Lancaster County PA Realty Check: January 2010

FHA Announces Policy Changes to Address Risk and Strengthen Finances

New Measures Will Help FHA Better Manage Risk, While Maintaining Support for the Housing Market and Access for Underserved Communities

WASHINGTON – Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. The changes announced today are the latest in a series of changes Stevens has enacted in order to better position the FHA to manage its risk while continuing to support the nation’s housing market recovery.

The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement. U.S. Housing and Urban Development Secretary Shaun Donovan previewed the changes in December of last year, noting that the FHA would announce additional details before the end of January.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens. “When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.”

Announced FHA Policy Changes:

1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
   • The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
   • If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
   • This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
   • The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
     
     
2. Update the combination of FICO scores and down payments for new borrowers.
   • New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
   • This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
   • This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
     
     
3. Reduce allowable seller concessions from 6% to 3%
   • The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
   • This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
     
     
4. Increase enforcement on FHA lenders
   • Publicly report lender performance rankings to complement currently available Neighborhood Watch data - Will be available on the HUD website on February 1.
     • This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
   • Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
     • Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
     • This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
   • Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
     • Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
   • HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
     • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
     • Legislative authority permitting HUD maximum flexibility to establish separate "areas" for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

In addition to the changes proposed today, the FHA is continuing to review its overall response to housing market conditions, and continuing to evaluate its mortgage insurance underwriting standards and its measures to help distressed and underwater borrowers through FHA/HAMP and other FHA initiatives going forward.

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HUD is the nation's housing agency committed to sustaining homeownership; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development ad enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov.

Every year I order the results of the National Association of Realtors (NAR) Survey of Home Buyers and Sellers. I am particularly interested in How the Buyer Found His or Her Home in the last year because that determines where my marketing efforts will go to sell the homes that I list. Because the numbers pertaining to open houses are so dismal, it is no longer a category in the survey results. I do understand that open houses were more successful before personal computers and the internet but now, approximately 90 percent of buyers begin their home search on the internet. Thirty six percent will find their home on the internet, another thirty six percent will find their home through the help of a realtor, twelve percent from a yard sign and six percent from a friend, neighbor or a relative. That covers ninety percent. Another five percent, will purchase new construction from a home builder or the builder's agent.

So why do some realtors continue to do open houses? I find that generally two types of realtors continue to do open houses despite the numbers. The first category is the realtor who has not adapted to the internet. He or she refuses to accept that it is here to stay and plans to retire in the next few years, so why bother? The other category is the new and inexperienced realtor. Both categories of  realtors have just a few listings and hope to acquire some buyers from the open houses. The reality is that qualified buyers who are looking for a home such as the one listed by the realtor will find it from the top sources listed above and either call the listing agent or have his or her own realtor schedule a showing.

Open houses are also a HUGE security risk for the sellers and the realtor. We all have been notified by our Boards of murders, robberies, rapes, etc. that have occurred at open houses. Let's face it. A realtor has no control over who is coming through the door at an open house. By doing so, you are leaving the door wide open to those who have motives other than buying a house. Besides those who intend to do harm to a realtor, you invite nosy neighbors, people looking for free food or a bathroom, and burglars to see what the seller has inside the home for him to take when no one is home.

At every list appointment that I have, I advise the seller prospects about the facts of open houses. Almost all of them, after being given the facts,, respond with "That's great. We were worried that you would want to do open houses and we are not comfortable with idea." Since I have been doing this in listing appointments, I have never had a seller insist that I do open houses. If I do, I will pass on the listing. A seller who refuses to accept the facts, will probably be difficult when it comes to the many other things that come with selling a home such as pricing, taking care of the home, etc.

I sell approximately 85% of the homes that I list. I am not a "mega" lister. I am interested in the quality of the seller and his or her home they want to sell and its price. When other realtors are doing open houses, I am doing things that are much safer and productive like showing homes to buyers who contact me through the internet or yard signs or just having some me time.

