There seemed to be a lot of attention in the general media to FHA's announcement last week of stricter guidelines.  There should be NO cause for concern here.

Yes, any changes to the FHA program are going to generate a lot of attention because the FHA program is now approaching a 40% market share!

However, the changes announced should not affect the majority of transactions in any meaningful way.

Here are the 3 basic changes:

1) Borrowers with less than 580 credit scores will have a minimum down payment requirement of 10% (as opposed to 3.5% for everyone else).  The reality is that almost all lenders have their own "overlays" to the FHA guideline (and have for some time) requiring a minimum credit score of 640 to qualify for an FHA loan.  Therefore, borrowers with less than a 640 credit score will be hard pressed to find a lender willing to grant them an FHA loan, regardless of down payment.

2) The Up Front Mortgage Insurance Premium is going up from 1.75% to 2.25%.  This premium is charged upon origination of the loan and is FINANCED.  It is ADDED to the borrowers base loan amount, therefore is amortized over 30 years.  To put it in perspective, it would add $5.68 to the monthly payment on a $200,000 base loan at a 5.50% interest rate.

3) Maximum Seller Contributions are being reduced from 6% to 3% of purchase price.  The reality is that the seller contribution cannot exceed the amount of closing costs anyway.  In most transactions, the closing costs don't get anywhere near 6% of the purchase price.  The 3% limit should satisfy the vast majority of transactions.

These are the highlights and should not have any detrimental effect in almost all cases.

Have a great week!

Ruben Concepcion

Here is the full FHA press release:

FHA Announces Policy Changes to Address Risk and Strengthen Finances

New Measures Will Help FHA Better Manage Risk, While Maintaining Support for the Housing Market and Access for Underserved Communities

WASHINGTON - Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA's capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. The changes announced today are the latest in a series of changes Stevens has enacted in order to better position the FHA to manage its risk while continuing to support the nation's housing market recovery.

The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement. U.S. Housing and Urban Development Secretary Shaun Donovan previewed the changes in December of last year, noting that the FHA would announce additional details before the end of January.

"Striking the right balance between managing the FHA's risk, continuing to provide access to underserved communities, and supporting the nation's economic recovery is critically important," said Commissioner Stevens. "When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency's history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market's recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities."

Announced FHA Policy Changes:

•1.       Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
 

•·        The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.

•·        If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.

•·        This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing

•·        The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.

•1.       Update the combination of FICO scores and down payments for new borrowers. 

•·        New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.

•·        This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.

•·        This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.

•1.       Reduce allowable seller concessions from 6% to 3% 

•·        The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.

•·        This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

•1.       Increase enforcement on FHA lenders 

•·        Publicly report lender performance rankings to complement currently available Neighborhood Watch data - Will be available on the HUD website on February 1.

•·        This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.

•·        Enhance monitoring of lender performance and compliance with FHA guidelines and standards.

•·        Implement Credit Watch termination through lender underwriting ID in addition to originating ID.

•·        This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.

•·        Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process

•·        Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.

•·        HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:

•·        Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite

•·        Legislative authority permitting HUD maximum flexibility to establish separate "areas" for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

In addition to the changes proposed today, the FHA is continuing to review its overall response to housing market conditions, and continuing to evaluate its mortgage insurance underwriting standards and its measures to help distressed and underwater borrowers through FHA/HAMP and other FHA initiatives going forward.

###

Greetings,

 Remember in prior emails and blog ( www.activerain.com/blogs/rconcepcion ) we had discussed that one of the key signs of recovery to watch for would be efforts to take bad assets off  bank balance sheets in order to improve their financial health.  This would in turn make it easier for them to lend out new money.

 Two important new developments in the past week:

•1)      The Financial Accounting Standards Board (FASB) agreed to relax "mark-to-market" rules.  Mark-to-market has up to now required that businesses value assets on their books at current market value.  This has been very detrimental to banks because the market for many of the loans on their books has all but dried up.  Therefore, they were forced to write down the value of these assets even if they had no intention of selling them.

This resulted in huge losses on paper and a need for enormous capital infusions (hence the TARP funds).

With the change in the ruling, there will now be more leeway in valuing these assets.  For example, the majority of these assets are performing loans that are generating income and can be valued based on the net present value of those future cash flows.

