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October 9, 2009October 5, 2019

FHA is taking care of business

by Dan Krell &copy 2009
www.DanKrell.com

After almost being absent in the local real estate market, the FHA (Federal Housing Administration) mortgage is now the mortgage of choice. Due to the almost eradication of “Alt-A” and sub-prime mortgages from the marketplace, home buyers who have little money for down payment and need flexible underwriting have once again turned to FHA. FHA is not only assisting home buyers, but financially challenged home owners are also being assisted through FHA refinance programs. The FHA mortgage has once again become the workhorse of the mortgage industry

The cycle of home buyer’s usage of FHA mortgages makes sense if you look at the explosive availability of “Alt-A” and subprime mortgages (which had lower credit and/or documentation requirements) earlier this decade. The increased usage of these mortgages reduced home buyers’ reliance on FHA to make their purchases. This home buyer behavior is supported by a study that determined a home buyer’s “mortgage debt decision” (between a conventional mortgage and a FHA mortgage) is dependent on their down payment, amount of the monthly mortgage payment, and mortgage insurance payments (Hendershott, LaFayette, and Haurin; 1997; Journal of Urban Economics, 41:2, 202-217).

With the decline of “Alt-A” and sub-prime lending, the number of FHA mortgages originated has recently increased significantly. Nick Timiraos and Deborah Solomon reported (The Wall Street Journal, “Loan Losses Spark Concern Over FHA,” September 4, 2009) that as of the 2nd quarter of this year, FHA’s “market share” increased to 23% as compared to 2.7% in 2006. As the number of FHA mortgages increased, so has the number of defaults; Timiraos and Soloman quoted the Mortgage Bankers Association statistics of 7.8% of FHA mortgages in the 2nd quarter were 90 or more days late or in the foreclosure processes (up from 5.4% a year ago).

As FHA’s risk exposure increases, so does concern over FHA’s capital reserves. In a September 18th press release (HUD.gov/news), FHA Commissioner David H. Stevens announced that FHA will take measures to reduce risk in response to the anticipated result of FHA’s annual actuarial study that may indicate that FHA’s capital reserve is below the congressionally mandated 2%. Although Commissioner Stevens stated,” …the fund’s reserves are sufficient to cover our future losses…the FHA will not require taxpayer assistance or new Congressional action,” he made it clear that “…credit policy and risk management changes are important steps in strengthening the FHA fund, by ensuring that lenders have the proper and sufficient protections.”

In addition to the announcement of adding a Chief Risk Officer, Commissioner Stevens announced changes to credit requirements, appraisal requirements, and streamline refinance procedures. Credit requirements on mortgagees (lenders) will change to ensure that lenders are properly capitalized; changes include increased lender net worth from $250,000 to $1M, and submit audited financial statements from supervised mortgagees.

FHA will adopt language from the Home Valuation Code of Conduct (HVCC), already adopted by Fannie Mae and Freddie Mac, which requires appraiser independence. Due to the volatility of the housing market, the FHA appraisal validity period will be decreased to four months from six months.

To tighten standards on FHA streamline refinancing, new procedures will focus on mortgage seasoning, borrowers’ payment history, collection of credit score, and a stated benefit to the borrower. Additionally, the loan amount will be limited to 125% of the value of the home.

This column 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 September 21, 2009. Copyright © 2009 Dan Krell

January 29, 2009October 5, 2019

Perfect storm of conditions provide bargains for homebuyers

This week the National Association of Realtors (NAR) reported that national home sales of existing homes improved this past December! The 6.5% jump in sales and reduce inventories of listed homes across the country is certainly good news. However the overall sales volume for the year was reported as being 13.1% behind those of 2007. In fact, the NAR reports that the national volume of existing home sales for 2008 is the lowest since 1997 (NAR.org).

Locally, the trends are similar. The Greater Capital Association of Realtors (GCAAR) reports data compiled from the local multiple list service (Metropolitan Regional Information Systems, Inc.); the data indicate that single family home sales in Montgomery County for December 2008 increased 23% from the previous month, and inventories fell from previous months. However, the volume of local single family home sales was also behind the volume for 2007 (GCAAR.com).

Lower home prices combined with relatively low mortgage interest rates may have been the right formula for December’s sales volume increase. Housing experts attribute home sales volume increases across the country to bargain hunters looking for good buys, including foreclosures and short sales. In a January 26th press release, NAR chief economist Lawrence Yun, was reported to say that “home prices continue to fall significantly” and that home buyers are “taking advantage” of the lower prices (NAR.org). Home prices also fell in Montgomery County, as median single family home prices fell about 14% from last year to $435,000 (GCAAR.com).

Additionally, mortgage rates remain relatively low. Freddie Mac’s “Weekly Primary Mortgage Market Survey” reported that a 30 year fixed rate mortgage to be 5.12% for the week of January 22nd (up from the 4.96% reported the week before) (freddiemac.com). So although mortgage rates are a bit higher than the past two months, rates are still close to recent historic levels.

