Scotsman Guide's On Mortgages and More blog covers issues and trends facing the residential and commercial real estate finance industries, as well as occasional analysis of loan-product trends from scotsmanguide.com. For questions or to contribute to the blog, e-mail blogs@scotsmanguide.com.
JAN. 30
FHA changes premiums, loan programs to bolster reserves
According to a press release from the U.S. Department of Housing and Urban Development (HUD) today, the Federal Housing Administration (FHA) is making several changes to its loan programs to better bolster its reserve fund. Some changes, like the suspension of the Standard fixed-rate Home Equity Conversion Mortgage (HECM), were previously announced. Others, like the increase in mortgage insurance premiums (MIP) and the continuation of MIP throughout the life of the loan, had been the subject of speculation for months, as FHA's fund troubles were well known.
Here are the details on these and other changes from HUD:
"As part of a broad effort to strengthen the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund (MMI Fund), FHA Commissioner Carol Galante announced a series of changes to be issued this week that will allow the agency to better manage risk and further strengthen the health of the MMI Fund.
“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs” said Galante. “In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.”
Home Equity Conversion Mortgage Consolidation
As discussed in its Annual Report to Congress, FHA will consolidate its Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) and Saver Fixed Rate HECM pricing options. This change will be effective for FHA case numbers assigned on or after April 1, 2013. The Fixed Rate Standard HECM pricing option currently represents a large majority of the loans insured through FHA’s HECM program and is responsible for placing significant stress on the MMI Fund. To help sustain the program as a viable financial resource for aging homeowners, the HECM Fixed Rate Saver will be the only pricing option available to borrowers who seek a fixed interest rate mortgage. Using the HECM Fixed Rate Saver for fixed rate mortgages will significantly lower the borrower’s upfront closing costs while permitting a smaller pay out than the HECM Fixed Rate Standard product, thereby reducing risks to the Mutual Mortgage Insurance Fund. Read FHA’s new HECM Mortgagee Letter.
In addition to the HECM consolidation announced today, FHA will announce the following changes in the coming days:
Changes to Mortgage Insurance Premiums
FHA will increase its annual mortgage insurance premium (MIP) for most new mortgages by 10 basis points or by 0.10 percent. FHA will increase premiums on jumbo mortgages ($625,500 or larger) by 5 basis points or 0.05 percent, to the maximum authorized annual mortgage insurance premium. These premium increases exclude certain streamline refinance transactions.
FHA will also require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan. Commencing in 2001, FHA cancelled required MIP on loans when the outstanding principal balance reached 78 percent of the original principal balance. However, FHA remains responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan, a term which often extends far beyond the cessation of these MIP payments. FHA’s Office of Risk Management and Regulatory Affairs estimates that the MMI Fund has foregone billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy. Therefore, FHA will once again collect premiums based upon the unpaid principal balance for the entire period for which FHA is entitled. This will permit FHA to retain significant revenue that is currently being forfeited prematurely.
Requiring Manual Underwriting on Loans with Decision Credit Scores below 620 & DTI Ratios over 43 Percent
FHA will require lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income (DTI) ratio greater than 43 percent. Lenders will be required to document compensating factors that support the underwriting decision to approve loans where these parameters are exceeded, using FHA manual underwriting and compensating factor guidelines.
Raising Down Payment on Loans above $625,500
Through a Federal Register Notice to be published in the next several days, FHA will announce a proposed increased down payment requirement for mortgages with original principal balances above $625,500. The minimum down payment for these mortgages will increase from 3.5 to 5 percent. This change, coupled with the statutory maximum premiums charged for these loans, will help protect FHA and further facilitate its efforts to encourage higher levels of private market participation in the housing finance market.
Access to FHA after Foreclosure
FHA will step up its enforcement efforts for FHA-approved lenders with regard to aggressive marketing to borrowers with previous foreclosures and remind lenders of their duty to fully underwrite loan applications. New loans must meet all FHA guidelines.
Borrowers are currently able to access FHA-insured financing no sooner than three years after they have experienced a foreclosure, but only if they have re-established good credit and qualify for an FHA loan in accordance with FHA’s fully documented underwriting requirements. It has come to FHA’s attention that a few lenders are inappropriately advertising and soliciting borrowers with the false pretense that they can somehow “automatically” qualify for an FHA-insured mortgage three years after their foreclosure. This is simply not true and such misleading advertising will not be tolerated.
