Mortgage Market Minute

Bank of America will halt originations of cash-out refinancings, citing what it calls a capacity problem. Source: National Mortgage News

On Dec. 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011. Among its provisions, this new law directs the Federal Housing Finance Agency (FHFA) to increase guarantee fees charged by Fannie Mae and Freddie Mac (Government Sponsored Agencies or GSEs) from the average guarantee fees charged by these companies in 2011 on single-family mortgage-backed securities. This requirement is effective immediately, meaning that the average guarantee fees charged in 2012 needs to be greater than the average guarantee fees charged in 2011. The increase in the Guaranty Fee or "G-Fee" as it's called, equates to approximately a pricing difference of 50 basis points more in terms of costs or roughly 0.25% higher in rates.

Borrowers who are current on their home loans may be able to refinance for lower interest rates, even if they are seriously upside down. The Federal Housing Finance Agency (FHFA) announced today that it will broaden the scope of the Home Affordable Refinance Program (HARP) by removing the current 125 percent loan-to-value cap for fixed-rate mortgages backed by Fannie Mae and Freddie Mac. Other program enhancements include, among other things, reducing certain fees, eliminating the need for a new property appraisal if the FHFA has a reliable automated valuation model (AVM) estimate, and extending HARP until the end of 2013. New federal guidelines for the HARP changes should be released to mortgage lenders and servicers by November 15. The basic eligibility requirements for an enhanced HARP loan are as follows: • Existing mortgage loan must be owned or guaranteed by Fannie Mae or Freddie Mac. • Existing mortgage loan must have been sold to Fannie Mae or Freddie Mac before June 1, 2009. • Existing mortgage loan cannot have been refinanced under HARP previously (except for Fannie Mae loans refinanced between March and May 2009). • Current loan-to-value (LTV) ratio must be more than 80%. • Existing mortgage loan must be current, with no late payments in the past six months, and no more than one late payment in the past 12 months.

Friday, October 21, 2011 The Senate late Thursday approved an amendment to restore the $729,750 maximum loan limit on government-back mortgages for two more years. Sponsored by Senators Robert Menendez, D-N.J. and Johnny Isakson, R-Ga., the measure rolls back the October 1 reductions in Fannie Mae, Freddie Mac and FHA/VA loan limits in high cost areas. The expiration of the higher loan limit has "made a weak housing market even weaker,” said Sen. Menendez during the Senate debate. “If we don't get that weak housing market moving again, we won't get the kind of robust economic recovery that Americans deserve.” The Menendez-Isakson amendment also restores the FHA loan limit to 125% of the median house price in low cost areas. It was reduced to 115% on October 1. The Senate approved the loan limit amendment by a 60-38 vote. It now moves to the House. It took a minimum of 60 votes under Senate rules to approve and attach the amendment to a Department of Housing and Urban Development appropriations bill. The National Association of Realtors lobbied heavily to get the necessary votes, officials said. To cover possible losses on higher balance Fannie/Freddie mortgages, the amendment imposes an annual 15 basis point fee on “jumbo GSE” loans. Source: National Mortgage News

