Richard's Real Estate Thoughts

HUD issued a press released today announcing changes to be published in a mortagee letter tomorrow. Most of these changes have been discussed in the industry over the last several months and were anticipated.

Here is a summary.

• Up front mortgage insurance increased to 2.25%
• Seller concessions will be reduced to 3%
• New borrowers with less than 580 scores will require a 10% downpayment

The changes will also increase lender liability for loan performance.

There will be a comment period before the changes to the seller concessions and the increased down payment for borrowers with lower scores are implemented.

Of these changes the seller concessions will have immediate impact on buyers, although increased lender liability and tighter enforcement of lender performance may very well prove to be the more lasting and significant change.

These changes are expected to be in effect in the Spring and early Summer. These changes are likely to be just the first of more FHA enhancements.

MGIC is the defendant in a suit by Bank of America lending units for denying claims. This follows a prediction earlier this month by Moody' that mortgage insurance companies might start rejecting claims on defaulted loans - to the tune of an anticipated $4 billion.

The big push is to hold the lenders more accountable for the lending decision - and of course to keep the MI companies viable.

FHA is changing fast - appraiser independence, 5% downpayment, tighter streamline refinance standards, higher credit score standards, higher mortgage insurance premiums.

As the FHA market share increases, largely from the loss of competitive conventional programs, loan approvals will become more difficult.

The mortgage insurance industry may need help to rebound. Right now it appears that they are going to fight by withholding payment of many default claims.

The housing recovery needs a strong mortgage insurance industry, but it also needs mortgage insurance that actually pays on defaulted loans.

At any rate, conventional mortgage insurance remains a major aspect of the housing market that has not received needed attention.

See my previous post on this issue.

Here is a S&P report downgrading 5 mortgage insurance companies: Old Republic, PMI, MGIC, Radian, and Genworth.

FHA has just announced that the implementation of new procedures to separate appraisal orders from the origination process has been delayed until February 15, 2010. This change is a major part of numerous changes that FHA has made or is planning to make in the near future.

The push for appraiser independence is seen by FHA to be an important part of the push to improve its loan quality.

The changes to the appraiser ordering process involve the requirement that appraisal ordering must be separated from the loan origination process both for mortgage brokers and for lenders. Generally to accomodate this change lenders have set up arrangements with third party appraisal management companies, similar to arrangements made to comply with HVCC.

This change was announced with ML2009-28. It may be that many lenders were struggling to establish procedures to handle appraisal ordering, especially on the heel of preparing to accomodate the massive changes to RESPA disclosures which also takes effect in January 2010.

Chattanooga has made several top cities lists - and here is the most recent top city recognition for the Scenic City.

Forbe's Best Bang for the Buck

The award looks at "Solid housing markets, relatively stable employment, enviable cost of living and quick commutes make these metros among the country's most affordable to live." It looked at the 100 largest metropolitan areas.

Categories considered were housing affordability, travel time rank, real estate taxes, unemployment, vacanies, job forecast, and home prices. Chattanooga was only in the top 10 category in the travel time category, but we were relatively high in each category.

The category that we ranked lowest in is unemployment, but even there our prospects are bright with the development associated with the VW plant.

Add in other top rankings and Chattanooga is the place.

Other recognitions:

Top Natural Wonders

Top 50 Next Great Towns

Top 20 Best Towns

Top Retirement Choice

 

FHA continues to toughen its lending criteria.

In January, new appraiser independence guidelines will take effect for FHA lending. FHA is adopting the language of HVCC. The goal is to separate loan origination from the appraisal. Banks will set up separate appraisal ordering processes for their internal originators and for their broker originators.

Coming soon FHA will change the approval process for lenders and correspondent/brokers. This change will give lenders more say over which mortgage brokers they accept.  It will also increase the lender net worth requirement over 3 years. The new net worth requirement will be $2 million, with 20% liquid.

Tougher enforcement has already been evident - see TBW and Lend America and many others. Now there will be tougher lender approval guidelines.

We will see how this change will impact competition, but it may be that near future FHA lending guidelines will so severely restrict the number of qualified buyers that lender competition will be less of a concern.

The biggest, most impacting, change though, for consumers as well as for lenders, will be in the area of borrower qualifications. Already we have seen tightening for FHA Streamline refinances.

Coming soon:

• higher mandated credit scores
• larger down payment - to 5%?
• lower allowed seller paid closing costs - to 3%?
• increased mortgage insurance premiums

 Details are expected to be announced by the end of January, but in a recent NPR interview Secretary Donovan said,"We just lowered the percentage of what we call seller concessions." I have not seen the change, but Secretary Donovan said it has been done.

He wants "more skin." He want borrowers to bring more cash to closing. Apparently a lot more.

I take that to mean that the decision is finalized - more skin right now means lower seller concessions.

And soon it will mean higher down payments and higher monthly payments from higher mortgage insurance.

Here is the interview.

The House Financial Services Committee has just announced that a new 1200 page legislation is being sent to the House Floor for a vote next week.

The Wall Street Reform and Consumer Protection Act (HR 4173).

This bill addresses a wide range of issues in the whole financial system - consumer protections, the "too big to fail" institutions, executive compensation, derivative regulation, mortgage reform, and rating agencies.

BTW, ever notice how Congress people like catch phrases: "too big to fail", "skin in the game", "say on pay." Kind of cute isn't it. I think that catch phrases fit well in sound bites and that repeating these catch phrases over and over helps Congress people get re-elected.

This new massive reform would create a Consumer Financial Protection Agency, an inter-agency oversight council, and a Federal Insurance Office.

I am not sure the reason all these pieces of legistlation are so massive.

