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.

Get an FHA loan for less?

Julian Castro, the current Sec for the US Dept of HUD, testified before the Committee on Financial Services on Wednesday, February 11, 2015 regarding the reduction of the Mortgage Insurance Premium

Before your eyes glaze -this is important.  A reduction in the premium has huge benefit to everyday people buying a home and financing it with an FHA loan.  About 5-years ago, HUD raised that premium and that cost borrowers a significantly higher amount to close their loans - money out of their pocket to HUD.  And, each month, their monthly payment included hefty monthly premiums that went to HUD.

Castro is seeking to reduce this amount for two reason.  1. The high premium is forcing borrowers to look at big banks offering 3% down payment mortgages with lower insurance.  2.  By reducing the premium and by offering a truce with banks who refuse to do FHA loans (by not forcing them to buy back FHA loans for immaterial defects), Castro is hoping that more people will apply for and get an FHA loan. 

This is important to HUD and frankly to the US.  First, HUD has seen a large drop in FHA loans for the reasons cited above.  Consumers don't want to pay and banks don't trust FHA to punt loans back to them for small defects that don't affect the material soundness and quality of underwriting a borrower.

But, FHA loans provide borrowers who can't get a 3% down loan at a bank with the ability to get a mortgage.  Those much talked about low down payment loans at major banks and bankers come with tougher credit, employment and asset requirements than an FHA loan

Since the 1930's FHA has played an important role in housing - providing loans to people who otherwise would not get one.   So, HUD is an important player in the US economy.

The US Congress cares about this reduction because not so long ago FHA and HUD ran out of money as the foreclosures went through the roof.   Castro stated that in response to this HUD increased the insurance amount from borrowers and toughened underwriting which brought in a 21 billion improvement to the insurance fund.

HUD remains under the limit required to have in reserve - a violation that a regulatory like HUD would not tolerate in a lender.  Congresspersons grilled HUD about this very fact in light of the reduction of the insurance premium, which goes to increase their reserves. 

Subprime mortgages are back

Subprime mortgages - what most consider the epicenter of the financial meldown - are coming back.

Sub prime mortgages were meant for borrowers with less than prime credit.  It started out that a subprime loan came with a higher interest rate and a larger down payment.  It slid into not requiring any income verification of the loans, then no asset verifications (with yet higher rates and higher down payments) to offering literally lowering the down payment and increasing the rate higher and higher.  In fact, lenders were so hungry for the returns that they offered adjustable loans with teaser interest rates and moved into "interest only" mortgages  - requiring the borrower to only pay the interest and never pay the debt off.  If not bad enough, there were negative amort loans - which allowed the borrower to pay less than was required to pay the mortgage, which meant that their mortgage debt increased, not decreased.  And, let's not forget that lenders got into giving out home equity loans with the subprime loans - so you got two mortgages.  One for 80% of the value and one for 10%, 15% of the value - which meant you only put down 5%.   It actually got worse when lenders came out with the "125's".  Those were 125% loan to value loans - which meant if you bought a 100,000 dollar house, the bank would happily lend you 125,000.00 to buy the house..... The appetite for those loans by investors was voracious.  Big banks bought sub prime lenders and got in the game.  It got huge.  In fact, in 2006 and 2007, more people were doing subs than doing your normal Fannie Mae or Freddie Mac loans.  And, forget FHA - they required too much verification and too much insurance premiums - and Realtors steered borrowers away from an FHA for fear of the appraisal - which was more stringently done on an FHA financed property.

Subs are back.  Now they are being hawked to borrowers who have fallen outside the tight lending criteria that came into place after the crisis.  When lenders would lend without regard to income, now they lend with regard to ability to pay and most won't lend to someone with less than a 640 credit score - and that credit score will cost you in points and fees.  Over 700 and maybe you won't have points.  So, young people starting out are locked out of the housing market.  And, we wonder why the housing market has stumbled and stumbled since 2010.

The new subprime loans come with higher interest rates than being offered to borrowers with 640 abd higher credit scores.  The loans can not have rates that increase if a borrower defaults nor any pre payment penalty should the borrower pay off their mortgage sooner (inheritance, sale, re-finance).   And, the borrowers do need to complete homeownership housing counsling.

But, while not as wild as before, they are back.  Some do not call them sub prime, they call them alternative mortgage products.  They argue it opens to doors to people who in other days easily qualified.

