HUD announces New, Permanent FHA Mortgage Loan Limits
November 13, 2008
RISMEDIA, Nov. 12, 2008-U.S. Department of Housing and Urban Development Secretary Steve Preston announced the new Federal Housing Administration (FHA) mortgage loan limits for single-family homes as prescribed by the Housing and Economic Recovery Act of 2008.
Beginning January 1, 2009, FHA will insure single-family home mortgages up to $271,050 in low cost areas and up to a maximum of $625,500 in high cost areas. The February 2008 Stimulus Package temporarily raised the FHA maximum to $729,750 through December 31, 2008. The new $625,500 maximum, however, represents a significant increase over the $362,790 limit that was in effect prior to the Stimulus Package.
“In today’s environment where access to credit is being restricted, we need to make mortgage loans readily available to households throughout the country, and especially in high-cost areas,” said Preston. “These new loan limits will ensure FHA can to continue help struggling homeowners refinance into safe, affordable government-insured loans, and allow many first-time buyers take advantage of today’s buyers market”
For several years, FHA’s loan levels were below the cost of the average home in communities across the nation. As a result, families who needed FHA mortgage insurance to qualify to buy a home were effectively locked out of the process. In some cases, borrowers turned to exotic subprime loans.
FHA mortgage insurance makes home financing more available to low-income and first time homebuyers. This is because the mortgage is backed by the full faith and credit of the government, freeing lenders from assuming the risk of default.
Higher FHA loan limits do not cost the government any money because the FHA Insurance Fund is fully supported by premiums paid by borrowers who receive FHA-insured mortgage loans.
The Housing and Economic Recovery Act pegs the national conforming mortgage loan limit to a house price index chosen by the new Federal Housing Finance Agency (FHFA). For 2009, the national conforming limit will remain at the current level of $417,000.
The Act says that the new FHA loan limits will be set at 115% of the median house price in a given area, as determined by HUD, but can not be lower than 65% of the conforming loan limit (the national floor). Also, the FHA mortgage limit cannot exceed 150% of the national conforming loan limit (the national ceiling).
Home Equity Conversion Mortgages
The Act also pegs the national mortgage limit for FHA-insured reverse mortgages to the national conforming loan limit. The FHA product known as the Home Equity Conversion Mortgage (HECM) will therefore have a national mortgage limit of $417,000. Unlike the new forward mortgage loan limits, the new HECM loans limits are effective on loans insured or after November 6, 2008. This is the first time that a single limit applies to these mortgages nationwide. As in previous years, the special exception areas of Alaska, Hawaii, Guam, and the Virgin Islands may have higher loan limits. Starting in January 2009 counties in those areas may have loan limits of 115% of area median prices, where that amount is above $417,000, up to a ceiling of $625,500.
Reverse mortgages allow homeowners age 62 and older to borrow against the value of their homes without selling them. Homeowners can select a lump-sum payment, monthly payments or tap into a line of credit. No repayment is required as long as a homeowner lives in a home with a reverse mortgage. The reverse mortgage is repaid, with interest, when a homeowner sells the home or dies.
HUD will inform mortgage lenders and brokers of the new limits through a mortgagee letter posted on www.hud.gov and www.fha.gov.
HUD is making available comprehensive listings of the new loan limits in all counties throughout country. Downloadable files are available for FHA Forward Loans, FHA HECM loans, and Fannie Mae and Freddie Mac purchases on the HUD website. The limits are determined by the county in which the property is located, except that for properties located in metropolitan statistical areas the limit is determined by the county with the highest median home price within the metropolitan area.
For more information, visit www.hud.gov.
Avoiding Foreclosure
November 12, 2008
There are options to a foreclosure other than just walking away like Forbearance, Loan Modification, Short Sale, etc.
Click on the following to read more…Avoiding Foreclosure
Tax Credit Unveiled - or is it really just a loan to the consumer?