Moreover, FHA will work with other federal agencies to address such false advertising by non-FHA-approved entities. Finally, as discussed in its Annual Report to Congress, FHA is also committed to structuring a new housing counseling initiative that would apply to a number of borrower classifications, including borrowers with previous foreclosures.
Continuing Effort to Improve Risk Management
The changes announced this week will further contribute to the efforts made throughout the Obama Administration’s tenure to improve risk management at FHA and protect the Mutual Mortgage Insurance Fund. Because of these commitments, the changes made at FHA over the past four years have already added more than $20 billion in value to the MMI Fund."
For this and other press releases from HUD, visit HUD's press room.
--Scotsman Guide staff
DEC. 10
Stating the case for stated-income loans
By Julie Teitel, senior vice president, GuardHill Financial Corp.
Believe it or not, there are still a number of banks and lenders who are interested in funding stated-income loans. Although this type of loan was abused in the mid-1990s, stated-income loans can provide a lucrative source of business for the brokers and originators who are interested in pursuing them.
Essentially, stated-income loans are meant for business owners that have trouble documenting their income in a traditional fashion. For instance, think of business owners who have enough entities under their control that it makes submitting paperwork simply overwhelming.
Brokers and originators should only do a stated-income loan if they feel extremely confident that the client qualifies. It should be clear that the given client has the requisite income for the loan, even if some nuances of that income are difficult to document.
For originators who are interested in pursuing this loan type, there are several ways in which a lender typically will handle the loan's specifics and requirements. In some instances, for example, a bank may determine the deal's loan-to-value (LTV) ratio on a sliding scale — 65 percent for loans for as much as $750,000; 60 percent for loans between $750,000 and $1 million; and 50 percent for loans between $1 million and $3 million.
Employment — not income — must be confirmed with a letter from a certified public account, and the client must have an established business. Note also that related business assets will be used only if the client owns 100 percent of the business.
Further, all large deposits for the past two months will have to be explained and documented. The client also must have good credit, although the loan's approval isn’t based upon a scale. Regardless, the bank likely will want to see 33 percent of the yearly stated-income on the application left over after closing as an asset reserve. This isn't a guideline, however; rather, it likely will be an expectation of the bank.
Lenders also may consider stated-income loans with 50 percent LTVs and maximum loan amounts of $1 million. Expect an extra 0.875 percent to be added to the rate in addition to this, however.
The client will not necessarily need to be self-employed to take advantage of this program, although the client's assets should make sense. Generally, a client will only need two months to six months in reserves.
Of course, these types of loans should never be abused. They're not for people with low salaries who cannot afford the property they're trying to purchase. An example of an ideal stated-income candidate would be a businessperson who owns 15 different companies — and, as such, would have to provide 10 different boxes' worth of tax returns in a normal loan scenario. For that kind of client, a stated-income loan may be exactly what you need to keep your client satisfied.
Julie Teitel is senior vice president of GuardHill Financial Corp. New York’s best and brightest real estate brokers, attorneys, accountants and financial advisers place their trust and confidence in Teitel, knowing their clients are in good hands and that she will develop a mortgage solution to meet their financial objectives. As a top producer in the industry, Teitel has been honored in Mortgage Originator’s nationwide top 100 originators. Reach her at jteitel@guardhill.com.
JULY 20
Finding fish and finding success
By John Izzolino, vice president of wholesale lending, Omega Financial Services Inc.
Even today, everyone in the mortgage industry still is dealing with the financial tsunami that shook America to its core. The recession has deeply affected lending and originating but, if you're reading this, you're likely one of the survivors. Pat yourself on the back — you've made it this far, which is more than can be said for many mortgage professionals.
Nearly everyone in the industry would agree that the pond is a lot smaller these days. And, with that, there are fewer fish, but there also are fewer fishermen. All in all, if you're a survivor, there are opportunities to be had.
Of course, these opportunities aren't as abundant as they were before. Few people can get loans approved as easily as they could back in 2002 or 2003. Now, there are guidelines that must be strictly followed, but that doesn't mean loans are impossible. There are still fish to be caught — you just have to be a better fisherman.
