Originator Digest: January 2010

Most know that under the Worker, Homeownership and Business Assistance Act, a one-time extension of the credit for homes purchased or under contract by April 30, 2010 was passed and a credit of up to $8,000 will apply to qualifying first-time buyers, and a smaller credit of up $6,500 will now apply to families that have lived in their homes for at least five years and wish to step up to a new home.  What some may have missed in the excitement is that the new law extends a similar credit until May, 2011 for members of the uniformed services whose duty takes them overseas. 

There are some slight differences in the credit:

1.       With the normal tax credit, if the home ceases to be the primary residence of the recipient of the tax credit within 3 years of purchase, the credit has to be repaid.  Under this credit, that provision is waived if the house is no longer a primary residence as a result of orders to go overseas again.

2.       If the contract is executed by April 2011 and close no later than 90 days later.

3.       only one spouse needs to be overseas on official extended duty for the required amount of  time to qualify for the credit

So, come April 30^th, the party won't be over.  This is a real win - win but the word needs to spread on the availability of this credit because not nearly as many are familiar about this as they are about the other credits and their timeframes.  This is good for the real estate market, those in the business and it's great for our veterans.

So let's get the word out!

P.S.  Sorry for the title of the post, . . Didn't mean to give you a heart attack.

On June 26^th of 2009, Fannie Mae announced that itwould be amending the

uniform residential loan application

to accommodate data collection and tracking not just of mortgage companies but of individual loan officers as well. Today, Fannie announced what those changes will be and what this new little fella will look like.  While they were at it, they added a few other features.

A quick list of changes made include:

• ·         Loan originators NMLS ID
• ·         Mortgage company’s NMLS ID
• ·         Changes to the declarations section
• ·         Changes to the details of transaction section
• ·         Changes to the options for how the application information was obtained

These changes affect loan applications taken on or after July 1, 2010.  The declarations and details of transaction changes are helpful and clarifying.  Make no mistake about it, the addition of the NMLS ID’s will eventually serve as a method by which Fannie and Freddie can weed out lenders and loan officers in the same way that FHA uses Neighborhood Watch (which I count as a good thing).

So there it is folks, when you’re proficient with the new GFE, HUD, licensing system, software updates and everything else then you’ll have this new friend.

In today’s press release from HUD, “FHA ANNOUNCES POLICY CHANGES TO ADDRESS RISK AND STRENGTHEN FINANCES,” FHA policy changes, additional desired changes and reasoning for the changes are announced in detail. The material changes are already becoming well known but the potential changes along with alternative approaches to FHA solvency are what we should really be paying attention to.

Briefly, here are the material changes that HUD will make within its existing authority:

1. The first step will be to raise the up-front MIP by 50 bps to 2.25%. (how this increase will be applied will be covered in a mortgagee letter to be released tomorrow and this will be put into effect in “spring”)

2. 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%. (the only part of this that is interesting is that this marks the first time FHA guidelines have been concerned with FICO scores – in a way, that’s too bad since FICO’s are generally overemphasized and capacity to repay is under emphasized – either way, it hardly matters since most lenders have underwriting guideline overlays requiring credit scores of 620 or more – effective date would be in “summer” after a procedural and meaningless comment period)

3. There will be a reduction of allowable seller concessions from 6% to 3%. (MORE ON THIS BELOW)

4. Neighborhood Watch data - Will be available in a more user friendly format on the HUD website on February 1. (this is great because it allows consumers and Realtors to vet loan officers and lenders)

5. HUD will implement Credit Watch termination through lender underwriting ID in addition to originating ID. (we’ll have to pay close attention to what’s actually new in the forthcoming mortgage letter due tomorrow vs. what is closer to reiteration with a promise to enforce existing policy – either way, this will weed out lenders that write loans that default at a higher rate and is a great thing)

Of these, number 3 will have the greatest consequence on home ownership (particularly for lower income home purchasers). HUD provides this explanation for this change:

“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.”

If the concern is to see that appraisals are unbiased and of high quality, FHA has already addressed this in Mortgagee Letters 09-28 and 09-36 (to name a few). HUD hasn’t even let these changes play out to prove their effectiveness and their already cutting seller concessions in an effort to regulate appraisals. This amounts to killing a fly with a bazooka. As for FHA being in “conformity with industry standards on seller concessions,” it’s not HUD’s place to conform to industry standards. In April 6th of 2006, former Assistant Secretary of Housing Brian Montgomery characterized HUD’s purpose this way:

“FHA was created in 1934 to serve as an innovator in the mortgage market, to meet the needs of citizens otherwise underserved by the private sector, to stabilize local and regional housing markets, and to support the national economy.”

