FHA has been an increasingly popular program in
the last few years. Especially here in San Diego
County, where FHA previously was not a very
relevant program, the higher loan limits has made
it the most popular for first-time home buyers.
But there is a price for such success. Some industry
estimates are that about 30% of all mortgages last
year were FHA-insured. This increase in lending
volume has put some strains on the FHA system.
A borrower who obtains an FHA loan is required to
pay mutual mortgage insurance (MMI) into the fund
that creates reserves against losses in the FHA
program. This MMI comes in two parts: an up-front
mortgage insurance premium (MIP) that is most often
financed on top of the base loan amount, and a monthly
MMI premium.
Because of the higher volume of FHA loans, and the
emphasis on helping first-time buyers and those with
lesser credit scores, there has been more late payments,
defaults, and foreclosures in the program. As a result,
the reserves have fallen below what is required for the
FHA program.
The new changes are designed to increase revenue to
the reserves, to decrease some of the risk from the
more marginal qualifiers, and for borrowers to rely
less on contributions from the sellers in buying their
homes.
The following changes will be effective with case
numbers that are issued on or after April 5, 2010.
This means that a borrower will need to be under
contract on their home by about April 1 to beat
the deadline for these changes.
First, the MIP has been 1.75% of the loan amount.
After the changes take place, this will go to 2.25%
of the loan amount. On a $300,000 loan, this will
add an additional $1,500 to the amount financed
and increase the monthly payment by about $10
per month.
Second, if a borrower has a credit score of 580 or
less, they no longer will be able to purchase with
the minimum down payment of 3.5% of the purchase
price. Those borrowers will now have to have 10%
down payment, and get a loan of 90% of the value.
Third, in the past sellers could negotiate to pay as
much as 6% of the sales price of the home toward
the buyer's closing costs. FHA will now limit that
contribution to only 3%. Part of the reason for this
change was because FHA was discovering that
sellers were inflating the sales price to cover the
larger contributions, and FHA was insuring loans
even higher than the 96.5% that the program
allowed.
All in all, it will be somewhat more expensive for
a borrower to obtain an FHA loan. It will still be
a viable program for borrowers with small down
payments and who need some forgiveness on their
credit scores.
The important thing is to know what changes are
coming so that you are not surprised when you are
ready to enter into your contract.
Wednesday, January 27, 2010
Wednesday, January 13, 2010
Forecasting Interest Rates
Interest rates have been staying low for quite a while
now. It's always difficult to try to predict rates, but
there seems to be a consensus building that may give
us some idea when rates may make an upward move
that will stay in place for some time.
To generalize, fixed rates on conforming loans - those
that get sold to FNMA and FHLMC with loan amounts
up to $417,000 - have been in the 4.75% to 5.25%
range for quite some time.
These rates have sustained because the Federal
Reserve is trying to spur a housing recovery by
keeping interest rates low.
In turn, lenders are willing to make long-terms loans
at these loan rates, because they have no intention
of keeping these loans on their books and carrying
the interest rate risk that goes with it. They know
that they have a ready buyer for these loans through
FNMA and FHLMC.
It is one of the main reasons why lenders are under-
writing the loans so stringently. They have to make
sure that the loan they are making is one that FNMA
and FHLMC will purchase from them. Strict adherence
to Fannie and Freddie's guidelines is vital so that the
lender does not have to keep the loan on their books,
and suffer the risk of that low-interest rate loan being
a money loser in the future when rates go up.
FNMA and FHLMC have been allotted more than
$400 billion to guarantee their recovery. But an
announcement was made on Christmas Eve, without
any fanfare, that they were given an unlimited financial
lifeline and removed the requirements to shrink
their holdings by 10% per year. Currently they are
instrumental in about 75% of mortgages made, and
their holdings amount to about $770 billion.
Additionally, there are loans that are created by lenders
that get bundled into pools of mortgages and then sold
to investors through a vehicle known as a Mortgage-
Backed Security (MBS). FNMA and FHLMC also put
together MBS pools to reduce their holdings.
Traditionally, these pools of mortgages have been sold
through Wall Street to investors, pension plans, etc.
But when the performance of mortgages began it's
decline a couple of years ago, the Wall Street investor
market dried up.
