FHA Loan Costs are increasing-are we surprised?

Uh, no we aren't surprised given the red ink that HUD is being washed with.
Here's a summary (more details below):
FHA Comparison – Loan terms over 15 years:
                                          Current/Prior to 4-1-12   On/After 4-1-12

Purchase Price                   $175,000                         $175,000
Minimum Down (3.5%)       $    6,125                         $    6,125
Base Loan                          $168,875                         $168,875
Loan with financed MI         $170,564                         $171,830
Monthly P/I at 3.750%         $ 789.91                          $ 795.77
Monthly MI                           $ 163.46                          $  178.99
Total PI/MI                           $ 953.37                          $  974.76
Total payment increase                                              $   21.39

What affect will this have on borrower qualification? To qualify for the same loan as above a borrower will need an additional $30 per month in income, assuming a 30% tax bracket.

The update notice:
The Temporary Payroll Tax Cut Continuation Act of 2011 requires FHA to increase the annual MIP it collects by 0.10 percent (now 1.15% for loan terms >15 years). This change is effective for case numbers assigned on or after April 1, 2012. FHA is also exercising its statutory authority to add an additional 0.25 percent to mortgages exceeding $625,500. This change is effective for case numbers assigned on or after June 1, 2012.

The UFMIP will be increased from 1 percent to 1.75 percent of the base loan amount. This increase applies regardless of the amortization term or LTV ratio. FHA will continue to permit financing of this charge into the mortgage. This change is effective for case numbers assigned on or after April 1, 2012.

Your takeaways:

• Effective for case numbers on/after 4-1-12.
• Sales contract dates, all loan documents and FHA case # must be dated on/before 3-31-12.

Why does this matter? If you're in the buying or refinancing market, better get 'er done....you will save money. Apply now: https://0990471896.secure-loancenter.com/WebApp/Start.aspx

As anticipated, HUD announced that mortgages backed by the FHA will become more expensive. Once again, future borrowers are paying for the problems of previous borrowers - the money will be used to bolster the sagging reserves in the FHA mortgage insurance premium fund. Hopefully any more claims that FHA is "fine" and doesn't need more capital will stop in the near future - it does need more capital. The increase in insurance premiums would bring in about $1.25 billion during the rest of 2012 and through September 2013 which will be added to about $1 billion FHA is receiving from the servicer settlement. Every little billion helps...

First, remember that the agency does not make loans, or buy loans, but instead insures mortgages that meet its guidelines. Mortgage insurance, similar to a guaranty fee, protects one party from the risks of the borrower becoming delinquent of going into foreclosure. With all this talk about FHA and compare ratios, and the removal of the streamline product from the calculations, it might be helpful to know where to find it. Anyone wishing to check it out for themselves can do so here. Click on the "Early Warnings" menu, Single Lender or general, and go from there. (And no, I don't know specific lender ID's.) If you want to see compare ratios excluding streamline refinances, they can be found through the "Analysis Menu."

FHA's guidelines are very lenient, although most lenders have overlays in order to bolster the product, and claim that borrowers with credit scores of 580 or more can put down as little as 3.5 percent. The FHA will increase its annual mortgage insurance premium by 0.10 of a percentage point for loans under $625,500, which would now cost 1.25 percent of the loan amount, up from 1.15 percent, on 4/1. And starting on 6/1 the premium for larger loans would rise more, or by 0.35 of a percentage point, bringing the total premium to 1.5 percent. This annual premium is broken down in monthly payments. The upfront mortgage premium is also increasing by 0.75 of a percentage point, bringing the premium to 1.75 percent of the loan amount, which can be financed/added into the mortgage.

I have not heard any details yet on the FHA's possible plans on some softening of the streamlined refi rules or charges for borrowers refinancing pre-Oct 2010 loans that were made under much lower annual MIPs. The expectation is that the FHA will grandfather all or a portion of the old, lower MIP. Certainly investors in Ginnie Mae MBS's are concerned about how much easing that HUD will do on streamlined refis.

As noted recently, Fannie & Freddie's big book of problem loans came from 2005-2008, but the FHA wasn't insuring many loans in the bubble years. The FHA's big exposure has come with its gain in market share after the demise of the subprime lending industry (remember LO's saying FHA loans are "the new subprime"?) And though recent production is "better" quality, they're still FHA loans, which means cum default rates well above 5%, which means that the FHA fund will continue to face financial pressures for the next several years.

