This new mortgage will affect every American looking to mortgage a home. And the impact will be felt by all of us.
Regulators are deciding the future of down payments. For those who have minimal down payments, FHA will become the norm.
The new mortgage: QRM: Qualified Residential Mortgage has yet to be defined in detail, but, basically, it will be the new mortgage which will require a defined minimum down payment. Some proponents are advocating as high as 30%. If a borrower does not have this minimal down, there will be limited non-QRMs available at higher rates.
Thus, there will be an increase of mortgages at FHA, which currently offers mortgages at 3.5% down and reasonable rates. The downfall of FHA is the 1% upfront mortgage insurance, which is financed into the loan and the monthly mortgage insurance which is paid every month for 5 years and until the LTV reaches 78% (for loans greater than 15 years) and paid monthly on loans 15 years or less when the LTV reaches 78% regardless of how long the payments have been made.
FHA may be gearing up for this by increasing their mortgage insurance rates by .25% effective with all new loans on April 18, 2011. Even the 15 year FHA loans, which were exempt from monthly mortgage insurance with LTV's less than 90%, will have monthly insurance.
So, let's compare FHA payments based on a $200,000 loan at 4.75 for 30 years:
Prior to October 2010: P&I and mortgage insurance: $1146.31
After October 2010: P&I and mortgage insurance: $1205.23: Increase of $58.92/month
After April 2011: P&I and mortgage insurance: $1247.31: Increase of $42.08/month
In less than a year, the increase due to mortgage insurance is: $101.00/month!
Proponents of QRM wish to see the originating company to maintain 5% of every loan on their books for the duration of the loan. To have so-called "skin in the game", proponents believe the originating company will "care more" about underwriting the loan and will think twice before closing on a loan. The opponents see this as a large negative for the consumer. A non-QRM will have higher rates, thus greasing the lining of lenders and hurting the consumer and the housing market. If an originating firm must keep 5% of the loan and it is a non-QRM, the lender will wish to have a higher return for the higher risk.
The 5% retention requirement will also negatively impact the smaller lenders who will not be able to stay in business with limited capital. How many loans can a small lender hold for the duration of the loan? Thus, an already high unemployment rate will grow worse with the closure of all the small lenders.
In 2009, 47% of homebuyers placed less than 10% down on homes. Imagine what this new QRM will do to the housing market!
Mortgage insurance companies are against the QRM, since they are in business to insure homes with down payments of less than 20%. If the regulators enact a 20% or more down payment requirement for a QRM, non-FHA mortgage insurance companies will no longer be required.
April 21 is the deadline to define a QRM, but that date will probably be moved to a later date since this is a big decision for the mortgage industry.
The mortgage crisis is causing many changes. Some are for the better, but this one needs to be reviewed and analyzed CLOSELY by regulators BEFORE they implement, since it may further negatively affect the real estate industry.
Stay tuned!
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