What ever happened to the days when common sense underwriting was done on each loan?  No two borrowers and no two mortgage applications are the same.  With automated underwriting and investment firms seeking every higher returns - all that went out the window.  For every borrower who lied and fabricated supporting documentation for their loans - lending became a nightmare.  In the good days, those who say got hit with a medical emergency were approved because an underwriter underwrote the loan and got the documentation proving they were on time with their payments prior to the emergency, have stable income and all that portends stability and ability to pay.  But, that is all gone now and those and new home buyers are the ones aone's who today are paying the price.

M&T Bank accused of unfair lending practices

It's always discouraging to see lenders accused of unfair lending practices.  Banks go to extremes to create tailored loans for low to moderate income borrowers in an attempt to reach out to protected groups and broaden homeownership.

Today, Reuters released a report citing that M&T Bank has allegedly been steering customers of minority status to LMI loans and to non-white neighborhoods.

In defense of M&T Bank, I find the last charge to be ludicrous.  Mortgage Loan Officers at M&T Bank or the Bank of What not could care less where someone buys a home.  They care about writing a mortgage.... but that's what this report claims

Here's the link  http://www.reuters.com/article/2015/02/03/mt-bnk-us-discrimination-lawsuit-idUSL1N0VD24M20150203

And here's the text:

M&T Bank accused in lawsuit of New York City lending bias

BY JONATHAN STEMPEL

NEW YORK Tue Feb 3, 2015 3:44pm EST

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Feb 3 (Reuters) - M&T Bank Corp was sued on Tuesday by a nonprofit group that accused the large mid-Atlantic lender of discriminatory mortgage lending practices in New York City.

In a complaint filed in Manhattan federal court, the Fair Housing Justice Center said M&T in 2013 and 2014 used racial criteria to steer prospective borrowers to particular neighborhoods, and to determine their eligibility for mortgages.

The advocacy group said it hired various women to portray themselves to M&T loan officers as first-time home buyers who were married and had no children.

Most of the "testers" who were not white were encouraged by the bank to apply for mortgages in its "Get Started" program, which helps people buy homes in lower-income neighborhoods or "majority minority" neighborhoods such as Harlem in Manhattan, or St. Albans in Queens.

In contrast, the Buffalo, New York-based lender discouraged white testers from using that program, encouraged them to move to majority-white areas such as Murray Hill in Manhattan, and told them they could afford larger loans and costlier homes than more qualified non-white testers, the complaint said.

One loan officer told a white tester about Get Started, only to then express doubt about buying "in an area where you're a min ... more minority than majority," the complaint added.

Fred Freiberg, executive director of the nonprofit, said in a statement that such activity "serves to reinforce patterns of residential racial segregation in New York City."

M&T spokesman Michael Zabel said the bank has a "deep commitment" to fair lending, as reflected by its top scores from federal regulators examining its practices, and a recent report on bank reinvestment in New York City from the Association for Neighborhood and Housing Development, an advocacy group.

The lawsuit accuses M&T of violating the federal Fair Housing Act, and state and city human rights laws. It seeks to halt alleged discrimination, as well as compensatory and punitive damages. Nine testers were also named as plaintiffs.

M&T said it has more than 700 branches stretching from New York to Florida.

Its planned $3.7 billion purchase of Paramus, New Jersey-based Hudson City Bancorp Inc, which was announced in August 2012, has been repeatedly delayed by federal regulators to allow M&T to strengthen its money laundering controls.

The case is Fair Housing Justice Center Inc et al v. M&T Bank Corp, U.S. District Court, Southern District of New York, No. 15-00779. (Reporting by Jonathan Stempel in New York; Editing by Christian Plumb)

Wells wins case

We have all read about the numerous legal challenges that banks have faced. 

Some have paid billions of dollars on behalf of banks that they purchased in 2009 at the direct request of the US Government, for the actions of the banks that failed.    To re-iterate, as this is surreal, the President lined up the CEO's of healthy banks at a meeting and specifically requested that they purchase specific banks that were failing.   The economy was a day away from another Great Depression and the successful banks did their good deeds and complied.   But, the banks that they purchased had engaged in subprime loans that were not illegal then - but today are considered illegal lending practices.