Put another way, what the does the change mean to borrowers? In the future, the two tiers of FHA MI change. Starting April 1 the up-front MI for loans up $729,750 will be 1.75% of loan amount (up from 1%). The annual MI for loans up to $729,750 will be 1.2% of loan amount if the down payment is 5% or more, or 1.25% of loan amount if the down payment is less than 5% starting 4/1. And the annual MI for loans $625,501 to 729,750 will be 1.45% of loan amount if the down payment is 5% or more, or 1.5% of loan amount if the down payment is less than 5% starting June 1. Borrowers had better pay attention to when they're in contract!

Until next time....

Menendez Introduces Bill to Keep People in their Homes

I’ve made the comment on a number of occasions that, to date, we just don’t have any real answers to the foreclosure mess. Smarter people than me (that’s almost everyone) are starting to come up with ideas that may jumpstart matters in getting us out of this mess we’re in.

I choose not to debate any longer about whom we should blame, who deserves or doesn’t deserve a break, and who did or didn’t take advantage of the system. You folks that see graphite ropes snaking down from black helicopters with ninja-like warriors sliding into your backyard can debate that if you wish. Keep gathering those storable food and water stocks and guarding against the inevitable EMP that’s sure to end the world as we know it.

The fact is we need positive forward-thinking and a way to move forward. We need to be thinking about sensible solutions to what has the real potential to harm all of us for a long time. Whether you were affected by this mess, or were able to avoid it, it’s time to take the best action for moving forward. Did I mention “forward” movement?

One of the better ideas I’ve heard is the Menendez Bill introduced last week. It may not have all the answers and it may not make everyone happy, but it’s one of the first “out of the box” plans I’ve seen that meets the sensibility test in many ways. You may want to check it out; there are other plans out there and I suspect we will see other proposals that address shared appreciation loan modification plans that address homeowner/lender responsibility.

It’s time for innovative ideas and solutions. I offer the following from Senator Menendez’ web site as a possible launching platform:

Menendez Introduces Bill to Keep People in their Homes

Housing Chairman Continues His Fight to Help Underwater Homeowners

February 9, 2012

WASHINGTON, DC – U.S. Senator Robert Menendez (D-NJ), Chairman of the Senate Subcommittee on Housing, Transportation and Community Development, today introduced an innovative bill to keep families in their homes, despite their mortgage being worth more than their home.

“Unfortunately, far too many New Jerseyans are underwater on their mortgages and are all too familiar with the burden this brings. When you owe more than your house is worth through no fault of your own, relief can be hard to come by. More and more people are choosing to walk away, since they feel that’s their only viable option, which only exacerbates the problem,” Senator Menendez said. “My bill aims to break this cycle and give homeowners the relief they are looking for by working with banks to find acceptable solutions for everyone.”

The Preserving American Homeownership Act is specifically aimed at homeowners who owe more than their house is worth (“underwater”), which is currently estimated to be more than 10 million properties and approximately 22% of all homeowners. On average, these homeowners owe anywhere from $40,000-$65,000 more than their home is currently worth.

Millions of homes are underwater currently because of the broad national decline in home values that has occurred since 2006, which can be seen here. Because of this, homeowners – whose home values declined through no fault of their own – are less likely to remain in their homes, further hurting the already fragile market, and banks are reluctant to reduce the amount owed to them (“principal”) because they will be losing income.

Senator Menendez’s bill seeks to help both parties – homeowners and lenders – by creating a program in which banks reduce the mortgage principal for eligible homeowners. In exchange, banks would be entitled to a portion of the increased value of the home down the road as home values increase

President Clinton recently outlined a similar plan during the National Retail Federation’s Annual Convention and Expo as reported in the American Banker. Clinton said: “The lender would, in effect, invest in the home so the banks would not have a bad debt on their books,” Clinton said. “The harsh way to do it is to foreclose on everyone now and turn everyone into renters – I hate that way.”

“We applaud Senator Menendez for introducing The Preserving American Homeownership Act,” said Richard A. Smith, president and CEO of Realogy Corporation, a leading global provider of real estate and relocation services headquartered in Parsippany, N.J. “This debt-for-equity arrangement offers a solution for qualified underwater homeowners to work together with their lenders to achieve a mutually beneficial outcome — avoiding the lengthy and costly process of foreclosure, offering the likelihood of appreciation to both parties and contributing to a stabilizing housing market.”