Conforming to industry standards with respect to seller concessions is not innovative, doesn’t meet the needs of citizens underserved by the private sector (since there practically isn’t one), will have a destabilizing influence on the local and regional markets and won’t support that national economy.

Here’s the deal folks, . . . . This change will be posted in the Federal Register in February. When it is, it will be open for comment and it is incumbent up on any real estate professional who has concern for home ownership rates (particularly for lower income families), that they voice their opinion on this matter. Rest assured, I’ll be posting the link with instructions on how and when to make these comments.

Another matter in need of action will be opposition to HUD’s pending “request for legislative authority to increase the maximum annual MIP that the FHA can charge.” I’m not suggesting that this isn’t the right solution but where’s the conversation? Is increasing the monthly MIP really cheaper for the consumer than financing it into the loan? What’s the average lifespan of a FHA loan? What will the impacts of higher monthly payments be on housing prices? Should HUD be taking steps that would make it less competitive with the private insurance market (keeping in mind the long view that someday the private market will become vigorous again)? It may be an unpalatable conversation to have but maybe FHA needs to get in line for TARP funds to cure its temporary capital base concerns instead of taking short sighted structural steps that could have adverse long term competitive consequences (maybe even an old fashioned congressional appropriation). FHA may be afraid to be compared to Fannie Mae and Freddie Mac but that fear shouldn’t stand in the way of rational solutions. Call your legislators and ask them for this conversation rather than a mandate for legislative authority.

I’d like to conclude by saying that, with a few exceptions, most of these changes are for the best and that we’re fortunate to be hearing about them with as much notice as we’ve been given. I just hope that the professionals in this industry rally around well thought out solutions to FHA solvency rather than quick fixes.

I'm re-posting this announcement from David Stevens, the assistant secretary for housing and FHA commissioner, because while there's been a lot of press covering what FHA changes have been announced and what their potential consequences will be, his announcement does a quality job of explaining why they are necessary.

Despite the fact that there will be a lot of groaning about these changes, it should be noted that FHA and Mr. Stevens, have done a laudable job of being up front about these changes, explaining their necessity and notifying the market in a timely fashion.  I can't say the same for Fannie Mae and Freddie Mac so we should be grateful for this.

I'll write a separate post about what I perceive the consequences of these changes will be after I've had time to dig into some stats.

On January 25, the National Mortgage Licensing System and Registry (NMLS) will be online and available to the public.  Realtors and buyers alike will be able to easily find critical information about loan officers.  Because implementation dates vary by jurisdiction, not all loan officers will be searchable in the system right away but, soon enough this will be a very valuable tool.

The available information is pretty comprehensive unlike most current license lookup services.  Rather than list what information will be searchable, let’s take a look at what questions this search will answer:

1.       Is this loan officer experienced?

2.       Has this loan officer had job gaps in his/her career (last 10 years)?

3.       Does this loan officer tend to stay in one place or bounce around from place to place (last 10 years)?

4.       How long has this loan officer been at their current place of employment?

5.       What are the loan officer’s qualifications in financial services related businesses (last 10 years)?

6.       Does this loan officer work for a branch company and, if so, where’s the corporate headquarters?

7.       Is this loan officer engaged in any other businesses?

If a borrower or Realtor wants to exercise due diligence on a potential experience with a loan officer,  this will be of significant use.  If one uses this tool to research the loan officer, and to some extent their company, they may have further questions about the mortgage company.  There are more options than the BBB, rip off  report and other consumer ratings agencies to do this.

HUD uses a program called Neighborhood Watch to analyze patterns of loans that become delinquent within the first 2 years of origination.  It serves as a good barometer of the quality of loans originated by a FHA mortgagee and it can be searched all the way down to the individual branch of that mortgagee (a good "compare ratio" is below 100 by the way).  It is VERY uncommon for Realtors or borrowers to use this as a tool but it’s a real weapon and, I think, should be used.  It's also a sign of things to come.

It would not surprise me if ultimately the NMLS Unique ID number for each originator becomes required to be added to each loan application.  Using that information FHA, Fannie Mae and Freddie Mac would be able to track loan performance from the mortgage company to the branch and all the way down to the loan originator.  I am not a big believer in the short term benefits of continuing education and testing but this addition of a public search feature to the NMLS and the future possibilities for loan officer tracking ARE an exciting and useful addition.

