Increases in FHA UFMIP, monthly MI factor, and reductions in seller paid closing costs
I’m sure you’ve heard through the grapevine all the recent changes that are going to be implemented with FHA loans. Basically now, regardless of consumers’ credit score and down payment, people will start seeing an increase in the amount that they are going to finance (UFMIP). About a year ago, the higher the score, the less UFMIP they would have to pay (risk-based adjustments), but not now.

Another thing that may sway less “qualified buyers” in the door is the reduction in seller contributions. More often times than not, 6% was WAY more than enough needed to help a buyer absorb and finance some of the costs, but just like everything in the mortgage industry, a few bad apples spoil it for all. Mortgage lenders were jacking up fees, telling Realtors, “Yo we need that full 6% if you wanna close this deal!” and look where we’re at now.

RESPA
With all these new RESPA laws that have started off the year with a BANG, what is happening is a huge staffing spike for mortgage companies. Mortgage lenders are creating compliance departments so they don’t get wacked by RESPA, and title companies are having a complete overhaul of their title software to stay in compliance as well. Who do you think is going to be picking up the tab for this? Consumers.

Feds Purchase Program
So now everything is going pretty damn good with rates, and I’d think you’d agree. Well a major reason rates are so low is because the economy is still in the dumps and the Fed is buying up MBS (Mortgage Backed Securities). MBS is what control mortgage rates in case you didn’t know. Well this is not going to go on forever, and what is going to happen is the Fed is going to stop buying pools of BILLIONS OF DOLLARS of these securities? This week, the Fed’s buying was $0.4BB less than previous weeks, so we are already starting to see the reduction of their commitment and investment towards the MBS market.

Equity Markets
The stock market has been on a downward spiral for a long enough time already. People have been watching their money go “bye-bye” for the last few years, but signs of a market recovery are already on the horizon.

Usually when equity market’s do bad, mortgage rates do good, and vice versa.

The reason behind this is that money managers either invest in stocks or bonds. When stocks are being sold off, the money is then parked into bonds, which improves bond prices and causes interest rates to decline.

The same applies for stocks. If stocks are in favor, money is pulled from bonds, causing bond prices to drop and interest rates to rise.

Bottom Line for 2010 - be prepared for higher mortgage costs.

The DOW is currently down about 133 points, and while several economic reports are out, the biggest one is, again, the Jobless Claims is in at 482k, that is the largest jump in claims in the past 8 months – a pretty big figure.

What does this mean for rates? Well, at the moment, we’re up about 25 bps so you should see a little drop – I’d say about .125% or so.

Remember- Economy bad, rates good.

The Treasury also  just announced next weeks auctions:

Tuesday, $44B of 2 Year Notes
Wednesday, $42B of 5 Year Notes
Thursday, $32B of 7 Year Notes

Yesterday, plastered all over the media, were the changes  in FHA financing. I don’t know about you, but I’m pretty sick and tired of all this “change” that has been going around lately.

While the majority of the details can be found on my blog, I also wanted to briefly outline them here as well.

So here’s what’s up:

1) Seller Contributions are going from 6% down to 3%.

a)     This is apparently being done to further help the consumer avoid added loan fees and inflated home prices. (I personally thought RESPA and HVCC were solving this)

2) Up Front Mortgage Insurance Premiums are being increased from 1.75% to 2.25%, and talks of the monthly mortgage insurance (currently .55%) going up as well

a)     Basically, it’s going to get a little bit more expensive for all borrowers regardless of credit score.

3) Down Payment of 10% on borrowers under a 580

a)     Now while FHA has implemented a minimum credit score of 580, that doesn’t really mean anything because all lenders these days are at least at a minimum score of a 620, so this rule won’t really affect you.

Now as for the timeframe in which these are going to be put into practice by lenders, it’s not certain yet, but I should be getting something soon, in which case, I’ll post an update on here.

