in reasonable condition with at least a little remaining spring. Some minor staining is acceptable, but large areas of staining are problematic. In addition, significant odors could present problems in underwriting.

Windows

Contrary to popular belief, replacement windows are not a requirement for closing, however, they will go a long way towards lowering heating expense. In spite of the fact that underwriting cannot require windows be replaced, they will look for certain minimum standards.

All windows should present the appearance of functionality, and should have intact glass. In a house with otherwise OK windows, a single window with a cracked pane is unlikely to provoke additional requests from underwriting, but a single window with a broken pane and a hole almost certainly will. In many cases, temporary measures, such as limited boarding (i.e. one or two windows) can be deemed acceptable. If a house is fully boarded up, usually that will need to be undone before it can be inspected for mortgage purposes.

Walls

In most houses, little attention is paid to the walls, as they differ so little with what we expect of them as walls, that is, they are flat vertical surfaces with minimal interruption. Problems can present themselves when we're looking at a home with deferred maintenance problems, such as we find in many foreclosures.

Wall problems come in two basic varieties: damaged materials; and graffiti. Wall materials can often become damaged by physical impacts; alternately, damage can be caused by intrusion of water into the home, weakening the integrity of the wall. Regardless of the cause of the damage, only the most minor of problems can be ignored; any significant damage will normally cause underwriters to request repairs prior to closing.

Graffiti can often be ignored, especially in small quantities. If the artist had been more "creative", it can become necessary to paint before the home will pass inspection.

Exterior

Contrary to popular belief, most home appraisers are not experts on roofing materials. It is rare that an appraiser will get on a ladder to inspect the condition; more often appraisers will depend on evidence available from visual inspection from the ground, and from interior inspection to identify any water damage, the most common result of a roofing problem.

The same goes for siding materials and paint. The most common area where a home will fail FHA inspection is in regards to peeling paint, as lead concerns preclude closing FHA mortgages on homes that might cause lead poisoning. In general, it is very easy to tell what constitutes peeling paint, as paint will often be coming off of the house in larger and larger sections. If you as a home buyer look at a home and suspect the home might be considered to have peeling paint, it will almost certainly be cited for that deficiency.

There are more potential problems a home could have than I can hope top cover in one article, but reading through this should give you a good idea of certain problems endemic to foreclosed homes. As discussed, many of these problems will prevent a bank from closing conventional or regular FHA financing on those homes. What kind of alternatives does this leave?

203(k) financing

The 203(k) mortgage is a subsection of the FHA program allowing a buyer to finance based not only on the purchase price of the home, but also on the cost of rehabilitation or improvements to the home. By working in conjunction with with a contractor, the bank will have assurance it wouldn't normally that the work will be performed satisfactorily, because both buyer and contractor must sign off to allow funds to be paid. For more information about 203(k) mortgages, please see my other article.

Thanks very much for reading! Please leave comments if you have questions that aren't answered here, or with anything you'd like to add.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjuunct Professor with Roger Williams University and the University of New Haven. He can be reached by cell phone at (401) 263-8655. Photos courtesy of Jim Dusty of Gordon Appraisal, used by permission.

Fed Intervention Fails to Close Mortgage Treasury Spread

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Fri, 05 Dec 2008 10:47:50 -0600

In spite of an unprecedented move by the Federal Reserve on November 25th to purchase $600 billion in mortgage-related assets, the spread between mortgage and treasury rates remained at its highest level on record for the week ending December 4th, closing at 2.96%. Investors sought the safety of treasury securities in droves, increasing their prices, and depressing the yield of the 10-year treasury note to its lowest close ever at 2.57% this Thursday. In spite of rampant speculation that the Fed may be prepard to act again, mortgage securities found few buyers. Mortgage rates averaged 5.53%, according to Freddie Mac.

The 10-week moving average spread entered December at 2.58%.

The mortgage-treasury spread measures the relative risk between mortgage securities and treasury securities. Essentially, the spread is the additional return on investment that an investor requires to mitigage the risk associated with investment in mortgages. The spread has been on an unprecedented widening trend since July of 2007, when it averaged 1.52%. That was the month in which the collapse of the secondary mortgage market accelerated.