In addition to taking advantage of lower home prices and mortgage rates, home buyers are also taking advantage of the FHA mortgage, which allow them to structure their purchase favorably. The FHA mortgage (HUD.gov), allows a home buyer to purchase a home with a low down payment (3.5% down) as well as allowing the home seller to contribute up to 6% of the sales price to the buyer’s closing costs. Additionally, the higher FHA loan limits (Montgomery County has a FHA loan limit of $625,500 as of December 16, 2008) have allowed home buyers to seek these advantages in homes that previously would not have qualified for a FHA mortgage.

As an incentive, the home buyer tax credit of up to $7,500 has received mixed reviews from home buyers. The tax credit, originally set to expire on home purchases through July1, 2009, actually needs to be repaid. However, syndicated columnist Kenneth R. Harney reported earlier this week (January 25, 2009) that congress is looking into removing the repayment requirement of the tax credit; removing the repayment requirement could add to the perceived value of purchasing a home.

Although recent home sales figures seem like a shimmer of light in a dark tunnel, many remain cautiously optimistic. Many housing experts agree that the new Administration and Congress must act quickly if any planned stimulus is to affect the spring housing market. Regardless, the present market offers an unprecedented combination of bargains, mortgage rates, programs, and government incentives.

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 January 26, 2009. Copyright © 2009 Dan Krell.

October 6, 2008November 23, 2021

Be Prepared to Repair Home Before You Purchase It!

by Dan Krell
Google+

The FHA mortgage has recently changed to accommodate the changing marketplace. Due to its broad availability and higher loan limits, the FHA mortgage is more prevalent now than it has been in the recent past. So, if you are a home buyer, it’s a good chance that you may be applying for a FHA mortgage to purchase your home.

You can expect the FHA underwriting to be flexible yet careful and thorough. You know that FHA underwrites your credit as a buyer, but did you know that FHA underwrites the property condition as well?

FHA underwriters and appraisers are required to assess a home for security, safety, and soundness. To protect your interests as a home buyer (security), as well as the interests of the FHA and lender, the home you are buying must meet minimum health and safety standards, as well as being structurally sound. Any deficiencies identified by the FHA appraiser will be required to be repaired prior to your closing (HUD.gov).

Having a home inspection may allow you to identify easily seen deficiencies within the home. If there are any safety or structural issues, you can be fairly certain that the FHA appraiser will see these as well and require these items to be repaired. However, since your home inspector is not an appraiser nor is the appraisal a home inspection (and having different purposes), there may be disparity between the two.

Items that are often identified by the FHA appraiser as needing repairs include (but not limited to): defective (peeling or chipping) paint surfaces in homes built before 1978; broken windows; roof having less than two years of useful life remaining; drainage problems; lack of handrails on stairwells of three or more steps; pest infestation; damaged and/or non-functioning electric, plumbing, or HVAC systems; foundation and structural defects; underground fuel (i.e., oil) tanks; and any other health or safety issue (fhainfo.com).

The FHA addendum (GCAAR form 1330 in this area) explains who is to make the required repairs: the buyer typically gives the seller notice what repairs are to be made. However, if the seller refuses to make the repairs the buyer has the option to make the repairs themselves. If both the buyer and seller refuse to make the repairs, the contract becomes void.

Many times, the buyer and seller negotiate as to how the repairs are to be made prior to closing. However, if you are purchasing a bank owned home, the bank usually prohibits the buyer from making any alterations to the home prior to settlement- including repairs.

If the home is in poor condition, however, the FHA appraiser will likely reject the home for FHA 203b financing. Don’t worry, though, you can apply for the FHA’s renovation mortgage (FHA 203k). Additionally, you can apply for a FHA 203k if the home you are purchasing is conveyed “as-is” (such as a bank owned home or short sale) and repairs are required. Be careful though, not all FHA lenders offer the 203k loan; you can find a FHA 203k lender at HUD.gov.
The FHA mortgage is an excellent way to finance your home purchase. However be prepared because property condition can sometimes turn a seemingly good deal into a no-deal.

August 6, 2008October 5, 2019

President Signs Historic Housing Legislation

by Dan Krell

The lack of fanfare over the signing of The Housing and Economic Recovery Act of 2008 on July 30th by President Bush was the anticlimax of the long Congressional battle of proposed housing legislation. The long awaited and highly anticipated legislation is historic for its wide reaching changes in the mortgage and housing industries as well as foreclosure assistance.

For the mortgage industry, the Housing and Economic Recovery Act of 2008 changes how the Government Sponsored Entities (GSE’s), FHA and VA will conduct their mortgage businesses. In addition to the recent loan limit increases ($625,000 for conforming mortgages and $625,000 for FHA loans in high cost areas) becoming permanent for Fannie Mae, Freddie Mac, and FHA, the new law will increase oversight and offer more options and protections to home buyers.

