FHA Planning on Tighter Requirements

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.

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.

Looking Backward and Forward

As we close out 2009, it gives me an opportunity
to look back and also make some acknowledgements.

This last year put us further along a path that began
a few years back.

There is no debate that there were lots of abuses in
the mortgage business. Originators took advantage
of borrowers. Borrowers blindly followed without
questioning where they were headed. Lenders
created these loans knowing that they were not
being looked at closely and passed them along to
investors without caring about the outcome. Investors
sold pieces of these mortgages to other investors,
representing them as solid investments.

Everyone wanted to believe that the loans were good
for the borrowers and good for the investors. Some
deluded themselves into thinking that property values
would never go down. And there was a lot of pain
that will continue for the forseeable future.

The government does not want this to happen again.
So, where previously the pendulum had swung far
in the direction of little scrutiny, now it has swung
in the direction that everything is checked and re-
checked.

In addition, many loan products are no longer avail-
able. For example, stated income loans and loans that
allowed for deferred interest. Equity loans, and interest-
only loans are vastly reduced in availability.

Through the course of 2009, we have seen the intro-
duction of new appraisal ordering systems that remove
direct contact between the originator and the appraiser.
This was done in an effort to keep originators from
exerting undue influence on the appraisers to "hit a
number".

We saw the introduction of new disclosure requirements
that protect the borrower from paying for services
such as the appraisal until they have had an opportunity
to review their truth-in-lending disclosure. And if the
Annual Percentage Rate (APR) changes more than
.125%, you are entitled to a new disclosure and a
mandatory 3-day waiting period before you can proceed
to the next step. This may delay closing transactions
on time.

Coming in 2010, are even more disclosure changes.
You will now see that some fees are set at the beginning
of the disclosure process and cannot be changed, some
fees can be changed based on changes in the market,
and others can be changed but have a cumulative limit
of 10% change. They are also tying these advance
disclosures to your final settlement statement that you
will receive at closing so that the comparisons are
crystal clear.

Be prepared for these changes. Don't think that because
you have experience with buying or refinancing that
you won't have a new learning curve. And be prepared
for possible delays and some confusion. All of these
changes are new to everyone and it will take a little
time to work through all the new requirements.

Acknowledgements:

I want to say "Thank You" to all of you with whom I
worked in this past year.

Being a mortgage professional is how I feed my
family, and I never want to take your confidence in
me and your loyalty for granted.

With that being said, please let me know how I can
improve my service to you. Send any suggestions
to me at doug@dougbrennecke.com.

I want to continue to earn your business.

Have a safe and healthy Happy New Year! I will
talk to you again in 2010.

The Feds Are Running The Show

We are finishing up a trying year in the mortgage
business. After last year's near-death experience
with economic calamity, the federal government
has been doing everything it can to prevent any
chance of a recurrence of the events that led to
the "mortgage meltdown".

Because the government is so involved in the
process, it is important to understand that the
lenders are being handcuffed from making many
of their own decisions about lending programs
and approval criteria.

Let's take a look at what type of lending is
prominent in today's market:

Conforming loans: These are the loans that
are designed for sale to FNMA (Fannie Mae)
and FHLMC (Freddie Mac), and currently have
a maximum loan limit of $417,000. FNMA
and FHLMC are "government sponsored
entities (GSE's)", and the performance of these
corporations are backed by the Federal Govern-
ment.

FNMA and FHLMC have written guidelines
that define what loans they will purchase from
the lenders after the loans are funded and closed.
Traditionally, there is room for interpretation
with these guidelines, and underwriters have
latitude to make loans outside of these guidelines
if there are sufficient "compensating factors" -
reasons why making an exception does not
present a risk. A couple of the most common
compensating factors are a low loan amount in
relation to the value and strong liquid assets
after closing.

High-balance conforming loans: These loans
have come into play when the mortgage melt-
down hit the market hard, and institutional
investors (non-government) refused to buy
loans because the quality had been poorly
represented and they suffered losses.