November 12, 2008
I’m sure you’ve heard about it by now, but do you really understand the new $7,500 first-time homebuyer income tax credit and how it works? I mean in-depth and practically? And do you also know how to make this new piece of legislation work for you? As long as your clients legitimately understand what they are getting themselves into, you can use this “credit” as a powerful tool to increase your business.
Before proceeding, I must clarify a few things. It makes me a little crazy every time I hear or use the term “credit.” You see, the entire initiative is administered by the IRS code, and “credit” is IRS terminology. It means that when qualifying individuals file their federal income tax returns, they get an actual income tax “credit” for 10% of the price of the home up to a maximum of $7,500. It’s only $7,500 when the home’s price is $75,000 or higher.
Let’s assume a qualifying couple purchase a $100,000 home between April 9, 2008 and June 30, 2009, and upon filing their federal tax returns are due for a small refund, say $300. Their $7,500 “credit” is tacked right onto the $300, and they end up with a pretty nice $7,800 income tax refund check.
Recapture
But that’s not the end of the story. This “credit” from the IRS must be “recaptured” over 15 years. Recapture doesn’t start until two years later, with payback at 1/15th of the full amount per year. Starting two years after their very nice check, Mr. and Mrs. Couple’s income tax burden is increased by 1/15th of $7,500, or $500 per year until such time that the IRS is paid back.
Now, doesn’t that sound like a loan to you? Agreed, the terms of the loan are fantabulous, with no interest due and a full 15 years and an additional two-year grace period to pay back. But in my book, a loan is a loan is a loan, which isn’t the same thing as a “credit.” And it’s a loan from the IRS, to boot!
Moreover, the (loan) recapture is accelerated if the home ceases to become the taxpayers’ primary residence or if the home is sold. The entire balance is due in the tax year of these occurrences. If the home is sold to a non-relative, however, the maximum recapture is limited to the gain on the home.
It is nice to know that the credit is forgiven for those homes sold at a loss. But as with everything that I cover here, always consult a tax accountant.
Who Qualifies and Other Facts
Other aspects of the income tax credit that I did not yet mention include that it applies to first-time homebuyers only. Under the law it is defined as having no ownership interest in a principal residence in the three years prior to the acquisition date of new home. If the borrower constructs their own home, count back from closing date or date of occupancy.
Ineligible borrowers include non-resident aliens; buyers who finance their home with tax-exempt mortgage revenue bond programs, where the home is purchased from a person who is related to the homebuyer, and a married person purchasing as an individual if the spouse is ineligible due to prior homeownership.
The credit is phased out for individuals with a modified adjusted gross income of $75,000 to $95,000, or joint filers with a modified AGI of $150,000 to $170,000.
If home is purchased in 2009 (prior to June 1, 2009), the borrower may elect to claim the credit on their 2008 tax return, and may amend 2008 returns if already filed.
Before I move on, I have barely scraped the surface of what you need to know, and believe it’s wise to read up further before you hit the streets. A couple of excellent resources are the National Homebuilder’s Association at www.federalhousingtaxcredit.com/faq.php or the August issue of my own e-zine, www.MortgageCurrentcy.com. Be wary of your sources, there’s a lot of misinformation out there. And above all else, remember that this is IRS tax code. Always defer to a tax accountant and do not offer tax advice.
Borrowers Short Funds
It’s time to make this credit/loan work for you. Think about using one of the following to get those difficult-to-come-up-with assets for those clients who are short funds:
* Scenario No. 1: the homebuyer borrows from their parents for downpayment, repays them with tax refund. With the Federal Housing Administration program, a loan from one’s parents is fully acceptable.
* Scenario No. 2: The homebuyer borrows from a 401(k) or other retirement plan. They repay in full with the tax refund. Neither Freddie (SS Guide Ch 37.16), nor Fannie (Selling Guide X. 603.15), nor FHA (4155.1 REV 5, 2-10, D.) require the monthly payment to be included in the debt ratio.
