Date: February 25, 2012
From: Mortgage Services, Inc.
Ronald A. Giannamore
Re: FR-5572-N-01 FHA Risk Management Initiatives
To All Concerned Parties,
This comment is directly associated with FR-5572-N-01 FHA Risk Management Initiatives.
We can appreciated all parties involved with needing to manage the risk associated with having to provide mortgage insurance to homeowners who may not quite have sufficient savings to purchase a home of their own.
While we’ve been in the mortgage and real estate business for more than 27 years, we can understand the agency's concern and commitment to managing current and future potential risks, especially in a current housing and economic environment. We also do understand now that the government is in control of both Fannie Mae and Freddie Mac, and also still provides the government insurance under FHA, USDA and VA mortgages for the housing market, has a concern about their total involvement in housing and are trying to reduce and/or share the risks associated with being in that position. We completely understand the major concerns the persons involved with managing such risks and agree with needing to take actions in protecting the government and the tax payers inherit risks associated with it.
That being said it is important to understand that while making such changes we must not limit and/or reduce homeownership opportunities within specific areas of the country because of these changes.
The major concern with the proposal is that in areas like the Northeast or West, where property taxes can range on average from $2500 to $7000 for a home valued around $100-140K, while in other areas like Tennessee or Arkansas can be around $400-$800 for the year. In most closings we’ve been involved with in the Northeast we can expect a borrower to pay between 6-8 months in advance in establishing an initial tax escrow account, and based on your numbers in the report a borrower can easily exceed the proposed 3% , or $6000 limit. A borrower purchasing a $140,000 home will need at least 8 months of property taxes in escrow. (Yrly taxes $5000 or $416.66 x 8 mths = $3,333 on this price range home.) This is a typical scenario for a home selling at $140,000 in an area like Waterbury, CT.
Just the tax escrow alone in this scenario represents 2.3 % of total closing costs. So most of the 3% maximum amount being proposed would be used up in helping the first time homebuyer just establish an escrow account and only leave (.7) or $980 for other fees. Attorney fees, title work, recording fees, appraisal and home inspection fees have drastically risen for buyers during the past 3-4 years and continue to increase. Mortgage Insurance fees have also increase for the borrowers as well.
If not taking this typical example into consideration would be extremely harmful and un-fair to borrowers currently living in these higher taxed areas of the country, and it would also drive homeownership rates down and eventually increase the cost of renting because more people would need to rent.
We completely understand and agree about reducing or capping fees where they can exceed $10,000 -$34,000. Any borrower purchasing in an area where closing costs are at these levels should most likely consider a smaller home and reducing or capping such fees would definitely support borrowers in choosing a home in a more conservative and affordable price range. We do agree that reducing and limiting the larger closing costs scenarios for the larger priced homes which are mainly used to induce a sale or temporarily reduce a borrower's housings expenses for a short period is a good idea. However, if such incentives where used to permanently reduce a borrower's costs for the entire term of the loan, then we would be for it.
We strongly believe that it would make sense to cap the total closings costs not to exceed $9000 or $10,000. In the example we’ve shown above that all of $8000 would be needed in a transaction similar to this one. In our opinion the 9 to 10 thousand cap is reasonable for all areas were the taxes are at these higher amounts.
Purchase Price : $140,000 Base Loan amount: $135,100 plus $1351 (MI Funding fee)
3.5% down pay: 4,200 Total Loan amount: $136,451
Closing cost estimate:
Points: Zero point option: $ 0
Bank fees: $ 695
Appraisal fee: $ 395
Credit report: $ 35
Attorney fee: $ 550
Title Search fee: Atty $ 250
Recording fees: Town $ 200
Tax service fee: $ 79
Flood Cert fee: $ 10
Title Insurance: Lender $ 543
Title insurance: borrower $ 150
Home inspection: choice $ 350
Full year home owners insurance $ 700
Tax escrow: 6 months $5000yr $ 3333 *
Tax adjustment back to seller $ 666 *(usually giving back at least 2 months of paid up taxes)
Oil or water adjustments AVG $ 200
Total estimated closing costs: $8156 Total closing costs for a home purchase of $140,000.
This represents .05825 percent of the closing costs using a NO POINT ORIGINATION FEE LOAN.
We are quite aware that anyone could make the numbers whatever they wish but the main purpose was to illustrate the difference between two very different areas of the country where the property taxes can be substantially different. Using taxes of just $1000 per year in the same example above would reduce the a typical borrower’s closing costs from $8156 (.058%) down to $4823 (.03445%) because we would only need to escrow and adjust for a total of ($1000/12 = 83.33 per month x 6 months = $499.08 plus an additional two months adjustment of $166.66 for a total regarding taxes of $666.)
The same borrowers in two different parts of the country could have the same exact closing cost, less the tax escrows and be almost double the required amount.
This is a major concern moving forward and again we can appreciate the responsibly of those in charge of making these changes.
Should anyone need any further clarification of our concern they can call us directly at 800.922.3210 ext 121.