There has been significant talk this week of a "Flight to Safety", a market phenomenon in which investors seek the investment most likely to preserve the value of their capital. This has been evidenced in the dramatic increase in demand for treasury securites, as they are viewed as risk-free. Due to this higher demand, returns on treasuries are at their lowest levels on record.

Through 2007, the Mortgage - Treasury Spread has increased by nearly a full percentage point as investors worries have not been assuaged by a bevy of government actions.

Still, opportunity exists to correct the current market situation. The "4.5% plan" is still a possibility, although news indicates that its reporting may have been quite premature. Additionally, proceeding with such a plan could likely be a profitable venture for the US Treasury, albeit one that sets a risky precedent. By issuing treasury debt to fund purchase of mortgages, the Treasury would be earning a roughly 2% return on its investment, and would likely see capital appreciation in the assets it purchases as mortgage rates fall. However, this opens up concerns that the government may interecede in future crises, and leaves open the possibility that this investment may not pay off.

Today's employment data is also quite discouraing, as 533,000 jobs lost also means 533,000 families less able to meet their mortgage obligations, further reinforcing investor concerns about mortgage assets. Other data suggests that mortgage delinquencies are at an all-time high, as well.

The mortgage market has been looking for a way out of the woods for a long time now. While last week's announcements appeared promising, further review has shown that we are still faced with serious problems to correct. Others have suggested helping families facing foreclosure directly by assisting with their mortgages, this solution only provides limited relief to a strapped economy. Insteady, I hope to see news soon of major government investment in areas that will create jobs, such as infrastructure - roads, bridges, sewers. People with jobs can pay their mortgages, which leads to higher home prices, and more jobs, among other things. Only time will tell.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor with Roger Williams University, and can be reached at (401) 263-8655, or by leaving a comment on this article.

Stop the insanity! No, wait, keep it going!

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Wed, 26 Nov 2008 14:36:51 -0600

Phew, what a busy couple of days!

I’m sure at this point you’ve been inundated with emails from loan officers since yesterday morning, so I probably don’t need to tell you that many buyers are qualifying for 5.5% with no points today. We saw a huge drop yesterday in rates, so, rather than harping on how attractive they are, I thought I’d let you know some of the why behind it.

Over the past 4-5 weeks, investor demand for mortgage securities had waned considerably, as wave upon wave of bad economic news suggested consumers and homeowners would face greater difficulty in meeting their debt obligations going forward. As a result, mortgage rates stayed artificially high, even as treasury rates approached their lowest point in half a century.

Overnight, going into Tuesday, the Federal Reserve announced it would buy $600 billion in mortgage bonds. This rallied immense support for the value of mortgage assets, and the result was a drop of anywhere from .375% to 1% in rate for many mortgages. At this point prospects of even lower mortgage rates have grown, although there isn’t any certainty yet they will become available.

Many buyers recently have been limited in what they can purchase, and a lower rate could well help them offer more. Now is a good time to reevaluate stale pre-approvals to see if a lower mortgage rate could help them close their purchase in 2008, to more easily take advantage of the great incentives currently available!

I want to wish you a very Happy Thanksgiving, and safe travels. I will be available Friday 11/28 with full ability to send updated pre-approvals, and, for those of you within earshot, I will be a guest on the Rhode Island Real Estate Insiders this Saturday, 11/29 at 10:00 AM on 790 AM Rhode Island’s True Oldies, and online at http://www.790thescore.com .

Dan Hartman

Senior Mortgage Advisor, MBA

Province Mortgage Associates

(401) 263-8655

Rates drop sharply on $600 Billion Fed Purchase - expect to see 5.5% 0 points in some cases

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Tue, 25 Nov 2008 09:12:05 -0600

I only have a minute to post right now, but I wanted to make sure you're aware that there has been a dramatic shift in mortgage pricing this morning.

This morning the Fed announced it was going to buy $600 Billion in mortgage assets. This has had a huge impact on rates, with most mortgage rates at least .375% better on RATE than they were yesterday. If you’ve been waiting for the right time to lock a floating loan, or you’ve been waiting on refinancing for a better rate, it’s here. Today is the day to make that move, but don’t hesitate, because this may not be the case come tomorrow, and I certainly wouldn’t hold my breath waiting for next week.

I'll provide more news as soon as I can, in the meantime, I'm reaching out to everyone I can who has been considering a refinance so they can take advantage of this before it' too late.