* Scenario No. 3: After closing, the borrower changes his/her W-4 withholding to recoup the credit immediately by decreasing the federal tax amount deducted from their paycheck. This can be very helpful to those who know they’ll be squeezed for money after closing.
* Scenario No. 4: Think ahead a few months to 2009. Immediately after the qualified homebuyer purchases, he or she goes to their tax preparer, files 2008 tax returns, and the credit is in his or her hands within minutes.
Realtor/Builder Business
This can absolutely help your Realtors and homebuilders increase their business. Create a handout with information that they need to know. (For a pre-prepared handout that you can personalize, visit Mortgage Talking Points at www.mortgagecurrentcy.com.) You’ll be surprised by how little most real estate agents and builders know about the credit.
Take it to the next level and bring the informational flyer with you to open houses. Take the time to put the property address of the listed house along with the Realtor information on the handout. Not only do you look good when the Realtor looks good, the flyer can be left at the home for future walkthroughs. It’s a great sales tool for the Realtor and the seller, so it’s likely to be left in the home. And it’s got your name and number on it when someone needs a question answered.
Mine Your Past Clients
This income tax credit is retroactive to April 9, 2008, including homebuyers who have already closed. It’s a great reason to stay in contact with prior clients and let them know that the credit exists, that they may qualify, and to talk to their accountant. And by the way, do they know a friend or family member who might benefit from the tax credit that you can help?
First-Time Homebuyer Classes
Create yourself a simple PowerPoint presentation for new homebuyers. Team up with an accountant, if possible, and market the class based on the tax credit. I’m sure the many accountants know clientele who may be very interested. Heck, team up with a Realtor and further increase your audience.
Don’t make it complicated, and please, again, put disclaimers on everything.
Leslie Petersen’s Disclaimer
I am not a tax accountant. I am not an attorney. I cannot offer legal or tax advice. I did spend an enormous amount of time researching and investigating the tax credit/loan that I’m covering today, but I do not represent the IRS. I cannot offer guarantees as to the accuracy of anything represented here.
To Your Success
Having said that, I legitimately want to see you succeed at what you are doing. I’ve barely scratched the surface. As mortgage brokers, you must be educated, and to thrive in this business, you must also be educators. The public knows little to nothing about the first-time homebuyer income tax credit. It’s new and thrilling information, and you can be their resource.
The first-time homebuyer income tax credit/loan is a powerful marketing tool and the window of opportunity is narrow. Use your expertise to attract new clients. Whether or not the credit/loan is right for them, you’ve still established new relationships and future business.
Leslie Petersen is a mortgage guideline expert. With over 30 years experience in mortgage lending, she writes an online newsletter, www.mortgagecurrentcy.com, on the changes in Fannie/Freddie, FHA, VA and other regulatory agencies, but with a twist. For originators, underwriters and managers, she also interprets them in plain English and shows them how to make the rules and changes work for them and get more of their loans approved. She can be contacted at leslie@MortgageCurrentcy.com.
Housing Real Estate Markets Most Likely To Rebound - Seattle is #1
November 6, 2008
If you’re a homeowner seeing property values plummet, look to the commercial real estate market for solace. It might tell you which areas will recover fastest–and which will likely remain weak. The Urban Land Institute recently asked 700 real estate professionals to name the best (and worst) places to invest in commercial real estate in the coming year. Those surveyed included private developers, Realtors and Real Estate Investment Trust executives. Their answers also apply to the residential market, since the single-family-home sector typically follows the economy. As wages go up and there are more jobs, more people can buy homes, pushing prices up.
The best cities in which to invest are those that are considered gateways to international investment, have vital downtowns where people can forgo cars, and don’t have a glut of condos or office space.These traits landed
Although the city is suffering from the loss of Washington Mutual and the downsizing of Starbucks, Boeing and Microsoft are still relatively strong. Apartment vacancies are low and there aren’t too many new buildings going up, meaning the market won’t be oversupplied. The same is true in the retail space.
