FHA Announces Major Changes

February 5, 2013

From the Mortgage Bankers Association of America

HUD announced a new series of changes aimed at strengthening the troubled FHA Mutual Mortgage Insurance Fund.

The steps include:

• Consolidation of FHA’s Home Equity Conversion Mortgage options;

• An additional 10 basis-point increase in FHA mortgage insurance premiums;

• Requiring borrowers to pay annual mortgage insurance premiums for the life of the loan;

• Requiring lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income ratio greater than 43 percent;

• A proposed increased down payment requirement for mortgages with original principal balances above $625,500;

• Increased enforcement efforts for FHA-approved lenders regarding “aggressive” marketing to borrowers with previous foreclosures

“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs,” said FHA Commissioner Carol Galante. “In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American home buyers.”

The changes come in the wake of FHA’s most recent actuarial report on the MMIF. The December report said in fiscal 2012, the Fund’s capital reserve ratio fell below zero to negative 1.44 percent, well below its congressionally mandated 2 percent capital reserve ratio, while the Fund’s economic value fell to negative $16.3 billion.

The report cited continued losses stemming from FHA’s former practice of allowing down payment assistance programs, as well as losses from FHA’s Home Equity Mortgage Conversion program, also known as reverse mortgages and spurred concerns on Capitol Hill that FHA might have to ask the federal government for additional financial support. HUD Secretary Shaun Donovan in December said no such decision would take place until the Obama Administration submits its proposed fiscal 2014 budget in February.

A summary of FHA actions announced yesterday:

Home Equity Conversion Mortgage Consolidation. FHA said it will consolidate its Standard Fixed-Rate Home Equity Conversion Mortgage and Saver Fixed-Rate HECM pricing options, effective for FHA case numbers assigned on or after April 1. Galante noted the Fixed-Rate Standard HECM pricing option currently represents a “large majority” of the loans insured through FHA’s HECM program and is responsible for placing “significant stress” on the MMIF. 

“To help sustain the program as a viable financial resource for aging homeowners, the HECM Fixed-Rate Saver will be the only pricing option available to borrowers who seek a fixed interest rate mortgage,” FHA said. “Using the HECM Fixed-Rate Saver for fixed-rate mortgages will significantly lower the borrower’s upfront closing costs while permitting a smaller pay out than the HECM Fixed Rate Standard product, thereby reducing risks to the Mutual Mortgage Insurance Fund.” 

Additional details can be found in a new HECM Mortgagee Letter: http://portal.hud.gov/hudportal/documents/huddoc?id=13-01ml.pdf.

Changes to Mortgage Insurance Premiums. FHA said it will increase its annual mortgage insurance premium for most new mortgages by 10 basis points (0.10 percent) and will increase premiums on jumbo mortgages ($625,500 or larger) by 5 basis points or 0.05 percent. These premium increases exclude certain streamline refinance transactions. 

FHA will also require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan, reversing a 2001 change in which FHA cancelled required MIP on loans when the outstanding principal balance reached 78 percent of the original principal balance. FHA acknowledged that it remained responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan, a term which often extends far beyond the cessation of these MIP payments. 

Galante said FHA’s Office of Risk Management and Regulatory Affairs estimated that the MMIF has foregone “billions of dollars” in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy.

“Therefore, FHA will once again collect premiums based upon the unpaid principal balance for the entire period for which FHA is entitled,” Galante said. “This will permit FHA to retain significant revenue that is currently being forfeited prematurely.”

Manual Underwriting Requirement on Loans with Decision Credit Scores below 620 & DTI Ratios Above 43 Percent. FHA will require lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income ratio greater than 43 percent. Lenders will be required to document compensating factors that support the underwriting decision to approve loans where these parameters are exceeded, using FHA manual underwriting and compensating factor guidelines.

Raising Down Payment on Loans above $625,500. Through a Federal Register notice to be published in the next several days, FHA will announce a proposed increased down payment requirement for mortgages with original principal balances above $625,500. The minimum down payment for these mortgages will increase from 3.5 to 5 percent. 

“This change, coupled with the statutory maximum premiums charged for these loans, will help protect FHA and further facilitate its efforts to encourage higher levels of private market participation in the housing finance market,” FHA said.

Access to FHA after Foreclosure. FHA also announced it will step up its enforcement efforts for FHA-approved lenders regarding aggressive marketing to borrowers with previous foreclosures and remind lenders of their duty to fully underwrite loan applications. FHA also said it will work with other federal agencies to address such false advertising by non-FHA-approved entities. 