Dan Hartman

Senior Mortgage Advisor

Province Mortgage Associates

(401) 263-8655

http://www.provincemai.com

Updates to Jumbo mortgage limits for 2009

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 24 Nov 2008 16:33:37 -0600

Earlier this year, we learned that the Jumbo mortgage was going to be a bit bigger for a time. For a year, the limit for mortgages purchasable by Fannie Mae and Freddie Mac was temporarily increased from $417,000 to as high as $729,750 through the beginning of 2009 as a component of the Economic Stimulus Act of 2008. That date is now fast approaching.

The original purpose of this temporary change was to address a mortgage market problem that arose in late 2007 and early 2008, specifically that demand for securities backed by Jumbo mortgages had decreased precipitously. By opening those loans to Government-Sponsored Agency purchase, the government’s hope was that it would be able to maintain property turnover. For the most part this was a success.

Supplementing the Stimulus Act limit increases, the Housing and Economic Recovery Act passed in August provides for extended loan limit increases in certain markets where home prices are significantly higher than the national average. In these markets, limits will be increased as high as $625,500 for purchase by GSAs and FHA insurance. This will continue through the end of 2009, and can potentially be extended beyond.

We’ve also seen recent releases of information regarding the 2009 limits for Fannie and Freddie loans, and FHA information has been coming out, so let’s take a moment to recap the new limits for single-family homes.

2008 2009

Maximum GSA $729,750 $625,500

Maximum FHA $729,750 $625,500

Local Limits

Rhode Island (all) $475,000 $426,650

Massachusetts FHA

Greater Boston $523,750 $465,750

(includes Essex, Middlesex, Norfolk, Plymouth and Suffolk counties)

Worcester $385,000 $285,200

Bristol $475,000 $426,650

Massachusetts GSA

Greater Boston $523,750 $465,750

Worcester $417,000 $417,000

Bristol $475,000 $426,650

Connecticut FHA

Fairfield $708,750 $511,750

Hartford $440,000 $320,850

Windham $272,500 $271,400

Connecticut GSA

Fairfield $708,750 $511,750

Hartford $440,000 $417,000

Windham $417,000 $417,000

What does this mean for the mortgage and real estate markets? At this point, a majority of our lenders have cut off new registrations of higher balance loans for many areas, getting an early start on the new loan limits. For the most part, I don’t anticipate a major impact will result from this. In spite of the lower loan limits available in our market area, home prices are also significantly lower, and even homes that require rehabilitation under a FHA 203(k) mortgage should be able to be served.

There are two areas I anticipate will be hardest hit on the FHA originations side, specifically Greater Hartford, Connecticut, and Worcester County, Massachusetts. These areas had a very large decrease in their FHA mortgage limits, and, as a result, I think there is a possibility that sales of properties will be impacted by the change in limit. Specifically, I can think of at least one client who is considering some properties in Worcester County, who probably will be affected.

If you have questions about your pre-approval, please double check with your Mortgage Advisor as to any changes in your approval status. If you aren’t working with a Mortgage Advisor, I would appreciate the opportunity to assist you.

Dan Hartman

Senior Mortgage Advisor, MBA

Province Mortgage Associates

www.provincemai.com

(401) 263-8655

CHFA and the $7500 Federal First-Time Homebuyer Credit

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 17 Nov 2008 10:11:54 -0600

Many of you who work in Connecticut are familiar with a very effective First-Time Homebuyer mortgage program offered by the Connecticut Housing Finance Authority. The CHFA Homebuyer Mortgage Program follows most FHA guidelines, but is restricted in regards to the buyers' income, and offers subsidized interest rates that are typically at a small discount to FHA rates. In my experience, the only reason I ever lose a Connecticut loan is to the CHFA program; unfortunately, it is a program we are unable to offer, as it is only available to mortgage companies with offices in Connecticut.

On Thursday, I spoke with a CT Realtor who had recently transitioned to a new office, and I asked her if she was familiar with the $7500 tax credit program currently available for First-Time Homebuyers purchasing in 2008-2009. She responded by putting me on speakerphone, where, after listening to my brief explanation of the credit, another person in the background stated "Yes, that's not available with CHFA."

