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.

Bank fund pay outs

 How bank funds are being spent:

 

http://www.wsj.com/articles/new-york-gov-andrew-cuomo-legislators-jockey-over-bank-settlement-proceeds-1418436720?mod=WSJ_hps_MIDDLE_Video_second 

 

Just clicking on the above link will take you to the fight over the bank settlement funds in New York State.  One city wants water pipes.  Another wants a bridge.  The state wants economic development.

 

But....wait.  Wasn't this from the big, bad, criminal banks?  Wasn't this over the mortgage crisis - they lent money recklessly to make bazillions from unsuspecting citizens?

 

If that premise is correct, and the government is fully repaid on the monies lent out, with interest, why are these proceeds not going to the victims?

 

Does this not remind you of the 1990's and the lawsuits against the cigarette manufacturers? 

 

Looser lending misrepresented by press

It's all over google, yahoo and other search engines.  Banks are loosening up lending and that will make getting a mortgage easier.  Pundits are stating the doors are now opening up for individuals who otherwise would be denied a loan.

But, after the housing crash and the accusations of mortgage misdeeds - demanding that lenders know who they are lending money to - how could this occur?

In actuality, it really is about the documentation.  Not the standards of underwriting such as credit scores, how long you're employed or how much you're trying to borrow.

Lenders have gotten into lawsuits with each other and with national agencies such as HUD, Fannie Mae and Freddie Mac demanding what is called a "put back".  A "put back", in mortgage parlance, is when a national agency like HUD or a lender who bought a loan from another lender "puts the loan back" to the original lender.

Say you went to a bank and got a mortgage.  Your loan probably was sold once or more times since you received the initial loan.  That's normal in the industry - it keeps the cash flowing for more borrowers to get more loans.

But, lets' say you miss one or two payments.  You had severe medical bills, you were out of the country, whatever the reason - it is not important.  What happens?  As far as you're concerned, you get late payments (which you do not want) on your credit reported on your mortgage payment history.

However, behind the scenes, the action unfolds.  Someone somewhere is tasked with going through your loan and looking at every single document that you provided and that you signed.   The intention is to determine one of four things:  1. You signed something incorrectly (a mistake by your original lender) with the wrong date or the wrong information on the disclosure.  2. You lied and are a fraud.  3.  The Underwriter made a mistake and improperly underwrote your loan to the proper guidelines.  Or 4.  There is some paper that has some error or something missing.

The employee who finds this gets a big slap on the back and the company then sends a demand letter to the bank that originally gave you the loan saying "We're sending the loan back to you ("put back") and you need to wire us the money for the loan ASAP or we are going to sue you"

For cases like egregious underwriting errors or fraud, this is common practice

But, this practice was abused by many major banks who kicked loans back and forth to one another and abused by agencies who did not want to insure loans to banks.  They looked for simple, tiny, errors that they could use as an excuse to trigger the "put back" or "buy back" clause

After much discussion in Washington, there was an agreement that limits this practice.  Because, typically, if an Agency like HUD, Fannie, Freddie or the VA refuse to insure a loan -you can bet that every bank between San Fran and Miami start kicking the loan back and putting it back - because none of them want an uninsured loan.

So, the agencies have come to an agreement to limit the demands to egregious issues and not to smaller items that do not materially change the fundamental quality of the original loans.

This does not translate to easing of credit.

This translates to less lawsuits from "put backs"

After all, if the government is going to legislate to a lender that they can only lend you what you can afford - (google "ability to repay") - do not thing for one second that they just loosened lending up like it was 2002 all over again

Should we loosen up lending?

