January 2015 – Cool Tools News Spool

Will Collateral Underwriter disrupt your closing?

Loan Guidelines, Residential Mortgage Comments Off

Jan 202015

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

by G. Steven Bray

Fannie Mae is making some changes to how it analyzes appraisals, and the effects could impact your closings.

In Dec, Fannie announced the elimination of the old 15/25 standard for comparable sales. Fannie expected appraisers to use comps that required no more than a total 15% net adjustment and 25% gross adjustment. The change is good news because I bet we’ve all worked on transactions in markets where those numbers just didn’t work.

I suspect Fannie relaxed this standard because of this second, more important change. On Jan 26th Fannie will make its Collateral Underwriter available to lenders. The Collateral Underwriter or CU is a risk management tool for analyzing appraisal quality. In 2011 Fannie began accepting appraisals electronically and has aggregated data from millions of appraisal reports. It now uses this data to analyze appraisals for risk.

On its surface this doesn’t sound like a big deal. CU automates the process of analyzing appraisals, which could be a good thing. The concern lies in how the analysis occurs. It’s reported that the CU results will include up to 20 comparable sales ranked by perceived risk. This will include the appraiser’s comps, which also will be assigned a risk ranking. What does it mean if the appraiser’s comps aren’t the ones CU considered the lowest risk? We don’t know yet. Expectations are that appraisers will be asked to respond to the CU results and to justify why they didn’t consider the lowest risk CU comps.

Let’s hope that it stops there and that appraisers won’t be asked to include the lower risk comps in their analysis. The concern here is that CU has no standardized way to determine neighborhood boundaries. Thus, the lowest risk comps could from a nearby, lower-quality neighborhood.

It also isn’t clear how the tool defines risk. Price certainly plays a factor, which again could favor lower-priced, lower-quality comps.

Later in the year, Fannie will embed the CU results into its underwriting software, which will mean the results will be available earlier in the loan process. Until then, I expect appraisals will take a little longer, at least until folks get used to managing this new risk management tool.

New USDA maps effective Feb 2nd

Loan Programs, Owner-occupied Comments Off

Jan 122015

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

by G. Steven Bray

The long delayed new USDA maps go into effect on Feb 2. We talked about these news maps in my Sep 8th blog, which you can find in the archives. The main changes are around the Austin and DFW metros and amount the removal of some exurbs from eligibility. Remember that USDA bases eligibility on the date it receives a complete loan file. For most lenders, this will be a couple weeks after loan application. So, homebuyers need to act soon to beat the changes.

USDA also implemented other significant changes to its rural development program at the end of last year. Some of the highlights are:

– USDA increased the program’s monthly mortgage insurance rate, called the annual fee, from 0.4% to 0.5% of the loan’s balance. Even with the increase, the RD loan program still compares very favorably to FHA. Both should have roughly the same interest rate, but USDA requires no down payment and has lower monthly MI.

– If a homebuyer can document that his current home no longer meets his family’s needs, he doesn’t have to sell his existing home as long as it isn’t financed with a USDA loan. Unfortunately, the homebuyer has to qualify with both house payments as USDA will not allow rental-income credit.

– USDA will allow lenders to escrow at closing for minor repairs. This could increase the number of homes eligible for USDA financing. Check with the lender before you execute a contract as USDA doesn’t define “minor repairs” and some lenders may not be set up to handle escrowed funds.

– Finally, the RD program now can be used to purchase homes with pools. However, the appraiser will be instructed not to attribute any value to the pool. Thus, unless the homebuyer has the funds to pay the difference between the appraised value and the contract price, it still may be difficult to use an USDA loan in these situations.

House flipping just got harder

Investment, Loan Programs, Residential Mortgage Comments Off

Jan 052015

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

by G. Steven Bray

FHA has never been a big fan of house flipping due to fraudulent flips that saddled it with big losses in years past. As a result, it instituted a rule that in order for a buyer to use FHA financing, the seller must have owned the house for 90 days prior to signing a purchase contract.

During the housing recession, FHA decided to waive this rule, allowing sellers to flip houses after owning the property for as little as 30 days. The waiver allowed real estate investors to make tidy profits selling thousands of rehabilitated homes to FHA buyers.

The waiver expired on Dec 31st. For any purchase contract signed after that date, the old 90-day rule applies. FHA says the dangers of house flipping outweigh the benefits for first-time and minority homebuyers – those dangers being that flippers will sell poorly renovated homes at inflated prices to unsuspecting buyers. Of course, investors disagree and point out that the house flip rule only raises the cost of renovated homes. Flippers say they can rehabilitate a home in 45 days. Having to hold the home for an additional 45 days just increases the flippers’ holding costs, which get passed along to the buyer.

If you’re working with investors, this change affects the pool of potential buyers. While they won’t be able to sell to FHA buyers for 90 days, they can sell to buyers using conventional financing as Fannie and Freddie only require a seller to own a home for 30 days.