If you really think about it, the only biggie here is the seller contributions. It just means that consumers are now going to need a little bit more cash available when buying homes to help cover closing costs.

Let the finger pointing begin…

FHA to Raise FICO Requirements, Reduce Seller Concessions, Increase Premiums and Downpayment

The Federal Housing Administration (FHA) is not, as some have claimed “the next subprime,” according to remarks prepared for presentation to congress this morning by Housing and Urban Development Secretary Shaun Donovan.

Secretary Donovan told members of the House Committee on Financial Services that FHA, in spite of actuarial reports that its secondary reserve level has fallen below the required two percent to 0.53 percent of its total insurance-in-force, is capable of withstanding the current economic downturn.  The actuary concluded Donovan said that FHA’s reserves will remain positive “under all but highly severe economic scenarios.”

He said that HUD had learned from recent history, “that the market is fragile, and we have to plan for the unexpected.  That uncertainty is complicated by an organization we inherited that, to be honest, was simply not properly managing or monitoring its risk.  Credit and risk controls were antiquated.  Enforcement was weak.  And our personnel resources and IT systems were inadequate.

“Little of this may have been obvious when FHA’s market share was 3 percent as recently as 2006.  But when our mortgage markets collapsed last fall, and homebuyers increasingly turned to the FHA for help, the potential consequences of these lapses in risk management became very clear.”

His department, he said, is in the process of drafting new policies to address the quality of FHA’s current portfolio, improve the performance of future loans, and restore the capital reserve above its mandated levels.

The agency is looking at several measures to improve the quality of its portfolio going forward.  It plans to reduce the maximum permissible seller concession from 6 percent to 3 percent because the current level exposes the FHA to excessive risk by creating incentives to inflate appraised values.  The change, he said, will bring FHA into line with industry norms and even further reductions may be considered.

The minimum borrower FICO score will be raised although the final number has not yet been determined.  The agency is studying whether new FICO minimums should be accompanied by changes in other underwriting criteria for lower down payment loans.

The up-front cash that a borrower will be required to bring to the table for an FHA-backed loan will also be increased to make sure that borrowers have “skin in the game.”  The exact way this will be accomplished is still under study.

These proposed changes, Donovan said, only require administrative decisions on the part of HUD, however, Congress will be asked to pass legislation to increase premiums.  The current up-front premium of 1.75 percent is below the statutory cap of 3 percent but the annual premium is at the maximum.  Raising premiums, he said, is the most effective means of raising capital for the reserve fund with the least impact per borrower.

Donovan said that more than 71 percent of the future losses the FHA is anticipating will come from loans already on its books, so, as MortgageNewsDaily reported on Monday, the agency is taking steps to enforce lender accountability.  Donovan said that, in addition to holding lenders responsible for their origination quality and compliance and increasing reviews of that compliance, lenders will be required to indemnify the FHA for losses resulting from their failures to meet FHA requirements and will be sanctioned nationally for any improper activities rather than through the FHA’s current policy of sanctioning individual branches.

The secretary reported that the anticipated changes are merely the latest in a series of improvements FHA has made to shore up its lending activities.

• In 2008, Congress put an end to the practices that led to the most troubled loans in FHA’s portfolio – so-called “Seller-Financed Downpayment Assistance” loans. Without these loans, Donovan said, the actuary reported that secondary reserves would have remained above the two percent threshold. “This year, we’ve taken several additional steps. We’ve steeply increased enforcement efforts, having suspended seven lenders, including Taylor, Bean and Whitaker and withdrawn FHA-approval for 270 others, including Lend America just this week.”

• Credit and risk controls have been tightened. Requirements for the Streamlined Refinance program have been toughened with several improvements to the appraisal process and proposing a rule to increase net worth requirements for all FHA lenders. The latter has just entered the notice and comment period.
• The agency has hired a permanent Chief Risk Officer to provide a comprehensive and thorough risk assessment and ensure that the assumptions going into the agency’s modeling reflect the most current economic conditions.
• FHA is working to increase staffing and technical capacity and upgrade our technology systems and delivered FHA’s first comprehensive technology transformation plan to Congress in September.