Recently, I wrote an article outlining the financial benefits of purchasing with today's low rates and tax incentives.  Since then, I've had a guilt complex because there's another combination of market factors that have been haunting me.  I don't see how home values aren't going to experience a decrease, albeit a slight one, late this year.

Artificially low interest rates and tax incentives have created synthetic demand for home purchases where prior market-based demand was anemic.  Nationwide, this has largely contributed to a decline in the rate of home value decreases, value stabilization or in some cases appreciation.  But let's look into a 2010 crystal ball for a moment:

1.       March - Fed's MBS purchase program ends in March driving rates up and some buyers away.

2.       March - Rates near or exceed 5.5% according to MBA and NAR, an important benchmark which could drive other buyers away.

3.       April  -  Prime, Alt-A and Option ARM resets spike and increase through the remainder of the year putting pressure on mortgage default rates not seen since 2007 when unemployment was under 5%.  This has dramatic inventory implications late in the year.

4.       April - Homebuyer tax credit terminates april 30^th which will drive buyers away.

5.       May - the short sale process becomes streamlined under HAFA.  With 23% of homeowners upside down on their home, this market will explode driving inventory up.

6.       June 1, rates near 6% according to MBA & Freddie Mac and are projected to stay there through the remainder of the year and this will drive buyers away.

2010 X- Factors:

•         The Fed has been buying approximately 20 billion in MBS securities PER WEEK!  Will anyone step in if home values go back down?  If they don't, rates will spike beyond projections.  If the Fed has to step back in, we might find ourselves printing money, diluting the dollar and driving oil prices up to those fearful numbers they were at pre-recession. 

•         Commercial Mortgage Backed Securities defaults increase sucking liquidity out of the lending market, possibly warranting government assistance and extending the choke hold on small business lending (extending the high unemployment number).

•         Dramatic FHA guideline changes affecting low down payment transactions and increasing the cost of FHA financing

•         FHA underwriting turnaround times extend.  Under the new net worth requirements, 489 FHA approved loan correspondents will lose their status, 719 will remain and all formerly non-approved companies will be able to do FHA loans (subject to investor approval).  The remaining FHA Mortgagees won't have adequate staff to underwrite FHA loan volume in a reasonable period of time.  The more the gears of the mortgage industry refuse to turn, the fewer closings can take place.

To me, this looks like a perfect storm for a supply and demand outlay that would send home values headed in the wrong direction.  I've seen plenty of home sale forecasts but where are the inventory forecasts that fully account for ARM reset defaults and streamlined short sales?  If inventory balloons and first time homebuyers diminish as the dominant factor in the market (as expected), the consequence is obvious. 

However, according to all forecasting models I've seen, I'm nearly alone in this thinking.   Each one shows home values making gains or stabilizing by at least the 3^rd quarter.  Baffled by this, I have to confess that this is definitely not a commonly held position and this author is starting to feel like Peter Schiff in 2006.  So, on the bright side,  you're reading a minority report.

Either way, there are lessons here.  It will take careful management of our clients' expectations this year.  In a lot of cases, interest rates will rise between point of pre-approval and closing and this is always awkward.  We might find ourselves bouncing back and forth between buyer's markets and balanced markets in the same 90 day cycle making the explanation of negotiating strategies a more delicate matter.  And perhaps most importantly, while we might be able to quantify benefits of low rates and tax credits, any commentary on home values to prospective homebuyers and sellers should not be taken with a grain of salt but rather with a salt lick (including mine).

I was updating my FeedBurner for OriginatorDigest.com and, as usual, I was looking for Bob Tedeschi’s weekly New York Times article as they’re usually fantastic and I’m an avid fan. His article Rethinking Vacation Homes comes so close to addressing the most important issues regarding 2nd home financing changes without actually doing so. I wouldn’t say that it’s Tedeschi’s analysis that’s off the mark but his sources fell short and failed to bring the most pressing matters and trends to his attention.

The article points out that Fannie and Freddie have changed their maximum loan to values available for second homes but defines these changes in a contradictory and confusing fashion. In one section it states that borrowers must have “down payments of 20 percent to qualify” and this is not the case and still won’t be going forward unless it’s a jumbo loan (see Freddie Mac’s Single-Family Seller/Servicer Guide, Volume 1, Chs. 22-28: General Mortgage Eligibility, Chapter 23: Maximum Loan Amounts and LTV, TLTV and HTLTV Ratios, 23.4: Maximum LTV, TLTV and HTLTV ratios (07/10/09).