These high-balance conforming loans are also
eligible for sale to FNMA and FHLMC and
have maximum loan amounts based on the
county in which the property is located. They
are to be underwritten with many of the same
guidelines, although there are more restrictions
in this category, because FNMA and FHLMC
don't want to take higher risks with higher loan
amounts.

FHA Loans: The last bastion to enable the
general public to buy a home with a small down
payment is the FHA program. It allows buyers
to put as little as 3.5% as a down payment, and
liberally allows for gift funds for the down payment
and closing costs, and for family members to
co-mortgage to help in the qualifying process.

There are minimum property requirements that
need to be met, and condominiums require some
additional scrutiny that may make many projects
ineligible, but it fills a need for first-time buyers
that the conventional market is avoiding right now.

It is also a government-backed program. In the
past, conventional loans were available up to 95%
of the value of the home, but these were made with
the support of private mortgage insurance (PMI).
PMI has backed off from insuring loans to those
maximums, again due to the losses that these
companies incurred when the mortgage meltdown
occurred.

VA loans: Another government-backed program,
available to active-duty military and honorably-
discharged veterans. These loans allow for an
eligible borrower to finance up to 100% of the value
of the home.

Guidelines are reasonable, and tend to give the
benefit of any doubt to the veteran, within reason.
They want to help their military members obtain
homes, without making excessively risky loans.

So, the majority of the mortgage market is being
driven by the directives of the federal government
and the financial support of the U. S. taxpayer.

There are lenders that do create loans for their
own lending portfolio, and do not rely on making
the loans for sale to the GSEs. Many of these
lending programs are adjustable-rate loans, because
the lender does not want a fixed rate of return on
their money, when the cost of money is subject to
change.

These portfolio lenders, as they are called, have
put together business plans that have worked
very well for themselves. But, even though they
have a proven track record of their business plan
being successful, there is still pressure from the
government to conform to what the government
wants them to do.

For example, stated-income loans were prominent
when the go-go days in the mortgage business
were happening. These loans did not require proof
of income, and many lenders, investors, and rating
agencies were not especially diligent in controlling
the risks associated with these loans.

Stated-income loans were summarily regarded at
that point as being high-risk and to be avoided at
all times. However, there were still lenders that
had done a good job of controlling the risks by
requiring higher credit scores and strong cash
reserves that had a correlation between the
balances on hand, and the income that was being
represented on the loan application.

These lenders could show statistically that they
had good performance with their business model.
But, despite this fact, bank regulators "strongly
encouraged" them to drop this lending program.
If the bank insisted that they wanted to continue
to serve the market with this lending vehicle, the
regulators informed them that they would continue
to review the bank operations for compliance in
all areas.

Nobody wants the federal regulators to hang
around their business any longer than necessary,
and the bank got the message that they needed to
drop a program that the government deemed to be
high-risk.

You continue to hear a lot in the media from the
politicians that they are doing everything to get
money "from Wall Street to Main Street", and that
they don't understand why the money is not being
lent to borrowers.

It is disingenuous on their part to ignore the role
of their own federal regulators who are looking over
the shoulder of the lenders and making sure that they
don't make any mistakes. When the politicians are
saying that the banks have a green light, and the
regulators are waving the stop sign, the banks pay
attention to the stop sign.

Making loans to good borrowers is easy. Rejecting
loan request to clearly bad borrowers is easy. But
there is a huge number of borrowers in the middle
of that spectrum, and underwriters are gun-shy about
making any decisions for which they may be criticized.

When that happens, they tend to adhere strictly to the
underwriting guidelines and not make any exceptions,
no matter how reasonable the request may be. It is
the safe thing to do, but it does not allow for a big group
in the borrowing population to be served.

Let us hope that as we head into 2010, that there can
be a rejuvenation of institutional investors who are
willing to encourage creativity and reasonable risk in
the creation of mortgage loans. Only the private
market can be counted on to do so. And, the reward
for all of us will be that the taxpayers can be taken
off the hook for the risk associated with almost all the
mortgage loans being created, and that can be shifted
to investors.

