Friday, May 27, 2011

FHA Loan Limits to Decrease October 1

Barring Congressional action, FHA loan limits will decline on October 1 in 669 counties across the country. Current limits, which are high relative to median home prices, were established via three federal laws enacted in 2008 & 2009.

Historically, FHA loans exist to serve low and moderate income home buyers. Without the housing meltdown and financial crisis they would typically be capped at 115% of the median home price for a county. The median price in Maricopa/Pinal counties (Phoenix MSA) is around $120,000. However the FHA loan limit in that same MSA is $346,250. These extra high FHA limits, inflated by laws designed to hold up the housing market, will go away on October 1.

Fortunately they won't drop to 115% of the median price, because there is a floor for FHA loan limits which is 65% of the conforming loan limits (for Fannie Mae & Freddie Mac). The conforming limit is still $417,000 so here in Phoenix the maximum FHA loan is expected to drop to $271,050.

Other notable AZ counties:

Coconino (Flagstaff & Sedona) will drop from $450,000 to $333,500.

Pima (Tucson) will drop from $316,250 to $271,050.

For my friends and relatives still in Los Angeles County, those FHA limits will drop from $729,750 to $625,500.

If those drops in maximum lending limits don't seem so bad, consider this... If Fannie Mae & Freddie Mac drop their limits, or those entities disapear, then FHA limits can fall much further.

If your thinking about buying a home in the high $200,000 to mid $300,000 range in Arizona, I would move to make that purchase this summer.

Here's a link to FHA's announcement and a list of all the affected counties across the country.

Monday, May 23, 2011

Know Before You Owe

One of the many facets of the Dodd-Frank Wall Street Reform Act was the creation of the Consumer Financial Protection Bureau (CFPB). The purpose of this new government agency is to protect consumers from predatory practices of banks and other financial institions including mortgage lenders. Elizabeth Warren, the individual appointed by President Obama to get CFPB off the ground, recently announced that they are working on the consolidation and simplification of the disclosures that lenders are currently obligated to use. The project is called "Know Before You Owe."

There are many laws that affect the mortgage disclosures and documents that a borrower must sign, and hopefully understand. The two most significant of these laws are the Truth-in-Lending Act (TILA) and the Real Estate Settlement and Procedures Act (RESPA). TILA and its relevant disclosures are regulated by the Federal Reserve while RESPA and its disclosures are regulated by HUD. CFPB brings the regulation together under one agency, and one of their projects is to combine the disclosures.

You can actually visit the CFPB website to review two prototype disclosures and vote for which one you prefer. The forms would replace the current Truth-in-Lending form as well as the unpopular and confusing Good Faith Estimate that was just updated last year.

Some in the mortgage industry complain that these forms are too restrictive and stymie loan product innovation. Others argue that loan product innovation created the housing meltdown to begin with. I subscribe to the "guns don't kill people, people kill people" argument when it comes to non-traditional mortgages. Although I recently heard another second amendment argument which was "guns don't kill people, it's those damn bullets." I'm not sure how that statement fits into the mortgage discussion, but I got a chuckle out of it.

Take a look at the two protype forms. Vote on your favorite and give the CFPB your feedback. Give me your comments below.

Tuesday, May 17, 2011

Questioning Quirky QRM

Can an already fragile housing market handle a further tightening of available capital? That is one of the issues that Congress and the Obama Administration have to grapple with as they attempt to create an environment where the mortgage market is less reliant on the government. This was also the topic of a presentation and panel discussion in which I particpated with several industry leaders including Amy Swaney of Citywide Home Loans, Bill Rogers of Homeowners Financial, and John Foltz. We also were fortunate to have Congressman David Schweikert, Vice-Chairman of the House Capital Markets Sub-Committee.

You may have heard the term, QRM. The initials stand for Qualified Residential Mortgage. It is the title for loans that are exempt from credit risk retention rules that came about from the 2000-plus page Dodd-Frank Wall Street Reform Act. It essentially requires mortgage lenders to retain at least a 5% slice of the loans they securitize and sell to other investors. The purpose, according to policymakers, is so that mortgage lenders keep some "skin in the game" when they sell loans in the form of mortgage backed securities.

On the surface that sounds logical. 5% doesn't sound like much, but it's enough to make sure that lenders make quality loans. And durring the real estate boom, plenty of poorly underwritten loans were sold to investors without the lender having to keep any portion of loan themselves.

The problem is that the 5% retention rule ties up the lender's capital. If a lender securitizes a pool of mortgage loans totalling $100 million, they have to keep $5 million in an escrow account until maturity or payoff of those loans. That could be a long time on a 30 year fixed mortgage. That $5 million just sits in that account waiting for there to be losses on those loans. It can't be lent out or invested any other way.

Now there are some exemptions to the Risk Retention requirements, and that's where QRM comes into play. First of all FHA & VA loans are exempt. FHA loans are about a third of the market right now, but that will soon change as maximum loan amounts are set to go down later this year. Also, Fannie Mae and Freddie Mac loans are exempt but only while the entities are in the conservatorship of the Federal government. It is expected by everyone that Fannie and Freddie will be wound down, and if they exist in the future it will be as private entities.

The only other exemption from the Retention Rule is for Qualified Residential Mortgages (QRM). QRM loans must meet the following guidelines:

  • 80% Loan-to-Value (LTV) for Purchase transactions (20% down payment)

  • 75% LTV for refinances

  • Housing Expense to Income Ratio of no more than 28%

  • Total Debt to Income Ratio of no more than 36%

  • No current late payments on credit

  • No late payments of more than 60 days in past 24 months

  • No collections or judgements in past 36 months

  • No pre-payment penalties, limits on balloons and ARMs

Most of these items are just common sense underwriting standards, but a few restrictions stand out as onerous. The 20% down payment requirement is the most notable. There is an alternative proposal to allow QRM loans up to 90% LTV with mortgage insurance.

Also the housing and total debt ratio limits of 28% and 36% will create complications. Calculating a borrower's income can sometimes be complicated, especially for those that are self employed or have inconsistent sources of income (commission, bonus, overtime, etc). This is a very important part of the underwriting process because the lender must verify the borrower can repay the loan. The method by which an underwriter calculates the income means much more going forward because now it can mean whether or not there is a legal violation. Look for underwriting to tighten up even further as a reaction.

By winding down Fannie and Freddie and pulling back on FHA loan limits, the government is reducing the tax payer's exposure to mortgage loan losses. They are also opening the door for the private market to return the market of purchasing home loans, probably at higher rates than the government programs. In the long run that is going to be healthy for the mortgage and real estate markets. But the housing market is still in an incredibly fragile position, and is in the second dip of a double dip.

Being sensitive to this, I think it would be wise to throw out the credit retention requirements altogether. Lenders already retain risk on loans they sell in the form of "Re-purchase Risk." If the loan they sell doesn't meet the underwriting guidelines agreed to by the investor, then the lender has to buy the loan back for the sold price.

Knowing that Congress and the Administration will not back-track on credit risk retention, I would recommend an alternative definition of QRM that allows for up to 95% LTV with mortgage insurance and throw out the housing expense and debt to income ratio portion of the definition. We are continuing to close the door on the American Dream. And yes, homeownership is still a noble dream for many Americans. We can help people achieve it responsibly.

Sunday, May 8, 2011

Celebrity Homes for Sale

I find it interesting to see what celebrity homes are on the market. What would it be like to live in a home once owned by Don King or Mel Gibson, or the house from Home Alone? Here are some dwellings with the "It Factor" that you can own, if you have what it takes. Mainly that's just money.

Private Properties