So, fast forward from 2009 to 2012 and the US Government and various US Attorney General's began a slew of lawsuits against banks for the practices of the former banks they purchased at the direct request of the US Government to bail out the failing banks.

This resulted in billions and billions of dollars in fines, settlements, agreements and funded the US Government significantly.   Various states also got into the free for all and settled with banks getting billions themselves. 

While this was going on, Warren's unregulated regulator - the Consumer Financial Protection Bureau - born out of the Frank-Dodd legislation - began to hire individuals with no mortgage banking, banking or any real life experience to..... yes to regulate mortgage banking, banking and financial professionals.

And this led to more regulations that in the eyes of many banks and other groups have resulted in the closing of smaller lenders who can not afford the increased costs to meet the regulations, the closing of companies accused or found to have "violated" or been "sanctioned" for immaterial items.  As smaller lenders closed, larger lenders have grown larger (the very thing the government and Sen. Warren rightfully did not want to have - the "too big to fail" banks).  And, lending constricted because no one wanted to originate a loan that was going to be punted back for immaterial issues unrelated to sound underwriting that resulted in no harm to the consumer.   Even JP Morgan announced they were throttling back on government mortgage lending themselves.

Then the US Government began to push for more lending because banks were not lending (why anyone was surprised banks were not lending is curious).   They rolled out former Chairman Ben bernanke who said he himself was denied on his mortgage (because he did not have the required two-years of stable income as he had recently retired as Chairman - and those rules were in place by the regulators and agencies run by the government such as Fannie Mae and Freddie Mac - so again, no surprise.).

So, banks again bended in return for the agencies (Fannie, Freddie, HUD) agreement not to push back loans for immaterial findings.  The banks announced with great fanfare the new expanded criteria in lending that really were just the old 97% LTV loans from the 1990's.   And, in response, HUD lowered their crushingly high mortgage insurance premiums to lower the cost to get an FHA loan.

It would have been nice if it ended there. 

It did not

Apparently, NYS decided that Wells Fargo violated an agreement they signed and paid into a 25 billion settlement (along with 4 other banks) regarding the servicing of loans. The claim was that bank was not responding to some struggling borrowers who were seeking loan modifications as quickly as timetables under the settlement.

The Judge rejected this overreach by the government stating " does not require absolute perfection in loan servicing" and ruled for Wells Fargo.

It's time that the public understand that banks lend money.  People borrow money.  What occurred between 2000 and 2008 was the result of greed.  That greed was fueled by the US Government pushing banks in the 1990's to lend more and more to people with lower credit standards, lower income and to give them more borrowing power.  And, the US Government tied that to the Community Re-investment Act - the more banks lent to those people the more CRA credits they got.

And, let us not forget that even the New York Times in the mid-2000's marveled how marginalized individuals got out of poverty and were now millionaires - having obtained homes that increased in value, or purchasing and fixing up run down houses that now were worth 2 and 3 times the amount invested.  

And, let us  not forget that mortgage fraud then came about as greedy people entered the mortgage business seeing a way to make a fortune and they ruined it for everyone - the professionals in the business, the borrowers, the banks - everyone.  And, let's not forget that there were many people on the street who were just as guilty as the get rich boys and girls in the mortgage divisions of banks and mortgage bankers who were not ethical in the least.

The blame for what occurred can go from Bush and Clinton wanting to increase the level of individuals who own homes, to wall street investors looking to make a buck, to mortgage brokers looking to make a buck to average Joe and Jill seeing a shot at making money through real estate. 

Consumers were not all victims.  Bankers were not all bad people.  This Elizabeth Warren story line has to come to an end.  People who do not pay their mortgage should be foreclosed so that the banking industry is able to recoup it's money and lend to the next person.  Not everyone in foreclosure was abused, used, ripped off and should gain our sorrow.  They may have seen a big house they could not afford and bought it.  Just as the lender should have better assessed their ability to re pay, the consumer should have sat down and thought "hmmm......Do I need the McMansion and the Suburban?  Will I have enough for food after I pay those payments?".   They did not think that one out.  Pretty basic.

So, now we have NYS being slapped down in their attempt to, again, get a payment from a bank for allegedly violating some new regulation put in place to stop some practice that was A-Okay with the government when they wanted the banks to lend lend and lend some more.  

