Well, it’s time to get back on my pony here. The site hack I experienced recently combined with this crazy market took the wind out of my sails. But like the fires that have brought nuclear winter to Sacramento–maybe I should say nuclear summer since it’s a 111 degrees today–conflagration in the mortgage industry show no signs of coming under control. So here are a few updates:

INDYMAC BANK IMPLODES

Renown for their dismal customer service attitude toward the mortgage broker community, Indymac Bank bellied up this week. Confessing that federal banking auditors had found the bank to be “no longer well capitalized”, Chairman and CEO Michael Perry announced that the company would take a powder, lay off 3800 or so employees (including some very decent folks locally), and completely exit the forward mortgage business until they can “improve their capital ratios.” That’s corporate double speak for “we’re outta here.”

While promising “to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks,” the company has left borrowers stranded and attempted to extort additional fees in exchange for not canceling existing rates locks. I had one refinance ready for docs that isn’t going to fund, and my associates have buyers packed in to the Bekins van who must now quickly find an Extended Stay while they secure alternative financing. At this point, we are having trouble working through the remaining staff to resolve issues. If you have an Indymac loan, find a replacement, now.

PMI IN RETREAT

Kiss 10% down investor loans goodbye. The same is true for owner occupied, cash out refinances. The mortgage insurance (MI) companies are in full retreat. In recent weeks there have been announcements that as of July 14, MI will no longer be available for any investment properties or cash-out owner refinances in declining markets.

That basically leaves only owner occupied purchases and rate & term owner refinances eligible for 80%+ LTV financing.  And MI for 5% down payments are evaporating as well, leaving borrowers scrounging around for at least 10% down on conventional loans.  If this announcement is a canary in the coal mine, it is quite conceivable that we will soon find ourselves in a 20% down payment world again. Wouldn’t that be lovely. If everyone suddenly needed 20% down, do you think that would freeze the recovery in its tracks?

Thank God for FHA and 97% financing, not to mention the Nehemiah down payment assistance program, which brings me to my next update…

NEHEMIAH FACES RENEWED CHALLENGE

Although I think it unlikely that we’ll see any tightening of FHA requirements in this election year, Nehemiah is facing new challenges from HUD. If it is decided that Nehemiah does artificially inflate property values and distort the market, say goodbye to this program. Sacramento’s sub $350k market has been re energized by investors and first-time buyers, the latter category leaning heavily on substantial seller concessions to overcome their lack of funds for down payment and closing costs. For now, Nehemiah is still around. Best to save up some money. FHA won’t go away, but buyers may have to have their own 3% down payment before long.

That’s it for now. Call me if you need help with financing on the west coast.

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The current mortgage landscape is suffering from a series of aftershocks following the mortgage industry’s 2007 major quake. It used to be easy to find the right ingredients for cooking up a solution to whatever financing challenge arose. But that was yesterday. And this ain’t your mama’s kitchen anymore.

Today’s rules are tomorrow’s moldy muffins. And the burning question from one week to the next is: will your approval still be good when you go into Contract?

The Problem with “Overlays”

Aside from constantly changing rules, banks apply their own “overlays” on top of normal lending guidelines. Take this example. FHA rules have this to say about credit:

“Neither the lack of credit nor the borrower’s decision not to use credit may be used as a basis for rejecting the loan application. We also recognize that some prospective borrowers may not have an established credit history. For those borrowers, and for those who do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means…”

Okay, seems reasonable. Some people don’t use credit or they’re young and haven’t acquired much credit. So we build alternative credit. But, here is today’s Chase email:

“Effective June 27, 2008, Chase will no longer accept nontraditional or alternative credit histories for FHA loans. ”

So, alternative credit is fine with FHA but not if your applying for an FHA loan through Chase. You see the problem? And who’s next? Often these notifications are a shot across the bow that other lenders will soon follow suit.

Automated Underwriting, the Non-Standard Standard

Fannie Mae and Freddie Mac both have their proprietary Automated Underwriting Systems (AUS). Fannie Mae’s is called Desktop Underwriter (DU), Freddie Mac’s is Loan Prospector (LP). Each is slightly different and prioritizes risk a little differently. It used to be true that once you had a DU or LP approval, you could take that to any bank and they would accept it as is, confident that they could unload those loans in the secondary market.

These days however, banks have their own AUS engines that overlay more restrictive rules, rendering a direct DU or LP approval questionable if not entirely worthless. It all makes for shaky ground, where an approval this week may not stand next week. And as buyers in Sacramento compete once again for lower priced properties, often taking months to secure a home, the question remains: Will today’s approval still be good tomoorrow ?

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In the last couple of weeks, both Fannie Mae and Freddie Mac have lifted the 5% reduction in LTV required for loans in “declining markets”. For those unfamiliar with this policy, here’s what transpired in the past few months.

For markets designated as “declining”, “stressed”, or in some cases “severely distressed”, the agencies began requiring a 5% reduction in the maximum loan-to-value allowed. Thus the 100% conforming programs like My Community Mortgage and Home Possible had become de facto 95% loans.

At that point, borrowers had to come up with 5% in down payment and qualify under the 100% program rules (think income restrictions and higher interest rates) in order to get a loan. In turn, ordinary 95% conforming loan limits were reduced to 90%, and so on. This was the change that drove everyone back to FHA financing, where a borrower can still finance up to 97% of the price and use a non-profit gift from Nehemiah to cover the down payment.