They suffered unexpected losses because the quality
of the loans in their MBS investments were not as good
as they were represented to be. Once burned, twice
shy. The investors have not rushed back into the
market to buy these new MBS issues.
To keep fluidity in the market, the Federal Reserve
has been purchasing MBS issues, since non-govern-
ment investors have been dormant.
So, the Federal Reserve is keeping rates low to stim-
ulate the economy. The interest rates are not market
driven, so investors are not excited about them unless
they can move the loans to someone else to absorb
the risk. The only players for buying these loans are
FNMA and FHLMC (Government-sponsored entities)
and the Federal Reserve buying MBS issues. It's a
giant circle, and the free market never touches it.
Now here is the indicator that rates may start to go
up: Federal Reserve policy makers are expressing
a desire to pull back on purchasing MBS issues when
they see some recovery in the economy. If this
happens, to attract investors other than the government
(since they are backing away) interest rates would
have to go higher.
When you start to hear the news reports that the
economy is recovering and that the Federal Reserve
is reducing their investment in MBS issues, be prepared
to expect higher interest rates. Some commentators
are thinking they could go up 1 to 2% from the low
rates that we have enjoyed.
now. It's always difficult to try to predict rates, but
there seems to be a consensus building that may give
us some idea when rates may make an upward move
that will stay in place for some time.
To generalize, fixed rates on conforming loans - those
that get sold to FNMA and FHLMC with loan amounts
up to $417,000 - have been in the 4.75% to 5.25%
range for quite some time.
These rates have sustained because the Federal
Reserve is trying to spur a housing recovery by
keeping interest rates low.
In turn, lenders are willing to make long-terms loans
at these loan rates, because they have no intention
of keeping these loans on their books and carrying
the interest rate risk that goes with it. They know
that they have a ready buyer for these loans through
FNMA and FHLMC.
It is one of the main reasons why lenders are under-
writing the loans so stringently. They have to make
sure that the loan they are making is one that FNMA
and FHLMC will purchase from them. Strict adherence
to Fannie and Freddie's guidelines is vital so that the
lender does not have to keep the loan on their books,
and suffer the risk of that low-interest rate loan being
a money loser in the future when rates go up.
FNMA and FHLMC have been allotted more than
$400 billion to guarantee their recovery. But an
announcement was made on Christmas Eve, without
any fanfare, that they were given an unlimited financial
lifeline and removed the requirements to shrink
their holdings by 10% per year. Currently they are
instrumental in about 75% of mortgages made, and
their holdings amount to about $770 billion.
Additionally, there are loans that are created by lenders
that get bundled into pools of mortgages and then sold
to investors through a vehicle known as a Mortgage-
Backed Security (MBS). FNMA and FHLMC also put
together MBS pools to reduce their holdings.
Traditionally, these pools of mortgages have been sold
through Wall Street to investors, pension plans, etc.
But when the performance of mortgages began it's
decline a couple of years ago, the Wall Street investor
market dried up.
They suffered unexpected losses because the quality
of the loans in their MBS investments were not as good
as they were represented to be. Once burned, twice
shy. The investors have not rushed back into the
market to buy these new MBS issues.
To keep fluidity in the market, the Federal Reserve
has been purchasing MBS issues, since non-govern-
ment investors have been dormant.
So, the Federal Reserve is keeping rates low to stim-
ulate the economy. The interest rates are not market
driven, so investors are not excited about them unless
they can move the loans to someone else to absorb
the risk. The only players for buying these loans are
FNMA and FHLMC (Government-sponsored entities)
and the Federal Reserve buying MBS issues. It's a
giant circle, and the free market never touches it.
Now here is the indicator that rates may start to go
up: Federal Reserve policy makers are expressing
a desire to pull back on purchasing MBS issues when
they see some recovery in the economy. If this
happens, to attract investors other than the government
(since they are backing away) interest rates would
have to go higher.
When you start to hear the news reports that the
economy is recovering and that the Federal Reserve
is reducing their investment in MBS issues, be prepared
to expect higher interest rates. Some commentators
are thinking they could go up 1 to 2% from the low
rates that we have enjoyed.
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