U.S. house prices have plunged by nearly a third since 2006, and homeownership rates are falling at the fastest pace since the Great Depression. The good news? Two key measures now suggest it's an excellent time to buy a house, either to live in for the long term or for investment income (but not for a quick flip). First, the nation's ratio of house prices to yearly rents is nearly restored to its prebubble average. Second, when mortgage rates are taken into consideration, houses are the most affordable they have been in decades. Two of the silliest mantras during the real-estate bubble were that a house is the best investment you will ever make and that a renter "throws money down the drain." Whether buying is a better deal than renting isn't a stagnant fact but a changing condition that depends on the relationship between prices and rents, the cost of financing and other factors. But the math is turning in buyers' favor. Stock-oriented folks can think of a house's price/rent ratio as akin to a stock's price/earnings ratio, in that it compares the cost of an asset with the money the asset is capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else equal. Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody's Analytics. The average from 1989 to 2003 was about 10, so valuations aren't quite back to normal. But for most home buyers, mortgage rates are a key determinant of their total costs. Rates are so low now that houses in many markets look like bargains, even if price/rent ratios aren't hitting new lows. The 30-year mortgage rate rose to 4.12% this week from a record low of 3.94% last week, Freddie Mac said Thursday. (The rates assume 0.8% in prepaid interest, or "points.") The latest rate is still less than half the average since 1971. As a result, house payments are more affordable than they have been in decades. The National Association of Realtors Housing Affordability Index hit 183.7 in August, near its record high in data going back to 1970. The index's historic average is roughly 120. A reading of 100 would mean that a median-income family with a 20% down payment can afford a mortgage on a median-price home. So today's buyers can afford handsome houses—but prudent ones might opt for moderate houses with skimpy payments. For example, the median home in the greater Phoenix market, including houses, condos and co-ops, costs $121,700, according to Zillow.com. With a 20% down payment and a 4.12% mortgage rate, a buyer's monthly payment would be about $470. Rent for a comparable house would be more than $1,100 a month, according to data provided by Zillow.com. Of course, all of this assumes mortgages are available—no given now that lending standards have tightened. But long-term data on down payments and credit scores suggest conditions are more normal than many buyers think, according to Stan Humphries, chief economist at Zillow. "If you have good credit, a job and a down payment, you can get a mortgage," Mr. Humphries says. "There's more paperwork and scrutiny than five years ago, but things are pretty much like they were in the '80s and '90s." Not all housing markets are bargains. Mr. Humphries says Zillow has developed a new price/rent ratio that uses estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. A fresh look at the numbers suggests Detroit and Miami are plenty cheap for buyers, with price/rent ratios of 5.6 and 7.7, respectively. New York and San Francisco are more expensive, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7. For investors seeking income, one back-of-the-envelope way of seeing how these numbers stack up against yields for other assets is to divide 1 by the price/rent ratio, resulting in a rent "yield." The median market's rent yield is 9.3% and Detroit's is 17.9%. Investors would then subtract for taxes, insurance, upkeep and other expenses—costs that vary widely. But suppose total costs were 4% of the purchase price. That would still leave a 5.3% rent yield in the typical market. With the 10-year Treasury yield at 2.2% and the Standard & Poor's 500-stock index carrying a dividend yield of 2.1%, rents for residential housing in many markets look attractive. A few caveats are in order. First, not all transactions are average ones. Even in low-priced markets, buyers should shop carefully. Second, prices could fall further. Celia Chen, a senior director at Moody's Analytics, expects prices to drop 3% before bottoming early next year and rising slowly thereafter. "If the economy slips back into recession, however, we could easily see a 10% drop," Ms. Chen says. And property "flipping" can be dangerous even when prices are rising. That is because, absent a real-estate boom, house price gains simply aren't that exciting. Research by Yale economist Robert Shiller suggests houses more or less track the rate of inflation over long time periods. Houses aren't the magic wealth creators they were made out to be during the bubble. But when prices are low, loans are cheap and plump investment yields are scarce, buyers should jump. -- WSJ