So Why The Change of Heart?

That’s a question for which I’ve not found a good answer. The real estate market crisis certainly isn’t over–especially here in California, where the number of foreclosures hitting the market is at peak flow. Furthermore, Fannie Mae and Freddie Mac are still losing money on bad loans within their portfolios and have only escaped reform by the distraction of the current crisis and the upcoming elections. So what would cause them to take on additional risk at this point in the cycle?

In the absence of a better explanation, the cynical side of me says politics is at the root. Because at the same time that the Agencies are relaxing their rules, the mortgage insurance companies who insure these loans are in full retreat. At this moment, almost none will insure 95% loans anymore. So, Fannie & Freddie can play good dad and let you go to the all-nighter, knowing mom will never allow it.

So, if you are confused by the news, just remember it’s the mortgage insurance companies who really hold the key.

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Even as the Sacramento real estate market’s lower price range turns frothy once again with first-time buyers and investors slugging it out over for bank foreclosures, the lending noose draws a little tighter.

The Pitfalls of Buying Auction Properties

A client called last week. She had purchased a home–a condo actually–at auction last November, and she got a great price. However, she was unable to arrange a loan because the condo was “non-warrantable”, a term that means the condo project didn’t meet Fannie/Freddie requirements. After paying late fees and penalties for failure to close on time, and not wanting to lose their deposit, she pulled money from their home on an equity line and paid cash for the condo.

Now she wants to refinance the condo and pull some of her cash back out. The trouble is, lenders have reinstituted “property seasoning” requirements and tightened up the cash-out rules. Fannie Mae and Freddie Mac now require 12 months “seasoning” before she can refinance and get any cash back out of that condo.

Moral of the Story

I hear frequent tales of all-cash buyers in the market. It makes sense. Some of these bank-owned properties are so trashed that banks won’t lend money on them. The only solution is to buy for cash, fix the place up, and then get the loan when the property is in decent shape.

Now, that game is over. I think lenders want to finance responsible investmentments, and they’re sick of “flippers” and people trying to make a quick buck. So, watch your step. And if buying for cash was going to be your strategy, plan to have your money tied up for a bit longer.

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Sacramento mortgage rates shot up to 6.24% this week from 5.5% during the week of January 24th, according to Freddie Mac’s weekly rate survey. Most people are still under the impression that the Fed adjusts mortgage rates or that mortgage rates move in lock step with Fed cuts. In recent weeks, Sacramento mortgage rates have done exactly the opposite. The market is a bit better this morning on news of flat consumer spending and lower consumer sentiment.

Nehemiah Gets The Cold Shoulder

I wrote about combining FHA + Nehemiah: a Path to 103% Financing a few weeks ago. It’s one of only a couple ways left to structure 100% financing. Several title insurance companies and at least one wholesale bank announced this week that they will disassociate themselves from deals where the Nehemiah program is being used. Nehemiah has survived numerous challenges in its non-profit status over the years, and it has another court test approaching. Are these companies are putting some distance between themselves and what will be hind-sighted as yet another contributor to the meltdown?

New Conforming Loan Limits

As the deadline approaches for HUD’s assessment of median prices, hopes fade for any meaningful increase in Sacramento conforming loan limits. According to my sources, Sacramento will be designated as a “high cost” area, but with median prices somewhere in the low $300k range, the formula may yield only a small increase, if any. Higher limits could unlock S.F. Bay Area markets and send more relocations our way to absorb inventory in the upper prices range.

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Lenders have finally begun pricing the new Jumbo Conforming Loans. So far, Fannie Mae will only be accepting delivery of the 30 year fixed on April 1, with the 5/1 ARM on May 1. Here is a comparison of the a) normal conforming 30 yr fixed, b) the new jumbo conforming 30 yr fixed, and c) the regular jumbo 30 year fixed, all from the same lender’s rate sheet today at 3pm.

a) 5.5% at 1 point / 5.875% at zero points
b) 6.5% at 1 point / 6.875% at zero points
c) 7.5% at 1 point / 8.000% at zero points

Similarly, here are the d) traditional FHA and e) new Jumbo FHA 30 yr fixed rates:

d) 5.750% at 1 point
e) 6.625% at 1 point

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In my last post New FHA & Conforming Loan Limits Announced, frequent Lending Clarity commenter and knowledgeable industry professional Catherine Coy provides a link to Fannie Mae’s guidelines and pricing policies.

A quick read of Fannie’s guidelines revealed some key points about the new conforming loans, or what Fannie calls Jumbo Conforming loans. This list is by no means comprehensive, so you’ll have to read it yourself to get all the details. These are just the ones that seemed particularly noteworthy to me:

Fannie Mae Jumbo Conforming Highlights

• Fannie will start accepting delivery of 15 & 30 yr fixed-rate mortgage on April 1 and 5/1 ARMs on May 1. (Lenders will probably begin originating these immediately)
• All new jumbo conforming loans must be manually underwritten.
• No “Cash Out” refinances allowed
• Fixed rate, 5/1 interest-only, and 5/1 fully amortized loans only
• Minimum Fico 660
• Max purchase LTV/CLTV for fixed is 90% (700 Fico required over 80%)
• Max purchase LTV/CLTV for ARMs is 80%
• Max rate & term refi LTV/CLTV is 75/95%
• Max 2nd home and investment purchase LTV/CLTV is 60%.

Here’s the matrix…
Read the rest of this entry »

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