Reuters reports BOA won’t take the bait from government policy makers to loosen credit
Here’s the rub.  While government leaders bemoan the real estate market lackluster recovery and go on Sunday morning talk shows ginning up need for looser mortgage underwriting credit --  one wonders if they are surprised that banks are not only ignoring their cries, but are openly saying “no”.
First, the government called for more home ownership in the 1990’s and pushed for greater capacity by increasing the amount of one’s income used for housing expenses (higher DTI).  Then, the government enticed that by tying the higher DTI to handing out candy to banks via CRA credits.  Without those CRA credits, banks could not operate fully.  So, out came “Low to Moderate Income” loans (“LMI”) and the slippery slide to no income verification loans and the sub prime was greased all the way to 2008 when it crashed.  
During the crash the government sold banks on acquiring the now defunct banks.  The Banks followed through.  BOA took over Countrywide.  Wells took over Wachovia.  You remember the famous picture of the banks lined up alphabetically in a room with government regulators looking for bail outs for failing banks?
Fast forward from 2008 to 2013 and 2014 and the regulators created by the government went on a PR campaign to blame banks and then fine banks – billions of dollars – for the acts that the government asked them to do.
Politicians felt pretty good.  They had banks save the failing banks (and they lent a large sum of money to failing banks themselves) and the went on a new PR campaign blaming banks (not themselves) for the reckless lending, tying it to high profits over sound lending.
So, lending got tight.  Now the economy is not recovering as quickly as they would like. So, now they want the banks to loosen up again.
So – after creating the mess, blaming it on the banks, lending untold billions to bail everyone out, failing to tell anyone they got their money back with interest, now the government wants banks to loosen lending?
JP Morgan Chase already said they are re-evaluating FHA mortgages and may exit from it.  HSBC pretty much has throttled back.  Mortgage brokers are for the most part, extint.  Small mortgage bankers are closed.  Mid sized mortgage bankers are seeking out marriage partners to survive.  Big banks won’t loosen lending.  Bank of America said “
In October, the top regulator for the U.S. housing market announced plans to allow many more Americans to buy homes by making a down payment of as little as 3 percent of the purchase price.
But Bank of America CEO Brian Moynihan said at an investor conference his bank hosted on Wednesday that it will require borrowers to make larger down payments "to make sure that can withstand the bumps in the road" of homeownership, such as "unemployment, divorce or sickness."
"I don't think there's a big incentive for us to start to try to create more mortgage availability where the customers are susceptible to default," Moynihan said.
"I know that that doesn't sound good for an instant housing recovery and faster housing markets but it's actually good because in the long term it keeps the housing more fundamentally based," Moynihan added.
Now, is that not what the regulators and government screamed on top of Mount Rushmore about?  Isn’t Moynihan giving them what they demanded?  As one said, be careful of what you ask for – you may get it.
Harsh?  Perhaps.  The losers?  Sound borrowers with credit scores in the low to mid 600’s who had an issue that they got past and want to buy into a home – who just a few years ago a good underwriter would have worked hard to get them approved for their mortgage.  Today – no way without a large down payment and higher credit score. 
Why after paying billions of dollars, facing exuberant regulators who do not know the 5-C’s of underwriting but are quick to judge a file’s compliance to underwriting.  Years of regulators issuing out “Sanctions” that lenders have to sign or face more severe penalties.  Years of dealing with regulators like the North Carolina Commissioner of Banks who simply make decisions and issue out findings without rationale or the New York State Financial Services Department who literally employs individuals who not only have no clue about lending; but can not speak English.   Yet, these people can and will close down a company or fine another or issue out edicts.  And, that’s the state level.  Try facing the feds.
Why would anyone lend a penny more that could default or comes within 10 feet of what was “wrong” two-years ago?
That is like you being told by a policeman that you went 35 miles an hour three years ago when the speed limit was 35 mph, so now you face a 10,000 dollar fine and they release your mug shot.   Then, the mayor complains that people are literally doing 30 miles an hour and encourages people to take it up to 35 MPH, the posted speed limit.
I’d be the first to keep it at 30MPH, below the posted high speed limit and above the minimum – just in case someone gets in an accident at 35mph and the police go backwards in time to issue out more tickets again……
Silly?  That’s what happened.  And, now we must live with that irrationality.

Cost of Regulation

According to the MBA,  higher costs and concerns about buybacks are driving the decline in mortgages for home purchases. It will slow to $635 billion this year, a 13 percent drop from 2013.
Banks have constrained home lending to many borrowers deemed creditworthy by mortgage finance companies Fannie Mae (FNMA) and Freddie Mac. Applicants approved for mortgages to purchase homes had an average FICO credit score of 755 in August, according to Ellie Mae, a company that makes software used to process mortgage applications. In contrast, Fannie Mae and Freddie Mac guidelines allow for credit scores as low as 620 for fixed-rate mortgages in some cases.
Lenders reported a 30 percent median increase in compliance costs this year from 2013, according to a survey by Fannie Mae released this month. And 72 percent of lenders surveyed said they spent more on compliance this year compared with last year

FHA Flipping Policy

FHA flipping policy

In an effort to stimulate repairs and sales in neighborhoods hard hit by the mortgage crisis and recession, the FHA waived its standard prohibition against financing short-term house flips. Before the policy change, if you were an investor or property rehab specialist, you had to own a house for at least 90 days before reselling — flipping it — to a new buyer at a higher price using FHA financing. Under the waiver of the rule, you could buy a house, fix it up and resell it as quickly as possible to a buyer using an FHA mortgage — provided that you followed guidelines designed to protect consumers from being ripped off with hyper-inflated prices and shoddy construction.