In another section of the article, it states, “while Fannie and Freddie may sometimes allow lenders to offer smaller mortgages on vacation homes to those with down payments under 20 percent, those borrowers typically must have private mortgage insurance.” This is true but it’s misleading. For loans being delivered to Fannie Mae and Freddie Mac prior to February 1st, qualifying borrowers can finance up to 90% on a second home and after that, they can finance up to 85% on any non-jumbo loan which is $417,000 in most places. According to the National Association of REALTORS®, the national median sales price at the end of the 3rd quarter in 2009 was $177,900 for single family residences so I should hardly think that 417,000 dollars is a small loan.

The real killer for second home financing in the last two years has been mortgage insurance providers not insuring 2nd homes but that had changed in 2009. The reason for this change was that, in enough areas of the US, insurers felt that home values either had stabilized or were stabilizing enough for them to come back into that market. Tedeschi’s sources only knew of one mortgage insurance provider that would insure second homes and wouldn’t name them “for competitive reasons” which I personally think is inappropriately self-serving. Here are two of them: Genworth and Radian (Genworth and Radian will currently insure up to 90% subject to qualification and geography).

The tragedy in all of this is that, while the mortgage insurance companies are loosening their guidelines, now the agencies (Fannie Mae and Freddie Mac) are tightening theirs. One would think that since Mortgage Insurance Companies are private companies evaluating their risk-based decisions on forward looking trend lines that Fannie and Freddie would be paying close attention their conclusions. Fannie Mae and Freddie Mac are instead making decisions based on past loan performance which has little predictive value. This will have the effect of constraining financing for second homes and, in areas where vacation properties are common, it might hurt home values.

This is ridiculous and real estate professionals should be appalled.

Lenders have always had a preferred order of recourse on loans headed in the wrong direction.  In the last few years, they've been so understaffed in their loss mitigation departments that they haven't been able to efficiently determine their best course let along execute it.  Lately it seems, they want Realtors to do their leg work for them more and more.

The preferred order of recourse for a lender may be characterized as follows (it's no coincidence that they appear nearly in this order in the Freddie Mac seller's guide):

1.       Loan refinance

2.       Insurance claim

3.       Loan modification

4.       Workout mortgage assumption (very rare)

5.       Short payoff (short sale)

6.       Deed in lieu

7.       Foreclosure

8.       Charge off (if the property is beyond repair)

If one takes the time to read Fannie and Freddie's seller guides, the Help for Homeowners Supplemental Directive 09-09 and the Home Affordable Modification Program Guidelines, not only do they need a real hobby but it's impossible not to come to the conclusion that these lenders are looking for outside help.  Loan modification companies, housing counselors, loan officers, lawyers and Realtors have all answered the call. . . . but for who's sake?  They mean to help their clients but who are they really helping?

Having read through all of this, I can't come to any other conclusion but that the lenders are using these people to facilitate the collection of the information they (the lenders) want only so they can facilitate the recourse option that that they prefer the most; not the request submitted.  The way that HAFA will work after April 5, 2010 as it fully integrates with HAMP, it's as though it's just another piece of the puzzle for the lenders.  The guidelines for the loan modification program contain a waterfall of options for the borrower but HAMP and HAFA represent a waterfall of recourse for lenders.

That said, there's a lot of great stuff coming on April 5^th.  "Every potentially eligible borrower must be considered for HAFA before the borrower's loan is referred to foreclosure."  Here are some brief highlights:

•         Utilizes borrower financial and hardship information collected in conjunction with HAMP, eliminating the need for additional eligibility analysis.

•         Allows the borrower to receive pre-approved short sale terms prior to the property listing (Lenders agree ahead of time to a minimum net).

•         Prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement.

•         Requires that borrowers be fully released from future liability for the debt.

•         Uses standard processes, documents and timeframes.

•         Provides financial incentives to borrowers, servicers and investors (for instance, sellers can get up to 1500 dollars in relocation funds).

For anyone who'll be involved in short sales in the next 3 years, the Help for Homeowners Supplemental Directive 09-09 is a must read as boring as it may be (https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf).  It's also advisable that one review the Home Affordable Modification Guidelines (http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf) because if the lenders see them as part of the same thing, we should look at them the same way (that doesn't mean we have to like it though).

