Bulls & Blogs

Last year, Fannie Mae and Freddie Mac created "streamline refinance" programs to help homeowners take advantage of historically low interest rates. While the programs were available to any homeowner with a Fannie or Freddie loan, the mortgage giants were particularly interested in reducing the chances of foreclosure among homeowners impacted by the recession who were paying their mortgages on time. The programs even allowed homeowners with "underwater" mortgages (mortgage balance more than home worth) to refinance.

Fannie and Freddie recognized that as a result of the recession some borrowers might have difficulty qualifying under standard guidelines, so the programs generally ignored credit scores and required minimal documentation. In many cases, all that was required was the borrower's latest pay stub. If homeowners were current on their mortgages, chances were good they would continue to be, especially with a lower mortgage payment.

While this was great for folks who receive a regular pay check, it didn't work so well for many self-employed folks. The programs required that self-employed homeowners provide their latest year's tax return to verify income. If the homeowner's business suffered during the recession, then the homeowner might be out of luck.

Well, the self-employed have caught a break from Freddie Mac. Starting this spring, Freddie changed the guidelines for its streamline refinance program so that income verification no longer is required for self-employed borrowers. While the homeowner must state income on the loan application, the homeowner does not have to provide tax returns to verify the income. Homeowners whose business income is recovering from the recession may be a good fit.

Note that the program only applies to loans owned by Freddie Mac. In the 2006-2007 timeframe, Freddie purchased 13% of marketed mortgages. Thus, there is no guarantee that Freddie owns your mortgage. You can find out by visiting the Freddie Mac Web site and clicking on the "Does Freddie Mac Own Your Mortgage?" link.

Some other restrictions apply. You cannot have had a late payment on your mortgage in the last 12 months, and the original loan must have been "A-paper" (no subprime loans, but stated income loans may qualify). You cannot change the borrowers from the original mortgage except in cases of death or divorce. If you have a second lien, it must be re-subordinated to the new mortgage. If the original mortgage was for your primary residence, you cannot refinance it as a second home or investment property.

Property flipping, through which a real estate investor buys and resells a property in a short period of time, is a popular way to achieve elevated returns on investment properties. Unfortunately, it also was a preferred means of committing fraud in the lead up to the financial meltdown. (Fraudsters often would conspire with appraisers who would inflate a property's value, thus enabling the fraud.)

As a result, HUD prohibited the use of the FHA loan program for properties that had been owned for less than 90 days. The FHA loan is a favorite of first-time homebuyers because of its lenient down payment and lower credit score requirements, and a large share of property flips are lower-priced homes, which tend to attract these same homebuyers. The result of the prohibition was that investors often had to hold properties for 90 days before they could sell for no reason other than to satisfy the regulation. This made the economics of purchasing distressed and foreclosed properties much less appealing.

With the number of foreclosures rising dramatically, HUD on Feb 1st waived this regulation under certain conditions. This is a huge deal for property investors because it means they can purchase a foreclosure at auction and immediately market the property for sale at an elevated price. There's only one problem: Most lenders are not applying the waiver to sales by private individuals. I did say most, not all. I know of at least one lender that is applying the waiver as HUD intended.

Check your excitement until you review the conditions. (This is only a summary. Drop me an email if you want the full text.)

• The seller must hold title to the property, so contract assignments may not pass muster.

• It must be an arms-length transaction with no identity of interest. The property should be marketed "openly and fairly."

• The property's title report cannot show a pattern of flipping.

• If the sales price of the property is 20% or more higher than the seller's acquisition cost, the waiver will apply only if:

  • A second appraisal verifies that the seller has completed repairs to increase the property value or explains why the increased value is justified absent repairs;
  • A thorough property inspection, performed by an independent inspector, must be provided to the buyer.

(Actually, the waiver allows the lender to justify the increased value without a second appraisal, but I don't know any lenders willing to do that.)

Getting the waiver will add some time to the loan process. Additionally, the lender cannot request a waiver until the first appraisal has been completed. Thus, the buyer may have to eat the appraisal cost if HUD rejects the waiver request.

If you want more information, or if you have a transaction you want me to review, don't hesitate to drop me an email.

Today was the last day of the Federal Reserve's direct intervention in the mortgage market. To recap, the Fed allocated $1.25 trillion in Jan 2009 to purchase mortgage based securities (MBS). The goal of this program was to support the mortgage and housing markets and to foster improved market conditions. The question is what happens now?

Mortgage rates clearly have benefited from the Fed's involvement. In very simple terms, markets set interest rates to earn a certain spread above what they consider a risk-free investment, the 10-year treasury bond. When the Fed began the MBS purchase program, this spread was 170 basis points (1.70%). Within about a month, the spread had tightened to 120 bp and has continued to tighten to roughly 65 bp today.