Combo Loans Are Available Again

When the mortgage industry was going wild, one
of the most useful tools was the combination
first loan and second loan.

As originators, we could use this combo loan
structure strategically, to help borrowers avoid
jumbo loan pricing, or to avoid private mortgage
insurance.

But when so many loans started to have problems,
the appetite from investors, including Fannie Mae
(FNMA) and Freddie Mac (FHLMC), diminished
for these types of loans.

We saw many loan programs evaporate, including
loans with deferred interest, many interest-only
programs, stated income loans, and the combo
loan products.

After retreating to the old standbys, the 30-year
and 15-year fixed rate loans, lenders have begun
to find acceptance of other lending programs.
These would include adjustable rate loans,
featuring fixed-rate periods of 3-, 5-, 7- and
10-years. We are also seeing some lenders
offering interest-only payment loans again, and
the combo loans.

The big difference in today's market is that
instead of the lenders pushing the envelope to
high loan-to-value ratios, we are seeing that
the combined loans are generally capped at 75%
of the value or sales price. This allows the
lender to keep the risk lower, especially since
the second loan is the most vulnerable to any
decreases in market value.

These programs can still be an effective tool
for a number of situations:

1. Sometimes a borrower is expecting to have
funds available after closing and wants to pay
down their loan balance.

If they get a fixed rate, amortized loan they
are allowed to pay extra toward their principal
balance. But the limitation is that it will not
allow their monthly payment to be recast,
which is often the goal for paying down the
loan balance. It will shorten the term of the
loan, but the payments will remain the same.

If we structure a combo loan between what
can best be described as the permanent loan
and the temporary loan, we can split the
amount that needs to be borrowed. The
advantage is that the borrower can retire the
temporary, second loan, and the first loan
can continue with payments that are appropriate
for that balance.

2. When loan request exceed the conforming
limit of $417,000, or the high-balance conforming
limit of $697,500 (in San Diego County), they
are subject to different terms, interest rates and
fees.

Many times, we can structure the loan request
so that the first loan stays at or below the
$417,000 limit, and combine it with a second loan.
The blended terms can often be more beneficial
than the terms for the high-balance loan up to
$697,500.

Alternatively, if a borrower needs a loan that
commonly falls into the jumbo loan category
(those loans that would be higher than $697,500
in San Diego County), we can structure the first
to fall within the high-balance limit and combine
it with a second loan. Again, the blended terms
may be better than the jumbo offerings.

3. You can have choices regarding the second
loans.

One choice is the fixed-rate, fixed-term second.
These are also called closed-end second loans,
and once they are originated, the payments
are designed to retire the loan over the specified
period of time. There is no flexibility to the
payment plan.

The other choice is the line-of-credit second.
These are commonly called HELOCs for home
equity lines of credit.

These are distinguished by having a maximum
loan amount approved, that may or may not be
drawn fully at time of origination. They feature
a flexible payment system, allowing for interest-
only payments or more. Also, once they are
paid down, they principal can be re-drawn again
within the maximum loan amount. In many
ways, it is like a credit card secured by your
home's equity.

It is always beneficial to have many choices to
help borrowers structure their loan requests,
and the re-introduction of the combo loan
products gives us more tools to work with.

Updates and Trends

Updates:

Every year about this time, we get an update for
the new conforming loan limits.

Conforming loans are those that are eligible to be
sold to FHLMC (Freddie Mac) and FNMA (Fannie
Mae).

For the 5th straight year, the limits are as follows:

Single family home $417,000
2-unit properties $533,850
3-unit properties $645,300
4-unit properties $801,950

As I mentioned in an earlier newsletter, loans above
thsoe loan amounts may also be created and sold to
FNMA and FHLMC under special legislation designed
to stimulate the housing market. The maximum loan
amounts for these loans, commonly called "Conforming-
jumbo" or "High-Balance Conforming" loans, are set
by county.