“It has come to FHA’s attention that a few lenders are inappropriately advertising and soliciting borrowers with the false pretense that they can somehow ‘automatically’ qualify for an FHA-insured mortgage three years after their foreclosure,” FHA said. “This is simply not true and such misleading advertising will not be tolerated.”

 


October 16, 2012
Closer Look at Proposed LO Compensation RuleWebinar discusses CFPB proposal

Oct. 15, 2012

By JERRY DeMUTH MortgageDaily.com

The Consumer Finance Protection Bureau’s current proposal for loan originator compensation, while clarifying many aspects of the current rule, also could lead to violations of some state laws, or even Internal Revenue Service codes, according to a recent online event on the subject. The deadline for public comments on the proposal is Tuesday.

The presentation was made by three attorneys with the mortgage banking and the consumer financial services groups at the national law firm, Ballard Spahr LLP. They spoke during a webinar on the proposed new rule sponsored by the Washington, D.C.-based firm.

First, the definition of loan originator is “very broad” under the proposed rule, said John D. Socknat, and even includes persons who assist consumers by advising them on credit terms, preparing application packages, collecting application and supporting information, or even advertises or otherwise communicates to the public that they provide such services. The latter, he said, would include business cards, rate sheets and promotional items.

But managers and administrative and clerical staff are excluded if they do not arrange, negotiate or otherwise obtain an extension of credit for a consumer or if their compensation is not based actual loan originations.

The proposal also “finally addresses” the anti-steering safe harbor issue, said Richard J. Andreano. The key to complying, he said, is that loan originators have to present the loan with the lowest rate to consumers, even if it includes more points than they said they are willing to pay and if they qualify for that loan. The current rule does not specifically require originators to present to borrowers the loan with the lowest rate, only the one with the lowest rates and fees.

But the originator can’t impose points and fees on a loan unless it results in a lower rate. But this only applies before the consumer has received the good-faith estimate and since this is occurring before the good-faith estimate,” Andreano pondered, “how do you determine if they may not qualify for a loan?”

He also noted all of this is in the preamble to the proposed new rule, not in the section on pricing policies. That section sets forth ties between specific increases and decreases in rates and the size of points and fees, with a specific rate reduction for each additional point.

These are very complex proposals,” he commented.

Andreano also pointed out that the CFPB, which originally had considered a flat-fee approach to originations, with the same fee applying to all loans, now proposes a “zero-zero alternative.” Under this proposal, any originator who receives compensation from any person other than the consumer may not impose on the consumer any points or fees unless a comparable, alternative loan without points and fees is made available to the consumer.

“That’s an interesting concept,” he said.

To prevent manipulation of loan qualifications and loan availability, the CFPB, Andreano said, is considering two different alternatives that would either prevent originators from changing their underwriting standards for the purpose of disqualifying consumers from a “zero-zero alternative” or prevent originators from offering loans with points and fees unless the consumer would qualify for a comparable loan without points and fees.

The proposed rules, said Michael S. Waldron, also now address the matter of compensation paid on a borrower’s behalf by parties other than the borrower. “This was not addressed previously,” he said, but warned that such an arrangement can be impacted by state laws.

“You have to make sure you follow state law,” Waldron emphasized.

Waldron also noted that while the current rule does not expressly address the sharing of pooled compensation, the proposed rule “outright bans” pooled compensation among loan originators who are compensated differently for loans with different terms.

Point blanks,” Waldron noted, are not expressly addressed by the current rule and may not be allowed under the proposed rule. Citing a CFPB advisory comment on the proposed rule that “there are no circumstances under which point blanks are permissible, and they there continue to be prohibited,” Waldron said, “‘Continue’ is a critical word. It truly shuts the door on point blanks.”

New conditions also are placed on contributions to both qualified and non-qualified profit-sharing plans, Waldron pointed out. When applying these, he said, loan originator participants have to make sure they do not violate Internal Revenue Codes or become non-compliant with other rules.

“There’s a lot of pitfalls when amending qualified and non-qualified plans,” he cautioned.

Finally, while under the current rule a loan originator’s compensation may not be changed based on changes to a specific loan’s terms or conditions, Socknat pointed out that the proposed rule would permit a reduction in an originator’s compensation to cover unanticipated increased non-affiliated, third-party closing costs that cause the actual amount of costs to exceed limits imposed by applicable law.

However, Socknat said, the proposed rule forbids an originator from agreeing to pay part of a borrower’s closing costs to avoid high-cost loan provisions.

