Category: mortgage

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The housing solution trap

When we’re feeling pain or anguish, immediate relief is often sought. So, it would make sense that, when we’re feeling pinched financially, a short term money fix might help. However, quick fixes don’t always address the underlying issues that precipitated or contribute to the problem.

According to recent reports, Americans are increasingly “feeling” the pain as the economy continues to stagger amid volatile financial markets and gloomy housing reports. The Misery Index, which can be construed as a quantitative measure of “pain” associated with an economy, was recently reported to have risen to its highest levels in 28 years. (Introduced in the 1960’s, the Misery Index is found by adding the unemployment rate to the rate of inflation. Obviously, the lower the index – the better.)

So it should come as no surprise that as the push for a jobs bill continues the focus has once again turned to the housing market. This week, the Federal Housing Finance Agency (FHFA.gov) announced that the Home Affordable Refinance Program (HARP) will be “enhanced” to accommodate more under-water home owners.

When the program was initiated in 2009, the intention was to assist the refinancing of home owners whose home values declined. It was estimated that it would assist millions of home owners. However, as has been widely reported recently, only about 900,000 home owners have been helped; and of those home owners, about 72,000 are under-water.

Seeking immediate relief for home owners, HARP’s eligibility requirements have become the center of attention. This week’s announcement to remove the “impediments” to refinancing is expected to increase the pool of home owners seeking refinancing of underwater mortgages.

HARP’s initial eligibility requirements included: having a mortgage guaranteed by Fannie Mar or Freddie Mac; the mortgage must not be an FHA, VA, or USDA loan; mortgage payments are current and payments must not have been more than 30 days late in the last year; the first mortgage amount must not exceed 125% of the home’s value; the refinance should improve the long-term affordability of the mortgage; and you’re able to make the new payments.

The new HARP guidelines announced by FHFA this week include lowering or eliminating certain borrower fees, removing the 125% loan to value ceiling, and extending the program to December 31, 2013.

In addition to helping already stressed home owners, it is expected that the money saved on mortgages will be pumped back into the economy. However, critics say that the revised guidelines will do little, if anything, to address the wider problem that exists in the housing market. Additionally, some critics point to the added burden on an already troubled Fannie Mae and Freddie Mac.

So, if the recent adjustment to HARP won’t do much for the housing market, as critics point out; what is the solution? Short term fixes may immediately reduce the pain. However, there should be little doubt that housing and employment are closely linked. Aside from monetary policy that might focus on flattening inflation; addressing long term sustainable economic growth, along with an expansion of permanent full time employment is the key to reviving the housing market.

Nothing feels better than taking pain away quickly and effortlessly. However, like many deep seated problems, the solution may very well lie in a long term plan that may require feeling some pain along the way.

by Dan Krell
© 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice.  Using this article without permission is a violation of copyright laws.

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Expensive mortgages on the horizon

Owning a home takes work. Soon, it will cost more too. In response to a crippling financial crisis, sweeping changes were established in the mortgage industry to not only stabilize the crippled financial sector of the housing market, but to also to temporarily provide access to credit in an all but frozen credit market. Now that the temporary stop gaps are coming to an end, will private investors make home mortgages more expensive or will Congress bow to housing trade groups to extend current interventions?

Since the increase of FHA mortgage down payments to 3.5% a few years ago, there has been talk of increasing it further to 5%. The move comes at a time when mortgage assistance programs are winding down and reliance on FHA mortgages to refinance underwater home owners is diminishing. Concerns over FHA reserves prompted higher annual FHA mortgage insurance premiums and, of course, also elicited calls to increase FHA mortgage down payments to 5%.

Of course, while some look for a solid FHA mortgage down payment increase, some look to future decreases. H.R. 1977: FHA Reform Act of 2011 (introduced May 24th which has been currently referred to committee) creates the position of “Deputy Assistant Secretary of FHA for Risk Management and Regulatory Affairs,” whose job would be, among other things, to review down payment requirements.

Besides the push for increased FHA down payments, the FHA maximum loan amount is set to decrease in October of this year. Temporarily increased to $729,750, FHA loan limits will revert to those set by the Housing and Economic Recovery Act of 2008 (HERA). Unless Congress acts on maintaining the current FHA loan limits, HUD states that 669 of the 3,334 counties or county equivalents that are eligible for FHA insured mortgages will be affected. In “high cost” areas, such as Montgomery County, the maximum FHA loan limit will be reduced to $625,500 (“Potential Changes to FHA Single-Family Loan Limits…A Market Analysis Brief; hud.gov).