Of course, there’s no guarantee that an improved commercial market will lead to an improved home market. However, investors have a better chance of seeing home prices rise in fundamentally strong markets like
It landed at the bottom of the list, scoring a 2.24.
What’s happening to housing in your area? Weigh in. Post your thoughts in the Reader Comments section below.
The other cities at the bottom of the list–
Recent attempts to turn downtown
Dorothy Pomerantz 10.29.08, 4:00 PM ET Forbes Magazine
How the Fed’s Lower Rate Affects Consumers
November 6, 2008
RISMEDIA, Nov. 4, 2008-(MCT)-Last month, the Federal Reserve cut interests rates for the sixth time this year in its efforts to restrain the credit crisis. The move that reduced the rate to 1% was a shot in the arm for Wall Street, which was up 10.1% last week. But what have all these cuts meant for the average consumer?
To find out, I spoke with Mark Vitner, Wachovia economist; Bill Hardekopf, CEO of www.LowCards.com; and Jeff Williams, a mortgage consultant with Allied Home Mortgage in Raleigh, N.C.
Here’s a breakdown on how they say the low interest rates have-or haven’t-affected some key consumer finance issues.
- Credit cards. Hardekopf said that lowering interest rates doesn’t automatically mean credit card rates will decrease. But over the past year, the rates cuts have kept the average advertised credit card rates stable at about 12%.
In other words, if you have good credit, you can still find low credit card rate offers. In fact, Hardekopf said that Capital One is currently offering zero percent on balance transfers and new purchases for 12 months.
“It’s certainly possible that others (credit card companies) will do the same,” Hardekopf said. The problem is that fewer people will qualify for the lower rates.
“The advertised rates are still low, but they are reclassifying the perimeters of what is considered good credit. Now, more people are falling into the average and poor credit categories,” he said.
To qualify for these low rates, people have to do everything possible to keep their credit score high, he said. That means pay your bills on time, don’t skip payments, don’t apply for a bunch of new credit cards, and keep credit card utilization low-at most, 30% to 40% of your credit limit.
- Mortgages. Many people assume that if the Fed lowers the interest rate, mortgage rates will also decrease. That simply isn’t the case, said economist Mark Vitner. He explained that mortgages are backed by mortgage securities, which aren’t doing well right now. Still, mortgage rates are hovering at about 6.45%, which is not nearly as high as in previous major economic downturns.
- Home equity lines of credit. This is an area where consumers may see some immediate relief, said Vitner. These loans are more closely tied to the prime rate, which moves in close concert with Fed interest rate cuts and hikes. “The interest cost on (HELOCs) will be less and make it easier on consumers. That frees up a little extra income for spending,” he said.
- Refinancing loans. Clearly, lower rates make refinancing cheaper. But determining whether this is a good option is a little more complex, said Jeff Williams of Allied Home Mortgage. If you have an adjustable home loan, it should be adjusting down, which is good and there is no need to refinance. But if you have an adjustable loan that is scheduled to reset at a much higher rate, refinancing may be a good option.
A number of banks are urging people to use the low rates as an opportunity to refinance into a 15-year or 20-year mortgage loan. But Williams said this may not be a good idea for everyone. He said that unless you are very secure in your job, it may be safer to stay with a 30-year loan, which typically has a lower monthly payment than a 15-year or 20-year loan.
- Car loans and personal loans. If you are shopping for new car or a personal loan, the lower interest rates will likely mean good news for you, said Vitner. “Lower rates means it’s cheaper to borrow money.”
- Saving accounts. Lower rates ultimately mean the money you earn on your savings will decrease. Now is a good time to shop around for the best rates. Hint: Online banks such as E-Trade Bank and HSBC Direct tend to offer higher returns on savings accounts and CDs than many traditional banks.