The comment deadline on the proposed rule is Oct. 16.

Comments can be submitted to www.regulations.gov.


The Most Optimistic Housing Forecast Yet

October 13, 2012

From CNN/Money…

The long-battered housing market is finally starting to get back on its feet. But some experts believe it could soon become another housing boom. Signs of recovery have been evident in the recent pick ups in home prices, home sales and construction. Foreclosures are also down and the Federal Reserve has acted to push rates on home loans near record lows. But while many economists believe this emerging housing recovery will produce only slow and modest improvement in home prices, construction and jobs, others believe the rebound will be much stronger.

Barclays Capital put out a report recently forecasting that home prices, which fell by more than a third after the housing bubble burst in 2007, could be back to peak levels as soon as 2015. “In our view, the housing market had undergone a dramatic over-correction during the prior five years, resulting in pent-up demand for housing purchases that would spark a rapid rise in housing starts,” said Stephen Kim, an analyst with Barclays, in a note to clients. In addition to what Kim sees as a big rebound in building, he’s bullish on home prices, expecting rises of 5% to 7.5% a year. Construction is expected to be even stronger, with numerous experts forecasting home construction to grow by at least 20% a year for each of the next two years. Some believe building could be back near the pre-bubble average of about 1.5 million new homes a year by 2016, about double the 750,000 homes expected this year.

“We think the recovery is for real this time around,” said Rick Palacios, senior analyst with John Burns Real Estate Consulting. “If you look across the U.S. economy right now, there are only a handful of industries looking at 20-30% growth over the next 4-5 years, and housing is one of those.” The housing rebound can have a ripple effect that could help get the entire economy growing at a much stronger pace, which will add to more demand for housing. “That turn in the [housing] market is occurring now and it should become a boom by 2015. It will be powerful enough … to lift the entire U.S. economy,” said Roger Altman, chairman of Evercore Partners and former deputy Treasury secretary, in a column for the Financial Times. Altman said he expects housing will add 4 million jobs to the economy over the next five years, as pent-up demand for home purchases drives building and and home prices higher. Source: CNN/Money


Why Are Mortgage Rates Not At 2.8%?

September 22, 2012

Imagine a 30-year mortgage on which you only pay 2.8 percent in interest a year.

Such a mortgage could already exist, but something in the banking system is holding it back. And right now, few agree on what that “something” is.

Getting to the bottom of this enigma could help determine whether mortgage lenders are dysfunctional, greedy or simply trying to do their job in a sensible way.

Right now, borrowers are paying around 3.55 percent for a 30-year fixed rate mortgage that qualifies for a government guarantee of repayment. That’s down from 4.1 percent a year ago, and 5.06 percent three years ago.

Mortgage rates have declined as the Federal Reserve has bought trillions of dollars of bonds, a policy that aims to stimulate the economy. Last week, the Fed said it would make new purchases, focusing on bonds backed by mortgages.

The big question is whether those purchases lead to even lower mortgage rates, as the Fed chairman, Ben S. Bernanke, hopes.

But mortgage rates may not decline substantially from here. Something weird has happened. Pricing in the mortgage market appears to have gotten stuck. This can be seen in a crucial mortgage metric.

Banks make mortgages, but since the 2008 crisis, they have sold most of them into the bond market, attaching a government guarantee of repayment in the process.

The metric effectively encapsulates the size of the gain that banks make on those sales. In September 2011, banks were making mortgages with an interest rate of 4.1 percent. They were then selling those mortgages into the market in bonds that were trading with an interest rate, or yield, of 3.36 percent, according to a Bloomberg index.

The metric captures the difference between the bond and mortgage rates; in this case it was 0.74 percentage points. The bigger the “spread,” the bigger the financial gain for the banks selling the mortgages. That 0.74 percentage point “spread” was close to the 0.77 percentage point average since the end of 2007. Banks were taking roughly the same cut on the sales as they were in previous years.

But something strange has happened over the last 12 months. That spread has widened significantly, and is now more than 1.4 percentage points. The cause: bond yields have fallen a lot more than the mortgage rates banks are charging borrowers.

Put another way, the banks aren’t fully passing on the low rates in the bond market to borrowers. Instead, they are taking bigger gains, and increasing the size of their cut.

So where might mortgage rates be if the old spread were maintained? At 2.83 percent – that’s the current bond yield plus the 0.75 percentage point spread that existed a year ago.

It’s important to examine why the tight relationship between bond yields and mortgage rates becomes unglued.