In addition to changes in FHA mortgages, conforming loans (mortgages that conform to Fannie Mae and Freddie Mac guidelines) will also change. October 2011 is also when the maximum conforming loan limits will revert to those established by HERA, as stated in a May 26th release from the Federal Housing Finance Agency (FHFA is the oversight agency for Fannie Mae, Freddie Mac, and Federal Home Loan Banks). Although the new loan limit will not differ from the current amount in a majority of regions, FHFA estimates that 250 counties or county equivalents will be affected. The maximum conforming loan limit for “high cost” areas, such as Montgomery County, will also be reduced to $625,500.

Although the current FHA and conforming loan limits were temporary, housing trade associations have warned about possible effects of reverting to lower mortgage limits on an unstable real estate market. Both the National Association of Realtors and National Association of Home Builders have commented on the imminent changes and have called on Congress to make the temporary changes permanent.http://www.blogger.com/img/blank.gif

Recent government interventions in the housing market may have been necessary but they were intended to be temporary. Continued intervention may continue to allow “lower cost” mortgages for some home buyers, but some have warned against maintaining the temporary stop gaps because it hinders private investors from entering the housing market as well as the possibility of artificially inflating housing prices.

by Dan Krell
©2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

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What’s Next for Housing Finance Market Reform

No one said change is easy, however it’s necessary. That thought is reflected in the Treasury Department’s (Treasury.gov) white paper entitled, “Reforming America’s Housing Finance Market.” The white paper, released last Friday, is an assessment of the housing market and offers proposals for reforming the mortgage markets. Being the most significant reform of the housing finance markets in 80 years, the main points for this reform are to create a robust mortgage market by “winding down Fannie Mae and Freddie Mac” and “increase the role of private capital.”

Although it was admitted that housing finance reform “will make credit less easily available than before the crisis,” experts agree that reform is necessary. However, that’s where the consensus ends; for you see, there is disagreement about what kind of reforms are to be realized. Industry groups such as the National Association of Realtors® (Realtor.org) and the Mortgage Bankers Association (mortgagebankers.org) hail mortgage market reform, but offer slightly different solutions.

Two extreme positions of reform are complete privatization and nationalization; the white paper contrasts each with the notion that actual reform would be somewhere between the two. A complete privatization of the mortgage market would limit access to financing as well as increasing financing costs; while a nationalization of the mortgage market would increase taxpayer risk and market distortion.

As possible solutions, the white paper weighs several proposals against four criteria: access to mortgage credit; incentive to invest in the housing sector; taxpayer protection; and economic stability. The best path is described as a “balance of [these] priorities.”

The options discussed are several versions of option 1, which is: “privatizing housing finance but with government insurance limited to FHA, USDA and Department of Veterans’ Affairs for a narrowly targeted group of borrowers.” The stated benefits of this option include minimizing market distortions and limiting “moral hazards” within the lending industry. Although this option would reduce risk in private markets, there is concern that it may cause capital to retreat from housing into other economic sectors (which could have an undesirable effect on home prices). Additional concerns include increased mortgage costs, restricted access to the 30-year pre-payable mortgage, and the inability for the government to quickly respond to a credit crisis.

Option 2 is the same as option 1, but with a guarantee mechanism that would engage in a crisis. This would address the inability of a swift government intervention in option one; however there is a risk of increased moral hazard.

The 3rd and final option proposed in the white paper is same as option 1, but with catastrophic reinsurance behind significant private capital. (Reinsurance is the purchase and re-issue of mortgage insurance from mortgage insurance companies, which transfers the risk of the loans). This option has the government role as reinsuring mortgage securities, which is thought to reduce financing costs by increasing the flow of capital to mortgage markets. Although the Stated benefits of this option include affordable 30-year pre-payable mortgages for the average home buyer, as well as allowing small lenders to participate in the mortgage market; there are some concerns, which include the possibility of creating another housing bubble by artificially inflating housing prices due to the increased investment flowing into the housing sector.

Although it’s inevitable, there is no clear path to housing finance market reform; which means that the road ahead may be bumpy.

By Dan Krell.
Copyright © 2011

Comments are welcome. This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

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Should you refinance your mortgage?

Have you refinanced your mortgage yet? Many home owners have recently taken advantage of some of the lowest mortgage interest rates we’ve seen in two generations. If you haven’t refinanced yet, it may not be too late. However before you run off to your local bank to sign mortgage documents, consider what you want to achieve and if it will benefit you.

Of course lowering your mortgage interest rate is a good thing, right? However you should also consider the mortgage terms and the cost of refinancing. Besides lowering the interest rate, you could refinance your mortgage to shorten the duration, change the mortgage type, cash-out on your home’s equity, or a combination of any of the above. These days, however, many homeowners are just hoping to capitalize on lower interest rates to reduce their monthly payments.

If you want to shorten the duration of your mortgage by refinancing your 30 year mortgage to 15 years, don’t expect to lower your monthly payment. Although mortgages with a shorter duration typically have lower interest rates, the monthly payment can be higher than a longer duration mortgage of the same type and amount because the amortization period is shortened.