Lee Morof
RE/MAX Showcase Homes
Birmingham, Michigan
www.NorthWoodwardHomes.com
info@NorthWoodwardHomes.com
Call:  248-514-2640

Ever since the first version of the first time home buyer tax credit, home buyers have been eager to engage but uncertain about home values and for some, this has caused them to sit on the sidelines.  I am not writing to suggest that this consideration is good or bad cause for not taking advantage of the first time home buyer tax credit.  I’m strictly writing from the perspective of a financing nerd.  Two influences will converge in April of next year that should serve as the decisive factors for causing first time home buyers to understand that this time, waiting will have a cost.  What’s more, that cost can be quantified.

 

The first factor concerns the expiration of the first time home buyer tax credit.  Sen. Benjamin Cardin introduced S.B. 1678 with bi-partisan co-sponsors (including Harry Reid) and it will only extend the credit for 6 months from its expiration date.  The 6 month extension was a disappointment for those who were hoping for a 12 month extension but Zillow estimated that a 12 month extension would cost approximately 14.86 billion based on current trends if that were to happen and 6 months seemed to be the fiscally responsible compromise.  This bill would set the tax credit to expire at the end of May and it doesn’t look likely that it would be extended barring a double dip recession.  It did not pass overwhelmingly and there was a of of opposition to the cost.

 

The second factor has to do with Ben Bernanke and the Fed.  In an effort to keep mortgage rates low and the secondary market machinery of the mortgage industry working, the Fed agreed to purchase 1.25-1.45 trillion dollars of mortgage backed securities.  Estimates of the impact of this effort on interest rates ranges from lowering them by 0.375% to 1 % but I find 0.5% to be credible.  The MBA rate forecast also lends credence to this assumption (shows rates going to 5.7 by year's end).  The Fed has announced that they will bring an end to this effort by March of 2010.  Consequently, we can expect a bump in rates in April of 2010 barring a double dip recession.  What’s worse is that there have been rumors that the Fed is doing to start selling some of what they bought and this could have the effect of driving rates up faster.

 

These two changes could cost first time home buyers tens of thousands of dollars if they don’t act in time.  Not only does an interest rate that’s ½ of one percent lower create a lower monthly payment but it pays down the principal balance faster on the front end of the amortization cycle.  If these two factors are added to the value of the tax credit the exact loss (financially speaking) to first time home buyers can be calculated if the assumptions are to be trusted.  Here are some examples:

Purchase Price	$125,000.00	$150,000.00	$200,000.00	$225,000.00	$250,000.00	$275,000.00	$300,000.00	$325,000.00
Loan Amount	$120,625.00	$144,750.00	$193,000.00	$217,125.00	$241,250.00	$265,375.00	$289,500.00	$313,625.00
10 year monthly payment differential assuming ½ point change to rate	$4,482.53	$5,379.03	$7,172.04	$8,068.55	$8,965.06	$9,861.56	$10,758.07	$11,654.57
10 year amortization differential assuming ½ point change to rate	$1,446.21	$1,735.45	$2,313.93	$2,603.17	$2,892.41	$3,181.65	$3,470.89	$3,760.13
tax credit	$8,000.00	$8,000.00	$8,000.00	$8,000.00	$8,000.00	$8,000.00	$8,000.00	$8,000.00
Potential Loss of Waiting	$13,928.74	$15,114.48	$17,485.97	$18,671.72	$19,857.47	$21,043.21	$22,228.96	$23,414.70

While it may have been unclear before as to when the right time to jump into the market might be, these factors combine to calm some nerves because even if home values do dip again at the end of the year, the savings from the combination of capitalizing on lower rates combined with the tax credit should offset value drops, should they occur. 

Zillow’s analysis of current market trends shows that, if the credit had been extended for 12 months, a total 1.86 million first-time home buyers would purchase homes between Dec. 1, 2009 and Nov. 30, 2010.  We didn’t get the credit extended that far.  I wonder how many are going to pack those plans into the first part of the year. 

Well we've got less than six months now so let’s saddle up!