For one thing, you have to be adept at finding the fish; gone are the days when they would simply come to you. These days, you have to seek out your clients and entice them with things like low interest rates, better service, fewer fees, paying for closing costs, etc. If you talk to some of the industry's veterans, you may find that this is a lot like the industry used to be. Before the 90s, the borrower had to qualify, had to have good credit and had to have enough money to close, standards that aren't all that unreasonable when you think of it. Arguably, the aberration was the subprime boom, and today's market is closer to the norm.
Today, as a loan officer, you need to thoroughly examine your borrowers, their documents, your calculations and your good-faith estimates — in other words, you need to do all the things you should be doing in any market condition. You need to enroll yourself in continuing-education courses and pass tests from the National Mortgage Licensing System (NMLS). You need credentials if you're going to be thought of as a professional, and the NMLS can give you those. The mortgage industry has been demonized so much that merely having an NMLS number can help restore your credibility.
In today's industry, loan officers also have to learn a word that they're not used to saying — they need to learn how to say "no." Some borrowers simply aren't ready to purchase a home, and the next best thing to a fast “yes” is a fast “no.” Tell your customers the truth, and they'll thank you for it. Don't let your hair turn gray from the stress of trying to fit a square peg in a round hole.
Dealing with the current market environment and legislation can be a daunting task, but take heart, my fellow originators — there's still business out there. Offering great service at reasonable prices trumps subprime loans programs and, further, offering great service always will keep you fed.
John Izzolino is vice president of wholesale lending at
Omega Financial Services Inc. He began his career as an agent for Stewart Title Guaranty Company in 1973. He left the title business for the mortgage industry when he took a position with King Mortgage in Clifton, N.J., in 1993. Izzolino has always maintained a reputation for honesty and integrity and commands the respect of his peers and co-workers. Reach him at (908) 302-1544 or info@ofswholesale.com.
NOV. 16
MIP increases raise questions about the future of FHA
By Dave King, loan officer and sales manager, SWBC Mortgage
The Federal Housing Administration (FHA) recently issued two mortgagee letters that increased the mortgage insurance premium (MIP) on the majority of FHA single-family mortgages. Mortgagee letter 10-28 was issued Sept. 1, 2010, and mortgagee letter 11-10 was issued this past Feb. 14, and both were predictably unpopular in the real estate community. It is the unintended consequences of those rate hikes, however, that may prove to be detrimental to the FHA program and the economy.
The increased monthly MIP could essentially end the FHA Streamline refinance program at a time when the government and our industry are trying to help homeowners who are upside down stay in their homes and take advantage of lower interest rates.
This program allows creditworthy borrowers to take advantage of lower rates despite the fact that they have negative equity and/or credit issues but they still live in their home and pay their mortgage on time. In my 27 years in this business, I have seen the Streamline refinance help many borrowers stay in their home, while also reducing risk exposure to taxpayers.
Given our current economic climate, the more common-sense approach would be to let homeowners do a Streamline refinance and keep their monthly MIP at the same level as their previous loan.
In addition, the new higher MIP could be extremely damaging to FHA over the long term because the new MIP encourages the most creditworthy borrowers to get conventional loans with private mortgage insurance (PMI) rather than pay FHA’s new, higher monthly MIP. For borrowers with 740-plus credit scores, it isn’t even close. The conventional option with 3 percent or 5 percent down is a better option — except for the fact that the FHA loan is assumable, but the increase in monthly MIP makes this component less valuable to future buyers. This doesn’t seem so bad because better choices for the consumer are always welcome. The unintended consequence, however, is that FHA is losing their best, most creditworthy customers (the ones who have paid for the program all along) and replaced them with fewer customers who are more likely to default.
Many of us in this business are well aware of the potential consequences of these MIP changes, which makes me wonder. Who made these decisions and why did they not have the proper perspective and industry expertise to predict the predictable outcome of mortgagee letters 10-28 and 11-10? Like you, I would like answers to these questions.
Dave King is a loan officer and
sales manager for SWBC Mortgage in Denver, Colo. He has been originating since 1985 and has been managing loan officer in his office since 1994, educating his colleagues. He has been one of Scotsman Guide’s Top Originators and top FHA/VA producers numerous times and currently sits on the State of Colorado’s Council of Advisors on Consumer Credit and Mortgage Task Force. Reach him at dking@swbc.com or visit www.davekingmortgage.com.
