Richard's Real Estate Thoughts

FHA continues to toughen its lending criteria.

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.

FHA, VA, Rural Development, Conventional, Jumbo,
Reverse Mortgages, FHA 203k Renovation

Home financing in Tennessee and Georgia.

www.RichardSmithHomeLoans.com

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

www.RichardSmithHomeLoans.com

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

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.

FHA, VA, Rural Development, Conventional, Jumbo,
Reverse Mortgages, FHA 203k Renovation

Home financing in Tennessee and Georgia.

www.RichardSmithHomeLoans.com

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

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.

FHA, VA, Rural Development, Conventional, Jumbo,
Reverse Mortgages, FHA 203k Renovation

Home financing in Tennessee and Georgia.

www.RichardSmithHomeLoans.com

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.

Congratulations to the Red Bank Lions football team. Last week they finished regular season play undefeated and with the number 1 ranking in the state.

Tomorrow they begin their playoff run.

Anything can happen of course, but this is a special team.

Great job and good luck tomorrow.

As the economy starts the turn around, employment becomes more important measure of the strength and sustainability. As a lagging indicator, employment gains will always trail recovery, but families and the economy need more jobs. The job creation target is 400,000 new claims. Today's New Unemployment claims number of 512,000, despite continuing improvement, remains above that magic job creation level.

This means the economy is still losing jobs. On a personal note, the paper mill in my hometown has just announced plans to close. The impact on my home town will be massive. 1100 jobs. Wow. And what do you do with a closed paper mill?

Tomorrow's unemployment numbers will be very important, more so than usually. September showed an increase breaking a trend of monthly improvement.

The question is - Was September's increase a blip or a trend. Expectations are unemployment will slide higher, maybe to 10%?

Estimates are that 16-20% are underemployed - combining the unemployed seeking work with the working parttime instead of full time or no longer seeking employment.

To sustain the recovery jobs must come back. With closing factories, the jobs may need to be in new industries.

FHA, VA, Rural Development, Conventional, Jumbo,
Reverse Mortgages, FHA 203k Renovation

Home financing in Tennessee and Georgia.

www.RichardSmithHomeLoans.com

Last night two local teams, the Lady Bucs of Boyd-Buchanan and the Lady Lions of Red Bank, won state championships in high school volleyball. For Boyd-Buchanan this year was a return trip to the Class A state final. This year they won, completing a 20-0 season within their state classification.

The final match was 3-0.

For Red Bank, where my son played basketball and my daughter was on a state championship soft ball team, this is the first time in the class AA state final in 19 years. This is the first state title for the Red Bank volley ball team.

Red Bank won their final match 3-1, after fighting through the loser's bracket.

This past decade Red Bank has won state championships in football and in girls softball.

The MVP's were Stephanie Sivvvlvers for Boyd and Courtney Lawson for Red Bank.

Congratulations to both teams and both schools.

FHA, VA, Rural Development, Conventional, Jumbo,
Reverse Mortgages, FHA 203k Renovation

Home financing in Tennessee and Georgia.

www.RichardSmithHomeLoans.com

The Calculated Risk Blog is a highly recommended read. This week there was a post with this chart on the growing distinction between new and existing home sales. The phrase used is "Distressing Gap."

In the post, some important points were made about the increased value to employment and the economy from new construction home sales.

The impact on the local economy of new homes construction is very great.

The model used estimates "impacts on income and employment in 16 industries and local government, as well as detailed information about taxes and other types of local government revenue." The model "estimates of the local impacts of building 100 single family units, 100 rental apartments, and $10 million worth of spending on residential remodeling (equivalent to 100 remodeling jobs at $100,000 each)1 in a typical U.S. metropolitan area, "

The estimated 1 year local impact of 100 single family new construction homes:

• $21.1 million in local income
• $2.2 million in local govenment revenue
• 324 local jobs created

The estimated continuing annual impact of 100 single family new construction homes"

• $3.1 million in local income
• $743,000 in local government revenue
• 53 local jobs created

 Similar estimates are provided for multi-family construction and residential remodeling.

The information from these studies should be emphasized and understood. We are all fully aware that new construction has fallen off, but I assumed that the drop was in line with the drop in home sales in general. The statistics in the Calculated Risk post show that new home sales have fallen significantly more than existing home sales.

This is not good for local economies to have such a disparity between existing home sales and new construction home sales.

The push for First Time Home Buyer with the tax credit and the increase in distressed properties are cited in the Calculated Risk post as major contributing factors to this growing gap in new and existing home sales.

To those factors I would add the loss of many construction financing programs, and the general tightening of qualifying standards in general that has pushed a very large portion of potential buyers out of the market - many of them minorities. On that topic, I will write more later.

FHA, VA, Rural Development, Conventional, Jumbo,
Reverse Mortgages, FHA 203k Renovation

Home financing in Tennessee and Georgia.

www.RichardSmithHomeLoans.com