The High-Balance Conforming loan limits for San Diego
County through 2010 are as follows:

Single family home $697,500
2-unit properties $892,950
3-unit properties $1,079,350
4-unit properties $1,341,350


Trends:

We are getting word that underwriting guidelines
will be tightening further as we head into 2010.

Currently, we can obtain loan approval through an
Automated Underwriting System (AUS) that essentially
gives the OK to the file (subject to verification
of the data submitted) and the lender will create
the loan, knowing that FNMA and FHLMC will purchase
the loan from them.

It is not uncommon for the AUS to approve a loan with
high ratios. When I use the term ratios, I mean the
relationship between the borrower's monthly debts
and their monthly income. The monthly debts will
include the proposed new loan payment, plus property
taxes, plus hazard insurance and a homeowner's
association fee if applicable, and combined with other
monthly debts for installment debts, revolving debts,
student loans, or alimony/child support payments.

The AUS has allowed for qualifying ratios above 50%
of the borrower's gross monthly income, especially
when the borrower has substantial liquid assets that
can be available to the borrower if they have extra-
ordinary expenses in a month.

The new guidelines look like they will provide a "hard
ceiling" of rations not to exceed 45% of the borrower's
gross monthly income. The discretionary judgment to
assess the borrower's overall qualifications appears to
be eliminated in an effort to standardize the approval
process.

On a related topic, we can often solve this problem by
having the borrower pay off some of their debts to get
the ratio below the stipulated guideline. We are now
seeing that some lenders, in conjunction with their
agreements with FNMA and FHLMC, are no longer
allowing the payoff of revolving debt - like credit card
payments - to qualify.

The best strategy would be for the borrower to work
toward paying off their bills, before we have the
opportunity to run their credit report, so that it
is not an issue for an underwriter.


As always, the mortgage business is changing all the
time. If you are considering purchasing a home, or
refinancing in the near future, take the time to get in
touch with me before the need arises so that I have
a better opportunity to help you navigate through the
changing guidelines that we will be facing.

Good News from Congress!

There have been two significant programs in place this
year that have contributed to any housing recovery that
we have been experiencing.

Both had deadlines that threatened to turn their coaches
into pumpkins, unless Congress pushed through legislation
that would allow them to continue.

First, the first-time home buyer tax credit of $8000 was
scheduled to expire as of November 30, 2009. There was
a lot of concern that with the length of time that it was
taking for short sales and foreclosures to work their
way through the system, that a lot of needy buyers would
miss out.

But, the Senate has approved an extension of the tax
credit until April, 2010. It appears that there are no
changes to the requirements to receive the credit, and it
has not yet been signed into law by the President. It
would be highly unlikely that it would not move forward.

Second, over the last couple of yeras we have enjoyed
a lending category commonly known as high-balance
conforming loans. Conforming loans have a maximum of
$417,000. The high-balance conforming loans that are set
by county.

In San Diego County, the high-balance conforming loan
amount on a single-family home is $697,500.

The enabling legislation called for an expiration to this
program as of December 31, 2009.

But, the President signed an extension for the availability
of these higher loan limits that will continue through
December 31, 2010.

This is incredibly helpful in the San Diego market because
it allows properties in the $550,000 to $900,000 range to
obtain more affordable financing that can be purchased by
Freddie Mac and Fannie Mae.

If we had to rely on the traditional market (loans above
$417,000 before the high-balance category was created),
availability of loan products would be impaired and the
interest rates and fees would be higher.


What the government is helping us with on one hand is
being micro-managed and over-regulated on the other.

Soon, I will try to summarize just how we are going to
try to navigate through the HVCC, MDIA, HPM Section 35,
HMDA, Red Flag, RESPA, and the SAFE Act which will
be in effect in 2010.

It is going to create a more complicated process and
create timing considerations that will most likely
lengthen the time it takes to close an escrow.

But, that is for another day!