For the GSEs (which include Fannie Mae, Freddie Mac, and Federal Home Loan Banks), the new law provides temporary assistance to the financially beleaguered Fannie Mae and Freddie Mac from the United States Treasury in the form of discount loans to help stabilize the mortgage giants. Additionally, a new and “independent” regulator to oversee the GSEs will act like a federal regulator to ensure that the GSEs are financially stable.

The new law includes the FHA Modernization Act of 2008, which gives the venerable government insured mortgage a face lift. There have not been such significant changes to FHA since its inception in 1934. Among the many changes, FHA will have a more streamlined process, increase the down payment to 3.5% of the purchase price, bar down payment assistance programs, and require home ownership counseling for home buyers.

The new law seeks to prevent mortgage fraud by launching efforts to license all mortgage originators. Although many states now require mortgage originators to be licensed, the new law will focus on those originators who are exempt from current laws (which typically include mortgage originators who are employed by federally chartered banks).

New mortgage disclosure requirements expand the Truth In Lending Act (TILA) to require lenders to provide meaningful information to consumers about their loans. The time frame will be three days from application and seven days before settlement. This is meant to allow consumers to compare mortgage rates and terms within a reasonable time frame.

Home buyers who purchase a home between April 9, 2008 and June 30, 2009 will have the opportunity to qualify for a tax credit which is repayable over fifteen years. However, the credit is limited to ten percent (up to $7,500) of the purchase price of a principal residence, and only for first time home buyers who meet income restrictions. Other restrictions apply, so you should consult your accountant for additional information.

For home owners facing foreclosure, the new legislation includes the HOPE for Homeowners Act of 2008. The program will allow the home owner’s present mortgage be refinanced through FHA. However among other qualifications, the program requires the home owner’s present lender to agree to accept losses to 85% of appraised value of home.

To the average person, these sweeping changes may seem dull and unimportant; many remain critical of the new legislation. However, because the Housing and Economic Recovery Act of 2008 is so wide reaching, it is truly historic.

July 11, 2008November 23, 2021

Don’t Panic – Housing relief is imminent

by Dan Krell © 2008
Google+

Thumbing through an old copy of the late Douglas Adams’ very popular story “The Hitchhiker’s Guide Through the Galaxy,” I find the “Guide’s” message of “Don’t Panic” apropos for anyone concerned about the real estate market or in need of assistance. “Don’t panic,” help is on the way.

Help is imminent in the final form of HR 3221: the American Housing Rescue and Foreclosure Prevention Act. HR 3221 is comprised of a number of other bills that have been proposed over the past year (which started in July 2007), and has been passed in various forms in both the House of Representatives and the Senate. The hang-up on its passage has been differences between the House and Senate version. The Housing and Economic Recovery Act of 2008 (Banking.Senate.gov) is the latest proposed changes to HR 3221 and is to be voted on in the Senate in the coming week. The evolution of HR 3221, along with its many names and Acts, can be viewed at House.gov and GovTrack.us.

One of the most controversial issues in HR 3221 is the provision for tax credits to home buyers. Although home buyer tax credits up to $7,500 will be provided as an interest free loan over fifteen years, advocates and critics have argued over the tax credit’s virtues and shortcomings.

The newest wording of the American Housing Rescue and Foreclosure Prevention Act comes from the Senate’s Housing and Economic Recovery Act of 2008. Highlights of this new version include the improvement and regulation of the government sponsored entities (Fannie Mae and Freddie Mac), permanent modernization of FHA, and foreclosure protections.

Oversight of the government sponsored entities (GSE) will be through a new office that will be responsible for establishing capital and management standards (which will include internal controls, audits, risk management, and portfolio management); enforcing its orders through cease and desist authority, civil money penalties, as well as the authority to remove officers and directors; restricting asset growth and capital distributions for undercapitalized institutions; putting a regulated entity into receivership; and reviewing and approving new product offerings.

Improvements within GSEs will include the permanent loan limit increases in high cost areas and required affordable housing goals. To assist in meeting those goals a Housing Trust Fund and a Capital Magnet Fund will be created, which will used for the construction of affordable rental housing.

Modernization of FHA will allow for broader access and a streamlined process to provide mortgages to home buyers in all areas. Additionally, FHA loan limits will be raised to 110% of area median home prices (with a cap of 150% of the GSE limit).

It is anticipated that FHA will also assist home owners who are in foreclosure. Originally known as the FHA Housing Stabilization and Homeownership Retention Act (H.R. 5830), (AKA HOPE for Homeowners Act of 2008), the program will provide refinancing assistance to those homeowners who are in foreclosure. If the home owner’s lender agrees to participate, the program will provide a new loan that is the lowest of either 90% of the home value or what the borrower can afford to repay.

Given all the necessary modifications and changes to the legislation, help is hopefully near. But just in case you are in doubt, remember not to panic.