Posted By Paige On November 3, 2008 @ 4:43 pm In Finance and Economy | Comments Disabled
By Vicki Lee Parker
Buy or Sell a Home Despite the Shaky Economy
July 9, 2008
According to mortgage research firm HSH Associates’ latest survey, mortgage rates have risen about half a percentage point over the past five weeks. On May 23, the average conforming 30-year fixed-rate loan was 6.02 percent. By last week, that figure had jumped to 6.55 percent. On May 23, the average jumbo loan sat at 7.12 percent. By last week, that figure had risen to 7.65 percent.
The average 5/1 adjustable rate mortgages (ARM) — a mixture of conforming and jumbo — also jumped half a percentage point. So what’s going on? At the moment, fear of inflation is driving this increase. Right now, technically, we are not in a recession, for the economy is still showing signs of life. With that as a backdrop, the Federal Reserve announced it was no longer likely to cut interest rates. In fact, the Federal Reserve may start raising rates sooner, rather than later, thanks to the fear that inflation will get out of control.
With that in mind, what are Americans to do? In these uncertain times, we’ve compiled advice for buyers, sellers and those who hold adjustable rate mortgages.
If you’re buying
- A down payment is a must. As a nation, we got used to zero-money-down loans. Today, the minimum for a Federal Housing Authority (FHA) loan is 3 percent. You’ll do better in most marketplaces with 5 to 10 percent. Most challenged housing markets are asking for somewhere in the neighborhood of 10 to 20 percent down. In this case, more is better.
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A credit score over 720 is what you’ll need to get the best rates in the marketplace. You can find financing with a lower score, but you’ll pay more. Right now, according to myfico.com, on a 30-year fixed-rate loan, the following score nets you the following rate, which translates into the corresponding monthly payment on a $300,000 loan:
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760-850; 6.179 percent; $1,833
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700-759; 6.401 percent; $1,877
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660-699; 6.685 percent; $1,933
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620-659; 7.495 percent; $2,097
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- Be sure to document your income and assets. The days of “liar loans” are long gone. Today, you must prove that you are the borrower you say you are. During the days of free-flowing money, lenders would allow the total debt you were carrying to creep up to 55 percent of your income. Today, that number is 43 percent, which makes the case that you should get preapproved for your loan, so that you know what you can really afford.
- You must force yourself to shop around. Last week, the low quote on a 30-year conforming loan from HSH.com was 5.875 percent, while the high was 9.5 percent. If you want to get the best deal possible, you need to shop around. Traditional mortgage lenders and bank-owned mortgage companies are going to be the best choice for anyone who wants a traditional conforming loan. But, if you’re still looking for something special — to not document your income, for example — you’ll need to deal with a lender who keeps the loan in its portfolio. Look at credit unions, small and mid-size banks, as well as thrifts, and mortgage brokers (but only mortgage brokers who have been through these ups and downs before). You will need a seasoned veteran. Finally, if you’re buying, and you’re one of these nonconforming cases, have a second deal ready to go in your back pocket in case the first one falls apart.
If you’re a seller
If you’re a true seller, be ready to adjust your expectations. Three years ago, this proposition was reversed; the market came to you. Today, you have to be realistic about what your house will sell for. By all means, get out of your first property before you agree to buy another; bridge financing is tough to come by.
If you have an ARM
Chances are that if you have an ARM that either reset this spring or is just resetting now, you’re looking at the rate going down, rather than up. Now is not the best time to look at refinancing out of your ARM, because you’ll pay more on the fixed-rate loan than you are on your current loan. But don’t get complacent; your rate may have gone down this year, but
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chances are it will go up next year. So if this year’s monthly payment is less than last year’s, take the difference and drop it into a savings account — that way you’ll be able to handle any bad news that comes in 2009.
If you’re feeling nervous, don’t fret; there’s a rainbow at the end of this message. Home prices have fallen — in some places to where they were in 2003 and 2004 — which offsets the gains in mortgage rates. You may be able to find such a good deal in your area that your out-of-pocket cost would be less than it would had you bought a more expensive home with a cheaper loan. The key is to lock into that good location now, and wait for a chance to refinance when the business cycle turns.
Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, www.jeanchatzky.com.
How King County Figures Assessments
June 18, 2008
Sunday, June 15, 2008
By Cindy Zetts
Seattle Times Real-estate editor
Excerpts from the blog
Readers are calling to complain about their 2008 King County property assessments.
The upshot: “My assessment went up, but my property value has been going down. What gives?”
What gives is that assessments lag market values by about 18 months, King County Assessor Scott Noble says.
Employees of the King County Tax Advisor’s Office spend all day every day explaining the complicated assessment and levy process to confused residents.
I called the King County tax adviser, Barbara Alsheikh, for the explanation.
An assessment does not determine the dollar amount that a property owner pays in taxes. It is a tool that determines a property owner’s share of the tax burden, Alsheikh said.
In other words, an assessment determines how big a piece of the pie you get, not how much that piece costs.
The amount of taxes paid comes from budgets and voter-approved levies in each taxing district — the county, cities, school districts, the Port of Seattle, hospital districts, fire districts, etc.
Here’s a quick explanation of how assessments are figured in King County: The county is divided into about 100 assessment areas, each comprising homes that share many of the same characteristics, such as view or construction quality.
About 15 percent of the homes in each region sell in a given year, but a half of those are excluded because they are bankruptcies, estate sales, foreclosures or some other deal that is not a market-value sale between a buyer and a seller.
That means that the value of all the properties in a given area are determined by the prices of 7 to 8 percent of the homes in that area.
Values for 2008 were set Jan. 1, based on sales that occurred as long as three years earlier, Alsheikh said, because the process is complicated and takes time.
And while we can look for assessments to go down in 2010 or 2011, we won’t necessarily be paying less in taxes. Just so you know.
Questions? Visit the King County Assessor’s Web site, www.kingcounty.gov/assessor; or the King County Tax Advisor’s Web site, www.metrokc.gov/taxadvisor; or call the Tax Advisor’s Office at 206-296-5202.
Fair deal on home loans
Two years ago, it was too easy to get a mortgage. Probably everyone knows someone who got interest-only or piggyback loans to buy a place and now can barely make payments.
When I bought my first house, the maximum mortgage payment could be no more than 25 percent of my gross monthly income, and my monthly bills had to total 36 percent or less. I also had to put 10 percent down or get an FHA loan.
When I bought my second home six years later, the limits were 28 percent (give or take) for the mortgage payment and 40 percent (give or take) for total monthly bills, depending on, oh, the mood of the lender, the time of day, I don’t know.
Then I started hearing about lenders who allowed monthly bill payments to total 50 percent or more of gross income.
Lending rules became a very slippery slope. And that was before creative financing and no-doc loans.
Many people who bought homes with subprime, negative-amortization, interest-only or piggyback loans shouldn’t have. Many are in foreclosure, looking into short sales, or jumping through hoops to try to refinance into loans they can afford.
I understand the argument that everyone has a right to a piece of the American dream. But I don’t agree with it. Look where it got us.
Now the pendulum has swung the other way, and it’s hard to get a loan. With stricter lending standards akin to those in the 1980s — more money down for buyers, more equity for refinancers, higher credit scores for all — it’s difficult for borrowers to get out of the holes they’re in because of mortgages they took out a few years ago.
So I’m curious. What requirements are fair? How much should buyers have to put down? Should all loans have to pay down the principal monthly? If you could set banking policy, what would that policy be?
This material has been edited for print publication.
The Seattle Times Company
Interest Rates Cut, Loan Rates Arent’ Falling
June 18, 2008
Saturday, June 14, 2008 -
Chicago Tribune
CHICAGO — The Federal Reserve has aggressively cut interest rates. Houses are sitting around unsold. The stage appears to be set for mortgage rates to fall as lenders compete for that scarce quarry: the well-qualified home buyer.
You wish.