“I’m a prime example of how shared appreciation mortgage modifications can really help homeowners,” said Juliana Collins who benefited from this specific modification previously. “When my house depreciated $200,000 in less than 3 years, it was a nightmare that I was unable to refinance my way out of. This modification finally gave me the peace of mind that not only will my family and I get to stay in our home, but I also won’t have to work multiple jobs and risk my health to be able to afford a mortgage that’s underwater.”

Chief Economist at Moody’s Analytics, Mark Zandi, on shared appreciation mortgage modifications: “I think [they’re] an excellent idea. … I do think [it] is appropriate – that there should be shared appreciation of any principal write down … but I think given that we’ve got this issue for the next three, five, seven years, I think this is entirely appropriate to do. Hopefully we learn from this and this will be part of the tool kit going forward.”

This program is a responsible win-win for everyone: underwater homeowners receive relief on their mortgages, while banks agree to take a short-term reduction for a long-term gain as the housing market recovers. In a similar program tested by a private mortgage servicer, almost 80% of homeowners who were offered the opportunity to participate chose to do so and had a re-default rate of only 2.6%.

Additional Details

• The principal balance of the loan would be reduced to 95% of the re-assessed value of the home and over a three-year period, provided the homeowner is able to make reduced payments, the principal balance would be reduced in 1/3 increments per year.

• In exchange, the bank would receive a fixed share (at most 50%) of the increase in the home’s value when the home is sold or later refinanced. The share depends on how much the bank initially reduced the principal. For example, if the bank reduced the principal by 20%, they would receive a 20% share of any later increase in the home price.

• Home values would be determined by independent third-party appraisers.

• Two pilot programs would be established by the FHFA and FHA for a length of two years for homeowner acceptance.

• Homeowners are eligible no matter how far underwater they are.

• Homeowners who are in default or foreclosure are eligible, but they must make timely payments on the modified mortgage going forward or they will not receive any principal reduction.

• Primary residences are eligible, but secondary residences and investment properties are not.

• If capital improvements are made to the home, homeowners will receive credit for the appreciation and banks will not receive a share of that appreciation.

Until next time…

The $25 Billion (?) Mortgage Settlement

From Mortgage News Daily, 2-10-12
The press can stop speculating on the servicing settlement: a final settlement between the nation's five largest mortgage servicers, two federal agencies and 49 of the states' attorneys general (AGs) was announced Thursday. (Ok, Oklahoma, what's the deal?) The market measured this as a slight positive for banks as the uncertainty of the settlement is cleared up and banks can now focus on moving forward on foreclosures. Bank of America, JPMorgan Chase & Co., Wells Fargo & Company, Citibank, and Ally Financial, (formerly GMAC) and their servicing subsidiaries have agreed to commit a minimum of $17 billion directly to borrowers through a series of relief effort options including principal reduction.

For more granularity, the ponying-up consists of Ally/GMAC ($310 mil), BofA ($11.8 billion), Citi ($2.2 billion), JP Morgan ($5.3 billion), and Wells Fargo ($5.4 billion) for $25 billion. Servicers will likely provide up to an estimated $32 billion in direct homeowner relief. There will be $4.2 billion paid directly to the states and $750 million to the federal government. In addition, a comprehensive set of new standards will be implemented to protect homeowners from future abuses and an independent monitor will be appointed to ensure servicer compliance. HUD Secretary Shaun Donovan has also commented that the total cost may increase to $45bn if additional banks sign onto the settlement deal.

Of course this does little to stop future lawsuits against these piñatas of the financial world. Nothing in the agreement grants any immunity from criminal offenses and will not affect criminal prosecutions. The agreement does not prevent homeowners or investors from pursuing individual, institutional or class action civil cases against the five servicers. The pact also enables state attorneys general and federal agencies to investigate and pursue other aspects of the mortgage crisis, including securities cases. The settlement only covers servicer liability for robo-signing and improper mortgage servicing. Notably, it does not cover any wrongdoings associated with mortgage securitizations, MERS, or any criminal liability.

"Because of the complexity of the mortgage market and this agreement, which will span a three year period, borrowers in some cases may be contacted directly by one of the five included mortgage servicers regarding loan modification offers, may be contacted by a settlement administrator or their state attorney general, or may need to contact their mortgage servicer to obtain more information about specific programs and whether their loan qualifies. More information will be made available as the settlement programs are implemented."