OCT. 5
Underlying dynamics of U.S. housing market offer once in a lifetime buying opportunities
By Thomas L. Testa, CEO, Testa Capital Group
At no time during the past generation has there been a better opportunity to purchase a home than in today’s market because of the opposing forces of the nation’s housing industry. These opposing forces — one pushing up on the housing market, the other pushing down — are at historic levels, creating a window of opportunity for buyers that we might not see again in our lifetime.
What are these historic forces? The positive upward forces include improved affordability, low interest rates, lack of new housing supply, cash investors, a strong rental market, and an emerging base of 81 million entry-level buyers who are driving demand and creating upward pressure on housing prices.
Pushing down are forces such as real estate owned (REO) properties, short sales, shadow inventory, tight lending criteria and diminishing governmental support. These factors are contributing to the increasing listed housing inventory, as well as fear and uncertainty about the market’s future direction. The housing market is at an equilibrium point, stuck in the stabilizing/absorption stage, but that won’t last.
This market stalemate is what’s creating the window of opportunity. At some point, the upward forces will overtake the downward forces. When that happens, buyers will exceed the number of available homes, demand will overtake supply and market expansion will begin, resulting in increasing home prices and the market’s move to the appreciation and expansion stage. In fact, according to the National Association of Realtors, the U.S. housing market is underperforming by about 20 percent of its potential, and the current market activity is at about the same level that it was in 2000 — and we have about 30 million more people living in the U.S. today. Eventually, a large number of these people will become homebuyers.
Today’s growing entry-level buyer base is represented by 81 million Gen Ys who are acquiring new homes and resales, including REOs and short sales because of their affordability. The historic level of cash buyers in the market purchasing distressed properties as investors also are an important upward force. Investors represent more than 28 percent of purchases in the nation’s housing market today, and they are snapping up a lot of the frequently distressed, standing inventory that might not be purchased by anyone else. Investors are playing an important role right now by buoying the market until more Gen Yers and other buyers can jump in to fill the gap.
Given all the differing factors and dynamics encompassed by the opposing forces scenario, correctly timing the absolute bottom of the current real estate market cycle and the start of the expansion cycle has many variables and is not an exact science. Consequently, in this transitioning market environment, we recommend that discretionary home sellers might be better off waiting until the market stabilizes. As tight lending standards loosen, would-be buyers will enter the market, increasing demand. We believe lenders should streamline the short-sale process and continue to methodically release REOs and shadow inventory they control onto the market, reducing fear and uncertainty and creating a more effective absorption process. We will all be better off if they do.
Thomas L. Testa is
CEO and co-founder of Testa Capital Group, a private capital real estate corporation. Through its Residential Reinvestment Program, the firm’s family of companies helps stabilize communities by repositioning distressed housing while also providing high-yield private investment opportunities. With offices in Newport Beach, Calif., Testa Capital Group sells its renovated homes on the open market or to the firm’s $100 million Residential Market Dynamics Fund. Testa’s real estate experience spans 33 years and he has generated more than $500 million in real estate closings. Based on his extensive real estate experience, Testa is frequently invited to speak and write on various real estate related topics and has been published in local and national media. Reach him at ttesta@testacapitalgroup.com.
SEPT. 1
Renovation of distressed housing can breathe new life and values back into affected communities
By Aphrodite C. Hill, president, Testa Capital Group
We’ve all seen it. Boarded-up windows, dead landscaping, peeling paint, termite-damaged exteriors, leaky roofs and broken garage doors are common sights when driving by vacated, real estate-owned houses (REOs) and short sales in many of our nation’s communities.
We all know from the news reports inundating us daily that economic and social challenges resulting from the presence of distressed properties in a neighborhood and community can be devastating. In many areas, these factors, coupled with today’s lower overall home prices, undermine equity for thousands of homeowners and with it the incentive to maintain attractive homes and curb appeal.
But it doesn’t have to be this way. We have learned firsthand that renovating and selling or renting an improved property can work market magic in solving these challenges. In many cases, this transformation and the resulting improvement occurs one home, one neighborhood, at a time.
It makes a difference. A well-executed renovation of a distressed property completed by skilled, knowledgeable construction teams and associated vendors can correct property deficiencies and create curb appeal that promotes a home’s aesthetic and market value, resulting in pride of ownership and successful reintegration back into the community.
Take Fort Wayne, Ind., for instance. Since 2009, the city has sponsored a program to purchase and refurbish distressed homes, which resulted in a collective increase of appraised values in the surrounding area of more than 63 percent (read more about the program). Renovating distressed properties also has appreciable economic benefits. It is estimated that every dollar spent in the construction industry involved in residential renovation turns over seven to 10 times in the community.