Half of refinance applications are abandoned or rejected, as are 30 percent of purchase mortgage applications, according to the Mortgage Bankers Association. All told, the Federal Financial Institutions Examination Council (FFIEC) says that well over 2 million mortgage applications were rejected last year. Want to avoid falling into that number? It's tough -- especially in light of the fact that mortgage lenders have become increasingly restrictive in terms of their lending guidelines since the housing market crash. Here, as a cautionary tale and primer on what to expect, are the top six reasons mortgage lenders reject applications. 1. Income issues. Most failed applications falling into this category have income too low for the mortgage amount they are seeking; often, a spouse's credit issues can create this problem, too, as the income the spouse plans to actually chip in toward the mortgage cannot be considered by a lender. But increasingly, the recent vagaries of the job market are also causing this issue, as people who have changed their line of work or have changed from salaried employee to freelancer over the last couple of years can also have their home loan applications rejected based on income. 2. Muddled money matters. If the mortgage for which you're applying plus your monthly payments on credit card, car and student loan debts will comprise more than 45 percent of your total income, you could have problems qualifying for a home loan. You might also run into problems if you rely too heavily on bonuses, overtime, cash wages or rental income -- all of these can be difficult or impossible to get a mortgage bank to consider, and if they do, they might not take all of it into account. 3. Credit issues. Today, the mortgage-qualifying FICO score cutoff falls somewhere between 620 and 660, depending on which lender and which loan type you seek. More than one-third of Americans, by some numbers, have credit scores too low to qualify for a home loan. Even if your credit score is high enough to qualify, if you have any late mortgage payments, a short sale, a foreclosure or a bankruptcy in the last two years, loan qualifying could be difficult to impossible. 4. Property didn't appraise. Since the whole industry had its hand (among other things) smacked for allowing home values to skyrocket in a very short time, appraisal guidelines have tightened up -- some would say, even more than overall mortgage guidelines. So, it is increasingly common to have the property appraise for a price lower than the sale price negotiated between the buyer and seller. This is especially common in the refinance realm, as well over a quarter of U.S. homes are now upside-down, meaning the mortgage balance owed is greater than the value of the home. (If you're trying to refinance an upside-down mortgage, consider the FHA Short Refi program -- contact your lender or get referrals to any mortgage broker who makes FHA details to apply.) 5. Condition problems. With all the distressed properties on the market, and with most nondistressed sellers barely breaking even, more home-sale transactions than ever are falling apart due to condition problems with the property. Many lenders will not extend financing on homes where the appraiser points out problems like cracked or broken windows, missing kitchen appliances, electrical problems, or wood rot. And in the world of condos and other units that belong to a homeowners association, if more than 25 percent of units are rented (rather than owner-occupied) or more than 15 percent are delinquent on their HOA dues, new applications for refinance or purchase mortgages on units in the development are likely to be rejected. 6. Technical difficulties with application. The days when lenders just took your word for it are long, long gone. Applications with incomplete or unverifiable information are doomed. If any of these mortgage loan application glitches arise in your homebuying or refinancing process, it's critical that you connect with your mortgage professional, be it your banker or mortgage broker, to determine what course of action to take. In some cases, it might be as simple as buying a stove you find at Craigslist and installing it before escrow closes; but with income issues your mortgage pro will need to help you determine whether it makes sense to pay some bills down, get a co-signer, or even wait six months so your income documentation will qualify. By Tara-Nicholle Nelson, Inman News™

Bank of America continues to say that it's committed to retail mortgage lending, but the megabank suffered another blow recently with the departure of one of its top loan producers in the nation, Kevin Budde of Southern California. Budde confirmed to National Mortgage News that he has accepted a branch manager position in Orange County with PrimeLending, the mortgage division of Texas bank PlainsCapital. He took five B of A employees with him. In 2010 Budde was B of A's number one producer nationally among purchase money LOs working with Realtors. “I did about $140 million of loans in Southern California,” he said. Budde had no harsh words for Bank of America, but said he grew frustrated with the lender because of all the “credit overlays” and extra steps it added to the underwriting process. He added that at B of A LOs and their staffs are asked to check over borrower information “two- three- and sometimes four-times.” Such scrutiny is forcing customers to look elsewhere for mortgages, he said, noting that little effort is being made at B of A to retain staff. “The people here are good,” he said. “It's the processes that are killing the business.” Source: National Mortgage News

It invariably happens, a property has been on the market for a short time and you receive an offer, but the Seller is reluctant to take it because they think that if there is one Buyer out there, that means that there may be more. In any given market, in any given point in time, there is a pool of Buyers ready, willing, and able to purchase. The particular Buyer that writes an offer has more than likely seen everything out there in the marketplace and is up on all the comparable sales and what is under contract. When that Buyer makes an offer, they have taken into consideration the present market conditions. If that pool of Buyers doesn’t purchase the property, then there is usually one course of action for the Seller; lower the price. Properties priced too high attract fewer Buyers, showings, and offers. Properties priced at market value, generate more Buyer interest. If properties are priced too high, then both Buyers and agents lose interest. In fact, what they do is say to themselves that they will wait out the Seller. Once the Seller gets more realistic, then the Buyers might come back. If the original pool of Buyers has “rejected” the property, then it is more than likely the price has to change significantly to get them back. Well-priced properties on the other hand generate immediate interest among Buyers and agents. If the price is too high, that excitement never happens. Dropping the price later will not generate the same enthusiasm. Unfortunately for the Seller, to pass up on the first offer is a hard lesson to learn. As you have heard, it isn’t possible to make a second good first impression. Source: The Briscoe Group