Barclays Capital broke down the numbers. $17 billion will come in the form of principal reductions on first and second lien mortgages ($10 billion), forbearance modifications, and costs to facilitate short sales. Principal reductions will not be applied to any loans in agency MBS trusts, and for principal reductions on non-agency loans or in bank portfolios, the servicer must determine that the modification results in a higher NPV than foreclosing on the home. $3 billion of the settlement cost will come in the form of refinancings for borrowers who are current on their mortgage payments but underwater. $1.5 billion, per Barclays, will be used to provide immediate cash payments of up to $2,000 to borrowers who lost their homes to foreclosure between January 1, 2008 and December 31, 2011.

The modifications, refinancings, and borrower payments outlined in the settlement will be performed over three years, with 75% of each bank's target required to be reached within two years. Servicers will identify borrowers eligible for these benefits over the next six to nine months. Banks that fall short of their settlement targets by the deadlines will be assessed cash penalties. Joseph Smith, the former North Carolina Commissioner of Banks, has been selected as a third party monitor to provide oversight of the participating bank servicers.

As part of the settlement, the participating banks will be required to comply with new servicing standards, most of which likely have already been implemented or are in the process of being incorporated into standard servicing procedures. (They are too numerous to repeat here.)

If you were a bank, wouldn't you try to modify as many non-portfolio loans as possible through this program since while they only get a 50% credit, banks also escape the actual monetary costs of forgiveness? However, this may not be possible for multiple reasons, and things become pretty complicated. For one thing, Barclays notes, the bank servicers will have to follow some NPV rules to make a judgment on whether to apply a principal forgiveness modification. All of the five servicers are part of the HAMP program and have presumably already been applying NPV tests to delinquent loans and have already determined on which loans a debt forgiveness modification would make sense. This settlement cannot change that assessment. Of course, more loans could be modified through debt forgiveness due to the increased HAMP PRA incentives that were announced a few weeks ago but this settlement does not change the NPV calculation beyond that.

So what can we gather from all this? As I told one reader, the whole thing was pretty much greeted with a shrug rather than champagne corks popping, especially since it certainly doesn't end many types of lawsuits. For the impact on non-agency RMBS modifications it is small, but will keep foreclosure rolls slow for another 6-12 months. The details released specifically exclude Fannie Mae/Freddie Mac pools from this settlement but one can expect that loans in private-label pools will be affected. It seems that the banks will be required to target the $17 billion in forgiveness and other relief, and will receive a 125% credit for every dollar of forgiveness that they apply to portfolio loans - but only a 50% credit for every dollar of forgiveness applied on loans that they service but do not own. The program will have a significant impact on liquidation timelines as it is likely to slow down 90+ delinquencies to foreclosure and foreclosure to REO roll rates as servicers take some time to adjust to the new servicing standards. After that, however, we expect these rates to pick up and rise to levels higher than that experienced over the past 12-24 months.

More to follow as this unfolds...until next time.

What About This APR Thing?

The Annual Percentage Rate (APR) is a way to compare the costs of a mortgage loan. Isn't it? Well, that's what it's supposed to do. The purpose is to provide you with a nice standard for comparing the percentage cost from one loan to another. Does it work? Kind of. Is it a reliable means of truly comparing a cost for a loan? Yes, it can be but it's usually not. Really.

OK, what kind of double talk crazy mumbo jumbo is this? Well, it is a US Government standard so it's just got to be the more solid than all of the gold in Ft. Knox, right? Oh yeah, there's not as much gold there as we thought, so never mind about that. Anyway....

Why use APR then?

Loans can be confusing. Slick lenders (Gasp! There aren't any of those are there?) can quote a lot of different numbers that mean different things. Why, that sounds like a deliberate attempt to confuse people! You think? In an order to reduce confusion, the US Government passed the Truth in Lending Act (TILA). We love our acronyms. TILA hasn't fixed this. Unscrupulous Lenders can (and sadly do) manipulate the numbers in their favor to talk you into their loans. Why Earl, after all....ain't their APR lesser than the other un?

One of the provisions of the TILA is that lenders are required to quote the APR to potential borrowers. I am particularly fond of the fact that something so important has the word "truth" in it; brought to you by the very business who provides very little of it on occasion. OK, to be fair, most of us are 100% above-board, honest individuals who want the same thing you do. Honesty, Fairness. The TRUTH.