Investors are purchasing many of the distressed properties being refurbished. The historic level of cash buyers in the market as investors is an important upward force advancing the recovery of the overall housing market. Investors represent 28 percent of purchases in the nation’s housing market today, much of which is standing inventory that might not otherwise be purchased. Frequently, these renovated homes are bought by first-time buyers who likely would not have been able to afford the homes two to three years prior. And they are smart investments for the investors.
These investors’ experience proves that property-value enhancement and community stabilization are achievable through the renovation and reintegration of distressed homes. The benefits of value-added housing, increased liquidity for sellers, more-attractive neighborhoods, new construction jobs and private-investment opportunities are critical to recovery of the nation’s housing. Based on this market reality, greater participation and support by the public and private sectors are imperative to promote the strategic acquisition, refurbishment and absorption of these distressed properties on a national scale.
Guest blogger Aphrodite C. Hill
is president and co-founder of Testa Capital Group, a private capital real estate corporation. Through its Residential Reinvestment Program, Testa Capital Group helps stabilize communities by repositioning distressed housing, while also providing high-yield private-investment opportunities. With offices in Newport Beach, Calif., Testa Capital Group sells its renovated homes on the open market or to its $100 million Residential Market Dynamics Fund. Hill’s experience includes expertise in finance, technology, real estate acquisitions, renovations and property management. Reach her at ahill@testacapitalgroup.com.
JULY 12
Home prices continue to sink
By Mitch Siegler, senior managing partner, Pathfinder Partners LLC
Notwithstanding the ebullience of stock-market bulls and this past April’s 244,000 job gains, the economic ship still has one gaping hole in its hull: housing.
This past May, real estate valuation website Zillow announced that 28 percent of American homeowners with a mortgage — more than 7.5 million — were underwater this past first quarter. This is an increase from 27 percent in the fourth quarter of 2010 and from 22 percent the previous year — a direct result of the 8.2 percent decline in average home values in the past year, according to Zillow.
This chart — derived from data compiled by Yale University professor of economics Robert Shiller of Case-Shiller Home Price Index fame and updated by Steve Barry for Barry Ritholtz’ The Big Picture blog — shows home-value trends dating back to the late 19th century (adjusted for inflation). The chart illustrates the fallout from the recent über-bubble in housing, which peaked in July 2006 and has been deflating precipitously since.
Looking at a few cities, the situation is better than the national average in San Diego, where the underwater rate is 26 percent (up from 22.3 percent in the same period in 2010 but still below California’s 32 percent level).
Zillow gives the gold medal in this dubious category to Phoenix at 68.4 percent with Tampa, Fla., taking silver at 59.8 percent and Atlanta bringing home the bronze at 55.7 percent.
According to Stan Humphries, Zillow’s chief economist:
“With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011 … underlying demand, post-tax credit, as well as rising foreclosures and high negative equity rates make it almost certain that we won’t see a bottom in home values until 2012 or later.”
Bloomberg reports that there were 3.87 million previously owned homes listed for sale this past April and another 2 million homes in foreclosure or in some stage of default. With the robosigning scandal behind them, banks are now steaming ahead to foreclose. Add it all up and the total inventory, including shadow inventory overhanging the housing market, likely is in the 7.5 million to 8 million range.
By all accounts, banks and loan servicers are slashing asking prices to move through the inventory. We have moved out of the peak spring selling season into the summer and fall doldrums. We’ve been seeing lower traffic counts at for-sale projects in the past couple of months, and various data points suggest a weaker-than-usual summer home-selling season.
Zillow expects prices nationwide to fall by another 8 percent by year end. As the chart shows, it could be worse. We remain 40 percent above the long-term trend line — a level to (or below) which prices have a nasty habit of reverting following a bubble.
Guest blogger Mitch Siegler
is senior managing director of Pathfinder Partners LLC. Prior to co-founding Pathfinder in 2006, he founded and served as CEO of several companies and was a partner with an investment-banking and venture-capital firm. Reach him at msiegler@pathfinderfunds.com.
ARCHIVESClick
here to view
Scotsman Guide's past Mortgage Metrics: Residential blog posts and
here for our past Mortgage Metrics: Commercial blog posts.