Rates on 30-year fixed-rate mortgages have stayed stubbornly above 6 percent for months. Interest rates on those loans are averaging 6.32 percent, mortgage investor Freddie Mac reported Thursday, an increase from the 6.09 percent the previous week.
Rates on five-year adjustable-rate mortgages rose slightly to 5.58 percent, according to Bankrate.com
Rates on jumbo loans, those larger than $417,000, were considerably higher, averaging 7.33 percent nationally Thursday, according to Bankrate.com.
Several forces are conspiring to keep rates up, economists and mortgage experts say, and they aren’t going away anytime soon.
When the subprime-lending bubble burst last summer, many large mortgage brokers went under because they could no longer find investors to buy their loans.
That means the pool of mortgage lenders is much smaller than it has been in recent years, and billions of dollars in liquidity have disappeared.
Gun-shy lenders
Also, surviving lenders are still gun-shy about rising delinquencies and foreclosures, which have forced many to take large write-offs.
“Time heals all wounds, and we haven’t had enough time yet to heal this wound,” said Diane Swonk, chief economist with Mesirow Financial in Chicago. “Banks and other lenders are being more conservative. They’re saying, ‘I need to be compensated for this risk.’ ”
But there’s even a bigger-picture reason behind the buoyancy in mortgage rates — the expectation that rising inflation is the economy’s biggest challenge.
Many people think the economy has narrowly avoided a recession and that the worst may be over. If that’s true, the Federal Reserve is unlikely to lower interest rates further and, in fact, could start raising them again as soon as October.
With commodity prices climbing, especially for oil and food, the Fed may have little choice but to tighten credit to slow inflation.
When inflation goes on a tear, investors want higher premiums for lending money, which means higher long-term interest rates.
“If people are concerned about inflation, they don’t want to hold Treasury bonds,” said Orawin Velz, senior director of research at the Mortgage Bankers Association in Washington, D.C. “If there’s a decline in demand for bonds, the price will go down, and the yield will go up.”
That’s been happening recently with 10-year Treasury notes, the benchmark for mortgage rates. But investors are fickle and skittish, Velz said, and their expectations can change with the latest economic report.
For the downtrodden housing sector, the question is whether 6.5 percent interest rates will keep homebuyers on the sidelines.
Donna Schwan, a real-estate agent with MetroPro in Chicago, isn’t worried.
“Mortgage rates going up is the best thing that could happen,” she declared. “We have a lot of people who are buying now because they want to get in before the rates go higher.”
Still attractive
Buyers spoiled by years of rates below 6 percent need to remember 6 percent is a very attractive rate, she said. Plus, with home prices falling, a buyer’s monthly payment may be the same despite that higher rate.
Mike Sante, managing editor of personal-finance Web site Interest.com, agrees.
“Historically, any time you can get a rate below 6.5 percent, you’re doing very well. We’re not at the double-digit rates of the ’80s or even the 7 or 8 percents of the 1990s.”
The exception is jumbo loans, which are commanding a much-higher rate than smaller loans that meet the standards of Fannie Mae and Freddie Mac, government-sponsored investors in mortgage loans.
A year ago, a jumbo loan might have cost a borrower an extra half point in interest over a so-called conforming loan. Now the spread is more like a point to a point-and-a-half higher, which translates into a much-larger payment.
With home prices rising by double digits annually over the past five years in some markets, lots of prospective borrowers have been pushed into the jumbo bracket.
“The spread has doubled,” Sante said. “For those folks, they have trouble.”
The Seattle Times Company
Major Policy Switch at FHA to Favor Those with Superior Credit, Regardless of Income
May 18, 2008
Saturday, May 17, 2008
Lower income borrowers often have higher credit scores and soon may benefit
Syndicated Columnist
DALLAS — Who has better credit scores on average, a homebuyer with a higher or a lower income?
Inside the country’s fastest-growing home-mortgage program, the surprising answer is: People with lower incomes have slightly higher FICO scores.
That finding, which emerged from a statistical analysis of all approved mortgages insured by the Federal Housing Administration (FHA) during fiscal 2007, is now buttressing a forthcoming major policy switch that could affect thousands of buyers and refinancers.