 •2)      Wells Fargo posted a record quarterly profit for the first quarter of 2009.  The $3Billion profit was a 50% increase compared to the $2Billion recorded for the same quarter in 2008.  Banks are able to borrow money at extremely low rates right now and are making a very healthy profit on the spread as they lend the money out at retail rates.  This will help improve the balance sheets of the entire banking sector.

 Both of the above will make banks stronger financially and hopefully result in further easing of credit.  The stock market agreed with a rally fueled primarily by these announcements.

Obviously good news and another strong sign of potential recovery.

 We continue to enjoy record low interest rates due partially to the governments intervention via continued purchases of mortgage backed securities and treasury bills.  I believe this to be a temporary window of opportunity for probably the next 3-6 months.  As the government backs away from these purchases, upward pressure on interest rates is likely to be seen.

 Stay Tuned.

Hello,

A month ago on my blog, I posted my opinion on two things to watch out for that would signal the start of a recovery.

Link:  http://activerain.com/blogsview/916279/Recovery-Signals-to-look-for

The first was that bad assets need to be taken off the books of the banks. 

Yesterday, the Treasury Secretary officially announced the White House's plan to clean up bank's balance sheets.  I won't bore you with the details.  Suffice it to say the stock market responded with a nearly 500 point jump in the Dow.  The smart money obviously agrees that this is a critical part of leading us out of this crisis.  Any recovery will now largely depend on the success (or failure) of the execution of this plan.  So we can say the first signal has now arrived.

The second piece was that homeowners who are upside down need to be put back in an equitable position.  The administration has not provided any direct relief on this front.  It would simply take too much money.

However, the House recently passed legislation which would allow bankruptcy judges to alter the terms/balance of a mortgage contract.  This is now before the Senate.  It may provide relief for some if passed.  If nothing else, it provides an additional incentive for banks to accept short sales - as a judge could force the loss on them anyway if the borrower decided to declare bankruptcy to get relief.

 More importantly, low interest rates and low prices are resulting in a dramatic increase in buyer interest.  I'm seeing a sudden surge in  pre-qualifications, purchase offers, and accepted contracts.  Although I can only directly speak for my experience in Key West, housing starts (new construction) nationwide surged in February after falling for eight months.  These are all certainly signs that the freeze in the market is starting to thaw.

 Stay tuned.

Hello,

As you may know, President Obama's housing plan calls for more consistent guidelines on Loan Modifications.  The details of this new plan have been released.

You can access the actual document here:   www.treas.gov/press/releases/reports/modification_program_guidelines.pdf

 Summary:

•-           Borrower submits hardship claim with lender (need to contact lender for list of what that particular lender wants to see in the package).

•-          Lender first reduces the monthly mortgage payment to 38% of borrower's gross monthly income.

•-          Government steps in to help further reduce the payment to 31% of gross monthly income, via dollar-for-dollar match of lender reductions between 38% and 31%.

•-          Borrowers eligible for up to $1,000 per year in financial "reward" for continuing to stay current on their mortgage.

•-          Lenders receive financial incentives to work with borrowers BEFORE they become delinquent.

•-          PRIMARY RESIDENCES only.

 Lenders can charge NO fees on these modifications.  BEWARE OF LOAN MODIFICATON SCAMS.  The State of Florida prohibits the collection of up-front fees for loan modifications.  Fees can only be collected once an agreement has been brokered between you and your lender.  Only a licensed attorney working on behalf of their client can charge an up-front loan modification fee.  I encourage you to work with your lender directly.  If you decide you want assistance and would like to be referred to a reputable loan modification agent, please give me a call.

 I am also working on the details of the REFINANCE plan, which will enable some homeowners to refinance properties up to 105% of current appraised value.  I expect to have this information for you very soon.

Have a great week!

Hi,

Details of the Obama administration's plans to address the housing crisis are beginning to be released.  I'll be carefully reviewing this info and will share with you anything that I think is particularly meaningful.

A government website has been set up where you can keep track of new information as it's released:  www.financialstability.gov

Here are links to details on the Homeowner Affordability and Stability Plan.  This plan is designed to provide aid via refinancing assistance, consistent loan modification guidelines, and further strengthening of fannie/freddie to support low mortgage rates.

