Archive for the 'Changing Guidelines' Category
As if tumbling real estate values, toxic loans, and rising foreclosures weren’t bad news enough, banks have begun freezing Home Equity Lines of Credit (Heloc), depriving homeowners the ability to draw on their remaining home equity when many need it most.
In recent years, the banks promoted Helocs by offering them like a free Happy Meal to consumers when they purchased or refinanced a home. Buying into the idea that a heloc could provide a safety net during difficult times, consumers often accepted.
ARE WE LAZY, OR IS THERE TOO MUCH FINE PRINT?
In its primer entitled What You Should Know About Home Equity Lines of Credit, the Federal Reserve Board notes:
Plans generally permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to draw additional funds during a period in which the interest rate reaches the cap.
But if anyone bothered to read the fine print or noticed the Fed’s warning, few anticipated the perfect credit storm in which we now find ourselves.
read comments (0)There have been many consequences of the subprime mortgage meltdown. But one which has received very little attention so far is the repricing of risk by investors who buy mortgages. That is about to change. What’s important to understand about this fuzzy term is that mortgage rates will now rise even for consumers with decent credit scores. Meet risk-based pricing.
In the 2007 mortgage meltdown, investors realized that the low interest rates previously offered didn’t adequately cover the risk of default. Past projections floated on a rising tide of appreciation that kept every one off the reef. Now that the tide has rolled out and shipwrecked many lenders, those left afloat are raising rates to compensate for the soaring level of defaults.
Are You an “A Paper” Borrower?
Long before subprime came along, there were two general categories of mortgages; “A Paper”, and everything else. Those of us involved in “A Paper” lending rarely visited the dark underworld of B, C, & D paper. But the advent of subprime brought light to that world and introduced us to risk-based pricing as the industry opened wider the gates of home ownership. So think of the current repricing of risk as a further striation of the A paper segment. This will mean that higher risk borrowers will now pay higher rates.
Pricing Adjustments
The long and short of this is that A Paper borrowers will no longer be treated equally. For instance, if Fannie Mae’s Desktop Underwriter (DU) approves your loan and your Fico score is below 620, expect to pay a rate 1/2 point higher than your friend whose score is 720, unless you’re putting 30% down. If you want an interest-only loan, a hybrid ARM, an owner occupied duplex, or a manufactured home, expect further adjustments to your rate, depending upon your loan-to-value (LTV) ratio.
FHA Reform Makes it Through the Senate
The Senate’s FHA Modernization Bill, S 2338 flew through with a 93 to 1 vote yesterday. The House previously passed its own slightly different FHA reform bill in September. The measure will now go to a committee to work out compromises between the two competing version before the final draft is forwarded to the Oval Office for signature.
Two of the key issues are:
- Raises the maximum FHA loan amount to $417,000, putting it in parity with conventional loan limits.
- Lowers the required down payment to 1.5% from 3% (the House version eliminates the down payment requirement altogether)
Passage of this legislation to modernize FHA would complete a series of reforms that began a couple of years ago as FHA began eliminating many of the disincentives that drove buyers and sellers to subprime mortgages.
No longer are pest reports and clearances automatically required for all structures, and the old FHA “non allowable” costs have been virtually eliminated. With the increased loan limits and falling prices, these consumer-friendly loans will be available to more homeowners and will fill the ugly void left by the departure of the sub prime lenders.
Did you know that most lenders today are not approved to do FHA loans? And unless a lender was in the business before 2000, it isn’t likely they’ve ever done a single FHA or VA loan. Do you really want to trust your escrow or your client’s escrow to someone like that?
So ask your lender: Are you HUD approved?
More importantly, ask: how many FHA loans have you actually done?
If you don’t like the answer, Contact me for a quote or apply for a loan here. I do mortgage loans in most of the western U.S., and I’ve been doing FHA & VA loans for almost two decades.
“FHA Secure”: The Solution to Foreclosure?
President Bush today announced FHASecure, a new FHA refinance program designed to help trouble homeowners keep their homes. The new program should provide an option for at least some of those people headed into foreclosure due to interest rate resets and skyrocketing mortgage payments.
Who will benefit?
Hard to say just yet, but here are five criteria listed on the HUD cite:
To qualify for FHASecure, eligible homeowners must meet the following five criteria:
- A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset
- Interest rates must have or will reset between June 2005 and December 2009;
- Three percent cash or equity in the home
- A sustained history of employment
- Sufficient income to make the mortgage payment
Number 3 in particular interested me. After all, if a homeowner needs to have 3% equity (or cash) in the home, this lifeboat won’t hold the folks who owe more than their homes are worth. That will be a key question for many here in Sacramento CA. I was hoping this might be similar to the old FHA Streamline Refi’s we did years ago. Value and appraisals were not an issue then and the borrower could refi to a lower rate as long as they had been current on their existing FHA payments.
I posted my Friday article about appraisals and “declining markets” over on Active Rain. It was popular enough to achieve “featured post” status and a good discussion ensued. To read those comments click the Active Rain link.
“Check Your Appraisal”
….was the heading on yesterday’s email from Wells Fargo Wholesale. This is a heads-up to Realtors and home buyers…
Fast Rewind
In mid July, FannieMae issued Announcement 07–11, entitled Collateral Valuation Practices and Declining Markets. Here are several key points from the memo:
- FannieMae’s Desktop Underwriter (DU) Version 5.7 released July 22, will now generate a message when it thinks that a property is located in a declining market.
- The appraiser must also indicate when the property is in a declining market.
- The lender is responsible for ensuring the accuracy of the appraiser’s work.
- Any pressure by the lender on an appraiser will cause the mortgage loan to be subject to immediate repurchase by the lender.
What’s The Big Deal?
The appearance of that term—declining market— in an appraisal has thrown a monkey wrench into many a loan approval. Appraisers avoid saying it, and lenders discourage the use of the term. However, FannieMae is tightening its jaws on past practice with this announcement. The teeth in those jaws are threat of immediate loan repurchase by the lender.
Today’s Mortgage Underwriting Changes
From BofA today….
All Expanded Criteria products will be suspended until further notice. Expanded criteria products include, but are not limited to, Stated Income/Stated Asset; Stated Income/Verified Asset; No Income/NoAsset; , No Ratio; and 80/20 (combos).
All Expanded Criteria pipeline applications must be locked by end of day Friday, August 24th.
Expanded Criteria is also known as Alt-A product. It’s where we go for folks that cannot fully document income to qualify, like nearly all self-employed people. Investors are no longer showing up to bid on any of this stuff in the secondary market. Banks have no choice but to stop making these loans until investors are willing to buy them again.
Bank of America is also making change to standard conforming product adjustments for all loans locked on or after 8/27/07.
This means rates will increase for lower credit score borrowers and smaller loan amounts on conventional financing.