That was pretty much the end of that conversation, but it left me curious about the interaction between this program and the various subsidized mortgage programs like CHFA, Rhode Island Housing, and Massachusetts Housing.

As I said, I'm not intimately familiar with recent CHFA guideline changes, so I would appreciate your input on this. Are you aware of any such restrictions? What are your thoughts on this?

Dan Hartman

Senior Mortgage Advisor

Province Mortgage Associates

(401) 263-8655

Financing Condominiums – What you need to know Part II: How Condos are Approved for Financing

Dan Hartman (Province Mortgage Associates - (401) 263-8655) — Mon, 03 Nov 2008 13:04:57 -0600

Last week, we looked at some of the most significant factors that are considered in condominium approval. Let’s examine the 5 methods allowed for approval of a specific condo.

Fannie Mae / FHA Approval

Fannie Mae and the Federal Housing Administration used to approve condominiums following an exhaustive process that involved extensive questionnaires, appraisals, review of hundreds of pages of condo documents, and, as often as not, site visits. As the housing market has worsened, the expense of performing these reviews was no longer justified. Despite their termination of this process, both FNMA and FHA maintain an extensive list of approved condominiums, and many lenders utilize this list as the basis for accepting condos as collateral.

Limited Review

A limited condominium review can be approved if a project is established, and if the buyer’s qualifications are strong enough. A limited review will be called for in the initial automated approval, and is typically granted only to borrowers with stronger qualifications and larger down payments. Recently, I have only seen limited reviews approved for buyers with at least 10% down payment and 720 credit scores, but for buyers with these stronger qualifications, a limited review is a very simple way to purchase a condominium.

What constitutes an established condominium? To be considered “established”, a condominium must be 100% complete, including all units in all phases, and all common elements, and the unit owners must be in control of the association.

Condo Project Manager

Condo Project Manager, or CPM, is an automated system provided by Fannie Mae that operates for a condominium much the way that Desktop Underwriter works for homebuyers. Once all the relevant information has been gathered, the closing attorney will be asked to provide a specific letter of reference, at which point the underwriting lender will be able to input data from the appraisal, and the condominium questionnaire, hoping to receive a good result from the system. Assuming acceptable findings are returned, no further approval is required for the condo. If not, there is one option left.

Full Condominium Review

Quite possibly the most paperwork intensive process in all of mortgage lending is the full condominium review. Condominium documents typically consist of one hundred or more pages of legal description, plans, and specifications, and must be considered line-by-line in determining eligibility, in a process that typically requires 3-5 business days after all documentation is submitted. Because of the degree of detail required to complete full condominium reviews, not all lenders offer to perform these reviews. If you believe your property may not qualify using the other methods, it is important to ensure the lender you are using offers this option.

A Few Insurmountable Hurdles

We’ve looked at several different methods by which condominiums can be approved. Before closing, let’s take a quick look at a few conditions that make condo financing nearly impossible.

Investor concentration: If more than 50% of the project’s units are owned by people holding them as investments, obtaining institutional financing is nearly impossible. Many Alt-A lenders offered “non-warrantable condo” financing until recently, however most have stopped. NB: the 50% figure will also include unsold units, so in a 3-unit complex, financing the 1st unit in is quite challenging. Recent success has been seen in such complexes where 2 units are sold to separate, owner occupant buyers, at the same time.

Incomplete construction: If construction is still in process for the complex, apart from construction of phases other than the subject unit’s phase, it is very challenging to obtain financing. Banks are concerned that the developer may be unwilling or unable to complete construction, thereby impairing the value of other units.

Ownership concentration: This refers to the percentage of units owned by a single entity, excluding the developer. Banks are concerned that if a single person owns more than 10% of the units in the complex, that person may have enough influence with the condo board to force decisions that are not beneficial to the project as a whole. For smaller projects (10 units or less), this rule is still in place, but is modified such that no owner may own more than a single unit.

Condominium financing is different from mortgage lending on non-condominium properties, but it doesn't have to be scary. Knowing the right way to get a property approved will alleviate most problems. Of course, this is not a comprehensive review, however, it is my hope that this will provide a good overview of the condo approval process, and some of the pitfalls that can be avoided. If you have condominium questions that aren’t answered here, please contact me directly.

Condo photos courtesy of Jim Dusty of Gordon Appraisal, used by permission.