The Secretary detailed the active role that FHA is taking in the current housing market, insuring almost 30 percent of purchases and 20 percent of refinances in the housing market, and financing the majority of minority home purchases.  But, he said, “as important as the FHA is at this moment, I want to emphasize that the elevated role it is playing is temporary – a bridge to economic recovery helping to ensure that mortgage finance remains available until private capital returns.”

Over the weekend, I received a copy of the proposed HUD changes that will impact correspondent “mini eagles” and mortgagee “full eagles”.

According to the letter, the changes are aligned with provisions contained in the National Housing Act, as amended by the FHA Modernization Act of 2008. The letter, date November 30, 2009, provides a comment period of 30 days rather than the normal 60 days. They’ve put this on fast tract so it can be implemented by the first of the year. You can read the entire document HERE

Two changes jump out at me:

1. FHA will no longer approve or oversee loan correspondents (mortgage brokers) that originate FHA loans. The approval and oversight will fall on the mortgagee that sponsors them. There are certain requirements that mortgagees must adhere to when approving correspondents, but it appears the sponsoring mortgagee will require a process to approve and monitor them. Another change is correspondents will not have FHA numbers; only the sponsoring mortgagee will have an FHA number. Therefore, all loan originations will be tracked by the mortgagee’s FHA number.

2. The other change is the increase in net worth requirements from $250,000 to $2,500,000 over a 3 year period. As the letter stated the increase in net worth requirement is to “Strengthening the Capacity of FHA-Approved Mortgagees”. Existing mortgagees will have time to meet a $1M net worth within a year of enactment, moving to the $2.5 within the 3 year period.

I had a conversation with a small mortgage banker on the East Coast yesterday regarding the proposed change. He’s been originating and selling FHA loans for over 15 years in his community. He more than meets the first year net worth requirement, but believes the only way for him to meet the net worth requirement within 3 years is to essentially defer all his personal compensation. Over the past year, he’s seen the ante increase for warehouse lines, investor approvals and now FHA.

My thoughts are…

Yes, barriers of entry are increasing and will push out many players. Capital and a solid balance sheet are going to be paramount to compete as a mortgage banker. It might look bleak, but new opportunities are already emerging: Private equity groups are interested in investing in mortgage banking companies; community banks are looking to partner with bankers; and larger better capitalized mortgage banks are assimilating smaller originators into their organization.

If you’re a small mortgage banker, don’t become “road kill”. Start planning your future today.

Can you imagine being 2 weeks into the process and your part-time Loan Officer calling and saying, “Hi Bob… um, we have a little issue?”

In our information age, you need what you want, and you need it NOW- but not so fast, Charlie.

What we see (and later save), day in and day out, is inexperienced Loan Officers wanting to get the “deal” in faster than they can ask your name, only to realize that they forgot to ask you that one “deal-killer” of a question at the beginning, and now everyone is out of time, and money- but has plenty of frustration.

So to ease everyone’s minds, we are here to help and want you to know that we have our fingers on the markets, the economy, rates, and guidelines; but most importantly, we are here to GIVE YOU CORRECT AND INFORMED ADVICE ON ALL FHA LOANS.

So with that being said, here’s the scoop on the new change in FHA guidelines:

As of October 1, 2008, all Up Front Mortgage Insurance Premiums (UFMIP) for purchases and full-credit qualifying refinances will be 1.75%.

For streamline refinances, UFMIP will be 1.50%.

For all FHASecure, you are looking at 3%.

As for the MONTHLY mortgage insurance premiums, as they have had some slight changes as well, but nothing too major.

Here is the link directly to HUD Memo detailing these changes:

FHA GUIDELINE CHANGES

As always, we’re here to help and welcome any questions you may have!