The bottom line is this, knowing the interests of lenders serves the interests of the client because lenders will likely be considering their interests when evaluating a borrowers documentation and request.  If one wants to see their clients request approved, they need to navigate the interests of the lender as those two sets of interests may not be the same.

Clearly, many if not most short sales involve a loan presently in default. As well, many times a short sale might involve a current borrower who can currently afford the payment. In several other situations, a seller may be “just hanging on” and the smallest thing could put them irreparably behind on their loan. Welcome to “eminent danger of default.”

In a hardship letter for a short sale (also known as short payoff), if a borrower/seller is currently not in default but can justifiably make the case that it is nearly unavoidable despite their willingness if circumstances were otherwise, they can proceed to conduct a short payoff/short sale (pursuant to Freddie Mac’s Single-Family Seller/Servicer Guide, Volume 2 Chs. 64-69: Servicing Nonperforming Mortgages Chapter B65: Workout Options B65.37: Eligibility requirements (08/20/09) – this can be viewed by going to http://www.freddiemac.com/singlefamily/ and searching the AllRegs link).  I'm referencing Freddie here buy the GSE's (or government owned entities) typically dance to the same tune.

Specifically, to be eligible, Freddie requires that the borrower:

1. Be experiencing or have experienced an involuntary inability to pay, unless the Mortgage is secured by a Manufactured Home and the Borrower has a buyer for the property

2. Be delinquent in his or her payments, or in imminent danger of default

3. Complete Form 1126, Borrower Financial Information

4. Be cooperative and allow access to the interior of the property for a BPO

5. Have had the property listed by a real estate broker at a price based on a market sales comparison using the as-is value with a 90-day marketing timeframe

6. Make the maximum possible contribution toward any deficiency from the sale in cash and/or a promissory note (though this will largely be governed by HAFA after April 5, 2010)

7. Not have entered into a program or arrangement where a third party takes title to the property and arranges a short payoff in exchange for a fee

8. Waive reimbursement of any Escrow, buydown funds or prepaid items and assign any insurance proceeds to us, if applicable

Interestingly, Freddie Mac maintains the requirement to be late for loan modification purposes. It doesn’t matter if default is eminent in this situation. To modify they have to have current income, be late on their payments and have to not be eligible for the Freddie Mac Relief Refinance (in that unlikely event that they qualified and were late on their mortgage).

It would therefore be wise to take a considerable amount of time in crafting the hardship letter appropriately to define the case for eminent default if such a situation exists (wise in any case but especially where the loan is current). Loan servicers will be evaluating income to be sure that the mortgage payment, expressed as a percentage of the gross income, is meaningfully in excess of 31% or they’ll be looking for significant life changes such as the loss of a job or something of that nature. If such situations exist, according to Freddie Mac’s instructions to its loan servicers, a borrower may proceed to a short payoff without being currently in default.

There seems to be some justifiable cynicism about whether or not lenders will fully adopt FHA's guideline change allowing sellers who are current on their mortgage and other installment debts at the time of the short sale (and where the proceeds from the short sale serve as payment in full) to purchase a new home using a FHA loan. Many seem to assume that even if FHA allows it, lenders won't fund the loans or will add so many underwriting guideline overlays that it becomes impossible to do them.

Yeah, that turns out to not be the case. 

This guideline change is still so now that many lenders haven't even updated their websites.  Here's a few who have and are funding loans in accordance with the new FHA guidelines concerning short sales and short refinances (there's more but this gets the point across):

•      Wells Fargo Wholesale (memo W09-224)

•      Wells Fargo Correspondent (memo W09-224)

•      Flagstar Wholesale (memo 09294)

•      Flagstar Correspondent (memo 09294 - not delegated)

The truth is that there are a lot of lenders that are adopting this policy in the same way as Flagstar and Wells Fargo; they just haven't made formal announcements yet. 

As a Realtor, if you want your clients to get access to these 4 listed funding channels contact your preferred mortgage broker or mortgage banker/correspondent and make sure they're set up with them and you'll be just fine.  You aren't looking for a needle in a haystack because these are common investors for brokers and correspondents to keep contracts with.  I wouldn't even characterize this as a niche loan program.

There's no need to "wait to see how this is going to play out" because it already has played out.  It would appear that FHA has given the market a break and the lenders didn't spoil the party (can you believe it ?!?!?!?).