I am not sure the reason that new agencies are needed, or why new agencies are just added to the old agencies.

I am not sure who has read all these pages of new regulation, and who knows what their impact will be to the overal economy, still struggling to recover, and to the housing market, still trying to recover.

My suspicion is that we will get many new legislative burdens, few of which will actually impact the problems that we faced with the housing market crash. The problems that caused the housing crash could have been addressed with existing agencies and targeted changes to lending programs and guidelines.

What we are getting now probably goes well beyond the fixes needed for the market.

The problems began with the changes that Congress brought to the secondary market in 1999 with the Commodity Futures Modernization Act. I am not sure how these new changes that Congress is working on in 2009 can be counted on to do anything but cause more problems.

Read my latest article in Scotsman Guide

	Look inside >
Lead Article: Inside the Reg Z Maze

Recently the Fannie Mae Chief Economist, Doug Duncan, in the November Economics Development report offered this encouragement:

It's (Unofficially) Over!

Backed by this graph.

The report addresses many of remaining serious problem - consumer confidence, housing market stability, and JOBS, JOBS, JOBS.

But great encouragement is to be taken with the significant turn around in GDP, evidenced in the chart.

A concern is how much the tax credits have created demand that may not be sustained, and whether consumers will continue to spend.

The report states, "While the improvement in consumer spending may not be durable, it does not mean that the recovery is in doubt. The Conference Board's Index of Leading Indicators, which is a gauge for economic activity over the next six months, increased in September for the sixth consecutive month after reaching its trough in March. The string of gains in the index supports our view that the recovery is taking hold."

On the mortgage side, the report looks for a boost in existing and new home sales spurred by the extension and expansion of the home buyer tax credit. But despite this boost in purchases, overall mortgage orginations are predicted to decline significantly for 2010 as rates tend back upwards.

The more I look over the HUD RESPA changes that start January 1, the worse they seem.

The latest version of the RESPA FAQ is an astonishing 49 pages long.

HUD has simplified the Good Faith Estimate by making it 3 pages rather than 1 page. That is the logic of government.

The stated goals are to increase transparency, to increase accuracy, and to encourage shopping.

I think the accomplished facts are to increase banker advantage by enabling bankers to hid their premium income. Bankers have always been able to hid their premium income. Brokers have always disclosed their premium income. HUD now will require brokers to add the premium income to the upfront charges, creating the false perception that brokers are charging more upfront.

It is an advantage that the regulators are giving to banks. It amounts to an anti small business policy.

But even for bankers, as well as closing agents, it is astounding that HUD would impose such a poorly conceived encumberance as these new RESPA requirements. At a time when lenders, brokers, and others in the housing industry are struggling to get through the down turn, HUD decides it is best to add further cost and burdens of new software, new forms, and new training.

You would think that HUD is intent on further restricting the housing market.

At any rate, one of the more consumer unfriendly, and more poorly thought out, aspects of the RESPA reform is the requirement that any Good Faith Estimate is fully binding on the loan originator. For the consumer this means that application, including credit, will probably be required before the application can receive an estimate of costs.

From HUD's FAQ - "An application includes information the loan originator requires the borrower to submit in anticipation of a credit decision. If a loan originator issues a GFE, the loan originator is presumed to have received all six pieces of information."

We will have to wait and see how this strict binding requirement impacts consumer ability to shop for terms, but I think it will limit them. And I think with the additional disclosure requirements placed on brokers, over that required of bankers, the consumer will be steered to larger bank lenders out of confusion rather than based on a fair and accurate understanding of the costs and terms.

The exact opposite of the stated goals of HUD.

For more on RESPA reform, please look at my article in November's Scotsman Guide.

 

Mortgage insurance company losses are a mounting concern for the industry.

 A concern that has not received much coverage in the media, nor in Congress. These companies have taken a beating in the market downturn.

Mortgage insurance enables home buyer to purchase with less than a 20% down payment. For FHA loans, the home buyer purchases government mortgage insurance from HUD. For conventional loans, the home buyer purchases private mortgage insurance.

Several companies offer mortgage insurance. All have taken heavy losses and as a result have tightened their lending guidelines. In many cases the MI companies have tightened their guidelines more than Fannie Mae and Freddie Mac have.

In other words, Fannie or Freddie might allow a loan to be, if the borrower can obtain mortgage insurance. But if the mortgage insurance is not availabie, then the loan cannot be made. Even though Fannie and Freddie guidelines would have allowed it.

Mortgage insurance is critical to home affordability and to the housind market.

Mortgage insurance is in trouble.

Standard and Poor's is looking closely at the larger mortgage insurance companies. This look may mean a credit rating downgrade.

The impact - higher premiums, tighter guidelines, less approved loans. It may be that Congress needs to look into what can be done to support this industry that is so vital to the continued housing recovery.

In an earlier post I suggested a twist on the home buyer tax credit that might have provided a boost to the struggling mortgage insurance industry, and might have actually helped create new home buyers. Both of these issues remain unaddressed.

As part of a $24 billion economic stimulus bill, the expanded and extended home buyer tax credit is now law.

The features of the bill are as publicized throughout the week;

• deadline extended through April 30
• April 30 deadline requires only that the contract is signed
• Qualified purchases must close by June 2010
• a reduced tax credit of up to $6500 is opened to existing home owners

Other provisions in the new stimulus focus on extending unemployment benefits. Today's increase in unemployment percentages provided the backdrop of today's signing

Here are the President's remarks. In his remarks, President Obama made the point that the credit is "fully paid for." Though he did not elaborate on that. I think he is referring to the deferring a seperate business tax credit.

The president also remembered those suffering in the Ft Hood shooting.