The Funding Source Syracuse

The Funding Source Syracuse

Thursday, February 12, 2015

So you're buying a home?

So you’re buying a home?

Rates are low, prices are holding steady on homes and you’re hearing that it really is a good time to buy.  

You’ve read all about the banks and the fines.  You think that perhaps the real estate bust is in the rear view mirror.  So, you’re out looking.

You’ve also heard that lenders have made getting a mortgage harder than pulling your molar out of your mouth with a toothpick and much more painful.  And, that is true.  There were (and are) many average people who just don’t get that lying on a mortgage application can (and should) land them in prison.  Even though the application says so in fine print (see Housewives of New Jersey – one count against Theresa was mortgage fraud).

In a nutshell, this concerned the government because it really is important to have people buy homes.  It’s important that we as a nation have a system to allow people who are starting out to get into their first home.  And, that is why the FHA loan system was set up in the 1930’s.  To allow for loans that should be easier to get than the average loan at the average bank.  And, many lenders offer FHA loans for this very purpose.

But, HUD, who handles FHA loans, made it tough.   They tightened credit, increased the down payment, introduced and increased the minimum credit score and came out with the maximum amount a lender can lend to a borrower.  If these rules were broken HUD would, and they did, slap lenders with serious fines.   And, HUD raised what is called the mortgage insurance premium.  This is an insurance premium that you pay once at the time of your closing and every month as part of your mortgage payment.  The insurance is an insurance policy that pays the bank back if you don’t pay your mortgage and the bank forecloses on your house. 

Lenders became skittish and backed away from doing FHA loans because HUD did not want to pay out the insurance policies to lenders.  The reason was that HUD was getting hit with so many foreclosures in the height of  the meltdown that their insurance fund was depleted and they had to borrow money from the US Congress to replenish it.   Not only that, HUD is required to keep a minimum of 2% cash buffer in their fund and they have not been able to get there since the melt down.  This is a violation of the rules.  Rules that if lenders violated, HUD would fine, cite and close them down.

None of this fell on deaf ears in Congress.  HUD Secretary Castro wants to lower the mortgage insurance to make it so that borrowers pay less in their mortgage payment when getting a mortgage.   This is great news for borrowers, as it will open the doors to individuals to buy homes.  It is questionable for HUD because by lowering the insurance they are reducing the amount of money that they need to collect to get to that magic 2% number.

Castro met with the House financial Services Committee to discuss lowering the Mortgage Insurance Premium (MIP) by 50 basis points.  He was met with some serious backlash from Congresspersons who are concerned about the financial well being of HUD.

FHA is not a mortgage.  FHA is an insurance program that insures bank that underwrites loans to FHA underwriting standards against future defaults by the borrowers.  Provided that the lender properly underwrote the loan, HUD should pay the premium.  The problem from the perspective of the banks is that when HUD saw their pool of money reducing they backed away from their mandate to back loans – and looked for anything that could get them off the hook from paying the bank on the loan.   This was so concerning that JP Morgan Chase openly stated they were backing away from FHA loans and Wells Fargo did the same.  Some cite a 70% reduction of FHA loans in volume on the books of those two lenders from previous years.   This is concerning to HUD because it reduces the premiums. Yet, lenders say this should be no surprise since HUD regulators were aggressive in their stance toward lenders during the worst of times.  Why would anyone believe HUD would stand by them in future times of crisis?

So, lenders in an effort to protect them put “overlays” on FHA loans That means that, for example, if FHA said the minimum credit score is 580 lenders would reject anyone with a score under 640 period.   And, if the score say was between 640 and 720 lenders were charging points or requiring more assets be proven – in an attempt to build their own reserve fund against buy backs that HUD themselves may attempt to back off from, as they had in the past.

This policy has reduced the number of FHA early payment defaults in and of itself. .

So the debate rages on.  We shall see what happens.   Does HUD reduce the mortgage premium?  Do they limit the program to only first time borrowers?   What’s the right balance to take from the heady days of 2007 to the constricted days of 2012 and 2013?  Time will tell.