If all lenders quoted the APR per TILA rules it would be a fair and consistent yardstick of the true cost of a loan. Unfortunately...all things are not always equal. To further confuse matters, the APR can include more than just the interest cost of a loan. On a mortgage, the APR might include Private Mortgage Insurance, processing fees, and discount points. There are other fees and charges that may or may not be included in a given APR quote....based on lender "interpretation" of how they want the APR to look. Well now hold on there just a minute, missy. Is that there legal? Uh.....no, it isn't. Well then, how do lenders get away with that? You see, Jimmy; there's a big difference between making a law and enforcing a law. As we all know.

Therefore, comparing one APR from one lender to another is about as reliable as your Doctor getting you from the front waiting room  to the little waiting room, and then into the exam room on time. Practically impossible. Or, when the cable guy says he'll be there between noon and 5, you might as well plan on about 5:30, the next day. Sorry, I digressed there.

Point is, you can’t simply rely on an APR quote alone to evaluate a loan. The cost of a loan is mostly about cost over time. How much will a loan cost based on how long you will have the loan? If you want somewhat of a fairly understandable explanation of how you know you're getting a fair loan, here's some yay-hoo attempting to provide an explanation: http://mijoymortgage55.blogspot.com/p/video-library.html. Check out the last video  titled: "Are You Getting A Fair Loan?" Or, feel free to watch all of them if you like pain.

And in the event that none of this makes sense to you, feel free to contact me directly and I can further confuse you...or something like that. Until next time....

The new Obama Plan and more....get a grip!

The new Obama Plan, and…

Commentary on the current state of proposed mortgage plans, or:

How will all of these plans work? Or will they?

Wondering what in the world is going on and what good will it do? Here’s the deal:

Current FHA Loans: If you currently have an FHA loan and your rate is at least 5.000% you can likely lower your rate and payment for little to no cost. Contact me for the low down.

“Underwater” loans: Go here: http://mijoymortgage55.blogspot.com/2012/01/underwater-whats-up-with-harp-20.html.

From Mortgage Daily 2-2-12:

The HARP 2.0 initiative is aimed at helping agency (Fannie/Freddie) homeowners to refinance. Then came HAMP 2.0 (this past Friday), aimed at helping to encourage more modifications.

Then, Obama unveiled a separate refinancing program (discussed below) targeted at non-agency homeowners (making refinancing easier for mortgages not backed by Fannie or Freddie). Finally, in the coming days/weeks we could get a final foreclosure settlement as well as a plan to sell foreclosed homes in bulk. In aggregate, all these policy moves could help at the margin but most believe they fall short of some grand Fannie/Freddie automatic refinance plan for which some investors had hoped. Maybe we're done with government initiatives for the year? Perhaps not - don't forget chatter out there about the foreclosed properties sitting on the agency's balance sheets, and large scale plans of selling them to investors. And we have some type of possible settlement between the state's AG's and large servicers...

Regarding President Obama's election year housing plan, which is probably going to require Congressional approval, and is therefore highly unlikely...there are fact sheets ranging from 7-10 pages. It certainly gave investors something to talk about yesterday, even if it will take many months, if at all, to roll out. There is too much to reproduce here, check out the original. Most believe that this plan will not pass through Congress, given the level of political polarization. And it is difficult to understand why the Administration thinks it can get this proposal through Congress when it cannot get the parts that do not need Congressional approval through the GSE's (Fannie & Freddie) and FHFA (a federal agency). If rising pressure on the GSEs does lead to them to adopt the agency components of this plan, there will be an enormous effect on agency MBS (Mortgage Backed Securities).

One statement noted, "... believe these steps are within the existing authority of the FHFA. However, to date, the GSEs have not acted, so the Administration is calling on Congress..." Most of the proposals for the plan do not need Congressional approval but the Administration is implying that the main reason to send these proposals to Congress is that the Administration cannot get the GSEs (and presumably FHFA) to do what needs to be done "in the taxpayer's interest..." Consequently, this public proposal seems to be a way to put pressure on the GSEs and FHFA to do what the Administration wants. I guess this is how modern government functions...

So please dig into the fact sheet noted above - that is what the market knows.

Consumers should probably not become too enamored or bogged down in the plan, as it will take, if it happens at all, several months to sort out, digest, and implement.

OK, there you have it. Still confused? Contact me...better do it now...  Before you lose it and go off and do something crazy.