There are many reasons why spreads increase and decrease. One big reason is supply and demand. With the Fed ending its purchases, who will step in to provide the demand for MBS? First, be clear that the Fed was buying AND selling MBS (though it certainly was a net buyer). There are other buyers in the market. Domestic and foreign banks also were net buyers. Hedge funds and money managers, on the other hand, were net sellers.

The Director of the FHFA (conservator of Fannie and Freddie) has made it clear that Fannie and Freddie are not going to hold the MBS on their books. Thus, they will be net sellers.

For the short term, it appears supply and demand may be out of balance. In order to draw private investors to soak up excess supply it's likely mortgage rates will rise. The most believable predictions I've seen estimate that spreads will rise to as much as 100 basis points. If the 10-year treasury hits 4.0%, this would equate to a 30-year fixed mortgage rate of 5.5%. (The extra 50 basis points is eaten in servicing and guarantee fees.) It's unlikely this will happen all at once. Instead, rates probably will be volatile as the market seeks out a new equilibrium.

Will the higher rates dampen the housing market? That's the big question. Mortgage application volumes are still depressed, which may help keep the spread tighter (because of less supply entering the market).

One last question: What will happen to the MBS the Fed purchased? Will it flood the market and put further pressure on rates? The Fed says it plans to hold the securities on its books for an extended period of time and sell them only as market conditions allow.

On January 20th, FHA announced changes in its residential loan programs designed primarily to prevent the insolvency of the FHA insurance fund. The fund insures lenders against loss when FHA loans go bad. More than 14.4% of FHA loans were delinquent (payments more than 30 days late) at the end of the third quarter 2009, and another 3.3% were in the foreclosure process. In its most recent audit, FHA reported that its capital reserves had fallen below the congressionally-mandated two-percent of its loan portfolio, and some industry experts are concerned that the fund eventually will require a bailout from the Treasury.

The changes designed to head this off include:

- An increase in the upfront mortgage insurance fee (UFMIP) paid by borrowers at closing from 1.75% to 2.25% of the loan amount;

- An increase in the minimum down payment for borrowers with credit scores below 580 from 3.5% to 10%; and

- A decrease in the maximum amount a property seller is allowed to contribute to the buyer's closing costs (seller concessions) from 6% to 3%.

The changes could have been worse. Most buyers add the UFMIP to their loan balances rather than pay it at closing, so the UFMIP increase is unlikely to discourage buyers. Very few lenders currently approve loans for borrowers with credit scores below 580, so the higher down payment standard will affect few potential buyers. Besides, a credit report can have a few hickeys, and the score still can exceed 580.

The most significant change is the decrease in the maximum seller concessions. The change makes FHA's guidelines consistent with conventional loan guidelines. It is said the change was aimed at arresting the practice of sellers increasing their sales prices to absorb buyers' closing costs.

FHA left the monthly mortgage insurance premium rate as it is - for now. FHA indicated it would like to increase the rate, but this requires congressional approval. An increase in this rate will reduce the number of qualified buyers because a higher premium raises the buyers' debt ratio, which, of course, is one of the primary loan qualifying factors.

In November, Congress passed an extension and expansion of the homebuyer tax credit. If you're considering purchasing a home, read the details carefully. This program could put as much as $8,000 in your pocket.

The tax credit is available to both first-time homebuyers (haven't owned a primary residence in the last 3 years) and so-called "long-time" homebuyers (have lived in the same home for at least 5 consecutive years in the past 8 years). Importantly, a buyer is eligible for the tax credit if he/she uses a co-signer, even if the co-signer is ineligible. (In other words, a parent can co-sign for a child.)

The credit is 10% of the home's purchase price up to a maximum of $8,000 for first-time homebuyers and $6,500 for long-time homebuyers. The purchase contract must be dated on or before 4/30/10, and the transaction must close on or before 6/30/10. (A special provision extends the date an year for active military personnel.)

The buyer must purchase the home as his/her primary residence, and the maximum purchase price is $800,000. Multi-unit (2 to 4-unit) properties are eligible as are condos, manufactured homes, and new construction.

Income limits apply: $125,000 for single and $225,000 for married. (The credit is available up to $145,000 and $245,000 at a reduced amount.)

Important restrictions include:
- Buyer must be 18 years or older;
- Buyer cannot purchase the home from a close relative;
- Buyer cannot be a non-resident alien; and
- Buyer cannot purchase the home from a decedent.

The IRS has some okay information in its Web site. You have to poke around a bit. I found the "questions and answers section" particularly helpful.