Now, let's end it.  Let's figure what part of the regulations need to go and what parts need to stay and lets adjust it.  And, lets educate the regulators about life and the politicians about taking private sector money to fuel government spending.

The public should really ask - where did that settlement money go to that the government got?  I think in New York it went to re-build a bridge.   I am not sure how, if there were injured and harmed tax payers, that the re-building of a bridge gets their homes back.   Maybe I'm just naive and dumb.  But, it is not ethical and it is not fair and it needs to stop.

FHA loans - more accessable?

 

Everything that goes up must come down they say.  And we have seen that with the price of gasoline (now expected to go back up).

And, we're seeing an increase in new home sales on the rise - something we have not seen since the crash.

So, that brings us to the question - what's happening?  A lot in the industry are seeing a big divide between high point and lower point pricing sales.  In other words, new homes in the luxury sector are beginning to see movement.

But, FHA and other federal agencies have pushed to open the door to credit after slamming in shut in the face of the financial meltdown of 2009 and blaming mortgage lenders for lending to people who should not have gotten mortgages (even though they qualified at the time of getting their mortgages).

So, for example, FHA has come out with a lower Mortgage Insurance Premium (MIP) for 2015.   The MIP is what HUD collects on FHA loans to put in their insurance pot to pay out on foreclosed homes.

A few years back, facing numerous claims on foreclosed homes, HUD raised the MIP to 1.35% of the loan amount.   That was a hefty payment.  It's been reduced to .500% which is a hefty reduction.

This requires congressional approval, but it means so many more people can now qualify for an FHA loan - or if they could qualify before it means they can either buy a higher priced home or pay less on the home that they wanted initially.   Good thing, right?

What about those that declared bankruptcy?  If you filed Chap 7 you still need to wait 2-years from the discharge date before you can qualify for an FHA loan.  If you filed Chapter 13 the rule is 1 year with the Trustee permission.  So, use the time to re-establish your credit with the use of pre paid credit cards that are easily obtained.  I'd go to a major bank that offers a Visa or M/C and ask if they will report it on your credit.  You want to show that you've taken out - and paid - credit after the bankruptcy and used credit properly to re-establish your credit while you sit out the bankruptcy.

And - if you have declared bankruptcy don't feel defeated or shamed. I know of a mortgage underwriter for a mortgage lender who herself filed Chapter 13 which is listed in the public records.    Maybe the person underwriting your loan declared bankruptcy himself or herself.  Remember that when you apply for a loan and be honest, sincere and explain what caused the bankruptcy.   Overzealous use of credit is not an excuse.   Documented loss of work because of the economy or medical reasons are some of the reasons that will assist you in overcoming the black mark on your credit report

Lower down payment mortgages back

In an effort to stimulate the economy, Fannie and Freddie have re-introduced the low down payment conventional mortgage.

Fannie and Freddie both had "Low to Mod Income" loans and the "97%" loans available before the mortgage meltdown.   Lending became tight as home prices dropped and borrowers defaulted.

After much debate between lenders and the federal government, the national Fannie and Freddie agencies have re-introduced the 3% down mortgage.

Fannie and Freddie usually are more cautious than FHA/HUD.   FHA requires 3.5% down (up from 3% before the crisis) with a very low credit score (usually 580, but very few lenders will go that low).  Fannie and Freddie are back to 620 credit score

Both require mortgage insurance and typically FHA is not as good.  It's usually more costly than a conventional mortgage insurance policy - and you can push off a conventional mortgage insurance policy once you've established enough equity (see your lender's rules regarding this).

So the question is how a lower down payment for conventional loans will impact housing.  Overall, it will open the door to those who otherwise would not qualify or did not have enough for their down payment.

But, it also increases the risks of lending - as the less a borrower puts down the less "skin in the game" they have.   We can't forget the "keys in the mailbox" route that many borrowers took just a few years ago when they owed significantly more than what their home was worth.  That's what happens when the down payments are not enough to make a person feel vested in the transaction.

The second question is what type of credit over lays will there be for the 620 borrower versus the 740 borrower, both with just 3% down?   Will it be a point or two points?  Will it be via rate?   If the rate is higher, how will that impact the DTI and will that then impact the lower income borrower from getting the 3% down loan?

We shall see how this plays out.  The banks have not forgotten the costs of mortgage lending, nor should they.   Prudence will most likely rule the day on the part of the banks.