(I will say that at first glance, the actual amounts being proposed for direct homeowner assistance do not appear to be meaningful.  Judge for youself by at least checking out the Executive Summary below).

Homeowner Affordability and Stability Plan

Homeowner Affordability and Stability Plan Executive Summary

Homeowner Affordability and Stability Plan Fact Sheet

Helping Homeowners Under the Homeowner Affordability and Stability Plan: Three Cases

Homeowner Affordability and Stability Plan Questions and Answers

Some other highlights that have been released in addition to the above:

-Public/Private Investment Fund to be started with $500Billion to be used to attract private capital to the secondary markets for real estate related assets.  (This is important because if successful would help establish a price for mortgage assets that are currently unsalable and thus destroying the balance sheets of financial institutions.)

-$1 TRILLION Consumer and Business Lending Initiative to "kickstart" small business lending, student loans, consumer loans, auto finance, and commercial mortgages.  This is to include increasing SBA loan guarantees and expediting the process.

As more details are released, I'll continue to share them with you.

Greetings,

We're off to a pretty decent start this year:  lower prices, interested buyers, and very low interest rates are creating a dramatic difference in loan demand compared to last year.

Of course, the lending environment is more restrictive - so it's important to get pre-qualified up front to uncover potential snags.

Down payments of less than 10% will be difficult, as mortgage insurance companies have categorized us as a "declining market" and adjusted guidelines accordingly (call me for further details - 305-294-1484). 

However, this is where the FHA program comes in, allowing down payments as small as 3.5% on primary residence purchases (all of which can be a gift or loan from family member).

Remember, we are FHA APPROVED!

 Interest rates on the benchmark 30-yr. fixed continue to be volatile.  Lows have touched into the upper 4% range, with trading primarily in the 5.0%-5.50% range since Christmas.

 IMPORTANT:  There may be a short window of opportunity on the current low rate environment (Jan-June 2009).  The primary reason rates are this low is that the Treasury has begun their scheduled purchase of over $500 Billion in mortgage backed securities between now and June.  With the removal of this temporary stimulus, rates could easily creep back up over 6% when this buying period has ended.

There are also concerns over the expected inflation that the Obama administration's economic package may cause in the long term - putting further upward pressure on rates later this year.

 If we're wishing for significantly lower rates (I certainly am), it may very well take further government subsidies to drive them lower.   This is yet to be seen and will likely be decided upon depending on how the economy seems to reacts to current measures.

 Expectations for the economy in general and real estate in particular:

In my humble opinion, two things need to happen for a "recovery" to begin:

(I won't begin to pretend to have the answer as to how to execute this - but nonetheless, it's what needs to happen)

•1)      Bad assets (loans) need to be taken off the books of the banks  - whether via a government entity as originally planned for the TARP funds, or change in accounting rules (mark-to-market problem) - or any other intervention.  As long as the banks are carrying these bad loans, they will not relax credit restrictions.  The government can pump liquidity into them until their roofs pop off - they are going to invest the money rather than lend it out (primarily commercial lending here - because they'll continue to make residential loans that meet fannie/freddie/fha guidelines - as there is a market to sell them).  They are going to hoard cash to protect against expected future losses from the existing loan portfolio and to help protect their ever dwindling capital positions.

•2)      Homeowners who are upside down on their homes (primary residences) need to be put back into an equitable position.   No one likes these bailout scenarios (myself included), but we are already there and need to put the money where it will do the most good (bottom-up approach as opposed to continuing to gift money to the bankers).  The foreclosures will not stop until this situation is directly addressed.  Interest rate reductions and other loan modifications are not going to do it.  People don't care about having their monthly payments reduced if they are $200k upside down on their home and can't see themselves ever recouping it.  They want OUT!  They're going to continue to walk from these properties.

 When you see these two things start to happen, you will know we are on the road to recovery.  Otherwise, we will continue to be stuck in the mud for quite a while.

 But what do I know?  I'm not some egghead in Washington or some corporate titan using a $35k antique toilet.  I'm just a guy getting a daily look into the finances of everyday Americans.

 Just keeping it real.

Feel free to call me if you want to discuss or just to tell me what an idiot I am (305-294-1484).

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