If you want to change the type of mortgage you have, consider the advantages and drawbacks of various programs that may be available. There are many types of mortgages; some are considered to be risky or advantageous depending on prevailing markets and your personal financial situation. Not for every home owner, mortgage types such as the balloon mortgage, reverse mortgage, or the many configurations of hybrid mortgages offer the mortgage holder specific benefits and risks. Home owners with these types of mortgages may refinance more often because of changing markets and financial conditions.

Although it’s not in vogue these days, cash-out refinances are still offered by some lenders to pay down debt, home renovations, or any other sensible reason you could use cash. If you are seeking to cash-out equity in your home, be prepared for stricter underwriting to make for a rigorous mortgage process. Depending on the lender and program underwriting requirements, you may also be required to document the purpose for the cash.

Although mortgage refinancing has recently been appealing due to very low interest rates, many home owners are having trouble qualifying. Remember that just because you may have qualified for a mortgage in the past, changes to your finances and credit history as well as changes in the mortgage industry could affect your ability to refinance. Another qualifying issue to consider is the loan-to value of the refinance, since many homes across the country have recently depreciated in value.

Even obtaining a FHA or VA streamline refinance has become increasingly difficult for some home owners. Once considered a “fast-track” refinance option, obtaining these streamline refinances have become more difficult in the last year because of changes to lender underwriting requirements.

If you’re still thinking about refinancing, compare rates as well as lender fees and mortgage terms. Determine if the cost of the refinance merits the advantages, as well as if there are alternatives. The Federal Reserve Board (federalreserve.gov/pubs/refinancings), the Federal Trade Commission (ftc.gov), Fannie Mae (fanniemae.com) and Freddie Mac (freddiemac.com) offer consumer resources to help you understand the benefits, drawbacks, and considerations of mortgage refinancing.

By Dan Krell
Copyright © 2010

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

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Maryland General Assembly says "Show us the money…"

by Dan Krell
Google+

The MD General Assembly does not literally want to see your money, however you are now required to disclose your income on all mortgage applications.

In an attempt to limit future foreclosures, avoid vacant eyesores in our communities, and spare the taxpayers of future bailouts, the Maryland General Assembly passed a law that requires all mortgage applicants to provide supporting income documentation when applying for a mortgage. In doing so, the state legislature has basically eliminated all stated income and “no-doc” loans; which are popular with self employed individuals.

Maryland is not the first state to eliminate these low documentation loans; Maryland joins Minnesota, North Carolina, and Illinois to require borrower income documentation for all mortgages. Stay tuned, other states will soon follow the trend.

Several weeks have passed since the implementation of Maryland HB 363 (aka Senate Bill 270), however the only mention of the new legislation comes from bloggers who complain that the income documentation portion of the law is unfair to the self employed. Many mortgage professionals feel that the across the board income requirement is an overreaction, and that such requirements are unnecessary as mortgage lenders have already changed their underwriting guidelines.

For those of you unfamiliar with the new legislation, here is brief synopsis of the entire law (which you can view at mils.state.md.us): Lenders are prohibited from charging prepayment penalties for mortgages; the Commissioner of Financial Regulation is to set mortgage lender licensing fees and examination requirements; expands the licensing requirements for mortgage lenders and mortgage originators; and lenders are to verify a borrower’s ability to repay a loan.

Unfortunately, there were many home buyers whose homes went to foreclosure because they could not afford the monthly mortgage payment at the time they purchased their home. Many of these foreclosures were “first payment defaults,” meaning they never made their first payment. By making the lender collect supportive income documentation from the borrower, the lender is now accountable for ensuring the borrower can afford the mortgage (by meeting debt to income guidelines).

If you are self employed, you may know that fully documented your income is much more complex than just providing a W-2 – but it can be done. Lenders are now required to collect third party documentation to support income (W-2/1099; income tax returns; payroll receipts; financial records; OR other third–party documents that provide reasonably reliable evidence of the borrower’s income or assets). In other words, “Show us where the money is coming from to pay the mortgage.”

Critics claim that self employed home buyers are penalized because they cannot provide the documentation to support their income. These critical claims that self employed home buyers have the income to support a mortgage payment but cannot provide documentation is suspect; it may suggest that the home buyer is not reporting their income (which is an entirely different matter), or is claiming that the amount that they deduct as legitimate business expenses will be used for paying their mortgage (which is also a different matter). I am not an accountant, but the critics’ logic against such legislation does not stand up.

If you are self employed and worried about obtaining a mortgage, don’t worry. Many mortgage options exist; and although not as prevalent, stated income loans are still available – but you should be prepared to present documentation to support your income.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 23, 2008. Copyright © 2008 Dan Krell.

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