FHA, which for decades has used a one-size-fits-all approach to pricing its insurance on home loans, plans to shift to a “risk-based” system keyed to FICO scores and down payments, beginning as early as mid-July. Private-sector lenders and insurers have priced interest rates and premiums using sliding scales of FICO scores and down-payment amounts since the mid-1990s.
FHA’s move, which will cover all new applications including “jumbo” loans up to $729,750 in high-cost markets through December, will bring the agency in line with the private sector’s predominant approach.
Brian Montgomery, FHA’s top official, outlined the impending change in a speech at the annual conference of the National Association of Real Estate Editors.
Under the old approach, he noted, buyers with stellar FICO scores paid the same premiums as borrowers with poor scores. That amounted to a pricing inequity for applicants who presented low risk of default on their loans, and an inappropriate subsidy of applicants who were likely to default.
A study of an entire year’s applications turned up the additional fact that FHA’s lower-income borrowers typically had higher FICO scores than buyers with larger incomes.
“Is it counterintuitive? Yes,” Montgomery said. According to the study, applicants with FICO scores of 680 to 850 had median incomes of $48,756 last year, while those with low scores of 500 to 559 had median incomes of $53,388.
Fair Isaac Corp.’s FICO scores range from about 300 to 850 — the higher the better — and are predictive of future defaults and foreclosures. Even at rock-bottom down-payment levels of 3 percent, applicants with lower incomes had higher credit scores than applicants with bigger incomes making similar-size down payments.
All of which underlines the key reason for making the switch to risk-based pricing: Why should people who have demonstrated superior credit — irrespective of their income levels — pay the same mortgage-insurance premiums as loan applicants who have seriously flawed credit histories?
Under the new system, according to FHA’s outline of its plan, “a larger number of low-income borrowers [will] benefit from premium reductions than … moderate-, middle- and upper-income borrowers combined.”
On 30-year loans with down payments of 10 percent or more, applicants with FICO scores above 680 will qualify for the lowest premiums — 1.25 percent of the loan amount upfront and annual renewal premium payments of 0.5 percent.
Borrowers with down payments under 5 percent and poor credit scores — FICOs ranging from 500 to 559 — will be charged premiums of 2.25 percent up front and 0.55 percent annually.
All borrowers will continue to receive the same market-based interest rate. Under the current system, borrowers pay uniform 1.5 percent premiums upfront, and 0.5 percent annually.
To set premium rates by credit standing, FHA plans to use the middle score of an applicant’s three FICOs generated by the national credit bureaus — Equifax, Experian and TransUnion.
If only two scores are available, it will use the lower.
For applicants with thin or “nontraditional” credit histories on file at the bureaus, FHA will underwrite and price the loans without reference to FICOs, with heavier emphasis on rent and utility payments among other measures of creditworthiness.
Though FHA mortgage volume has more than doubled in the past year, the move to risk-based pricing is expected to make it more attractive to buyers and refinancers.
During the housing-boom years, FHA lost much of its business to subprime lenders and insurers who offered zero-down, low- or no-documentation loans at high interest rates and fees, including prepayment penalties.
FHA, by contrast, always has required at least a 3 percent down payment, full documentation of income and assets, but has never permitted prepayment penalties.
Since taking over as FHA commissioner in 2005, Montgomery has emphasized “modernizing” FHA and winning back market share.
That has included pushing for higher loan limits to serve greater numbers of borrowers in high-cost areas such as California and along the East Coast.
FHA also is now the government’s key vehicle for refinancing borrowers stuck with unaffordable — and often toxic — subprime mortgages.
Kenneth R. Harney: kenharney@earthlink.net
Copyright © 2008 The Seattle Times Company
Mortgage Market Credit Restrictions Expand
May 12, 2008
Kenneth R. Harney: kenharney@earthlink.net
Saturday, May 3, 2008