One explanation, mentioned in a Financial Times story on Sunday, is that the banks are overwhelmed by the demand for new mortgages and their pipeline has become backlogged. When demand outstrips supply for a product, it’s less likely that its price — in this case, the mortgage’s interest rate — will fall. There are in fact different versions of this theory.

One holds that bank mortgage operations are still poorly run, and therefore it’s no surprise they can’t handle an inundation of new applications. Another says banks deliberately keep rates from falling further as a way of controlling the flow of mortgage applications into their pipeline. If mortgages were offered at 2.8 percent, they wouldn’t be able to handle the business, so they ration through price, according to this theory.

Another backlog camp likes to point the finger at Fannie Mae and Freddie Mac, the government-controlled entities that actually guarantee the mortgages. The theory is that these two are demanding that borrowers fulfill overly strict conditions to get mortgages. Banks fear that if they don’t ensure compliance with these requirements, they’ll have to take mortgages back once they’ve sold them, a move that can saddle them with losses.

As a result, the banks have every incentive to slow things down to make sure mortgages are in full compliance, which can add to the backlog. Once this so-called put-back threat is decreased, or the banks get better at meeting requirements, supply should ease.

But there is a weakness to the backlog theories.

The banks have handled two huge waves of mortgage refinancing since the 2008 financial crisis. During those, the spread between mortgage and bond rates did increase. But not anywhere near as much as it has recently. And the spread has stayed wide for much longer this time around.

For instance, $1.84 trillion of mortgages were originated in 2009, a big year for refinancing, according to data from Inside Mortgage Finance, a trade publication. In that year, the average spread between bonds and loans was 0.89 percentage points. And the banking sector was in a far worse state, which would in theory make the backlog problem worse.

Today, the sector is in better shape, with more mortgage lenders back on their feet. But the spread between loans and bonds is considerably wider. In the last 12 months, when mortgage origination has been close to 2009 levels, it has averaged 1.1 percentage points. This suggests that it’s more than just a backlog problem

Some mortgage banks seem to be having little trouble adapting to the higher demand. U.S. Bancorp originated $21.7 billion of mortgages in the second quarter of this year, 168 percent more than in the second quarter of last year.

Wells Fargo is currently the nation’s biggest mortgage lender, originating 31 percent of all mortgages in the 12 months through the end of June. In a conference call with analysts in July, the bank’s executives seemed unfazed about the challenge of meeting mounting customer demand.

“We’ve ramped up our team members in mortgage to be able to move the pipeline through as quickly as possible,” said Timothy J. Sloan, Wells Fargo’s chief financial officer. He also said that the bank had increased its full time employees in consumer real estate by 19 percent in the prior 12 months. Not exactly the picture of a bank struggling to expand capacity.

But if banks are readily adding capacity, why aren’t mortgage rates falling further, closing the spread between bond yields? Perhaps a new equilibrium has descended on the market that favors the banks’ bottom lines.

The drop in rates draws in many more borrowers. The banks add more origination capacity, but not quite enough to bring the spread between bonds and loans back to its recent average.

The banks don’t care because mortgage revenue is ballooning. But it all means that the 2.8 percent mortgage may never materialize. Source: New York Times


House Passes FHA Bill To Shore Up Finances

September 12, 2012
From Mortgage Daily–This may portend further FHA mortgage insurance increases….

A near-unanimous vote was reached in favor of a bill that would increase liability for mortgagees that commit fraud or knowingly violated policies on government-insured mortgages. The legislation also addresses the solvency of the government’s home loan insurance fund.

H.R. 4264, the FHA Emergency Fiscal Solvency Act of 2012, was passed Tuesday by the House of Representatives by a vote of 402 to seven.

The bill would establish minimum annual mortgage insurance premiums of at least 0.55 percent of the remaining insured principal balance. In addition, it would give the Department of Housing and Urban Development the discretion to charge premiums up of up to 2.0/2.5 percent. The higher premiums would take effect six months after the bill is enacted.

The legislation also requires lenders that commit fraud to reimburse the Federal Housing Administration for related losses.

“If fraud or misrepresentation was involved in the origination or underwriting of the FHA mortgage, HUD could require the mortgagee to indemnify HUD regardless of when an insurance claim is paid,” an executive summary of the bill says.

Mortgagees would be required to indemnify FHA if HUD determines that lenders knew, or should have known, about a serious or material violation of FHA underwriting standards.

Government-insured mortgages that become 90 days delinquent during the first two years could trigger indemnification from lenders.

HUD will be required to set up an indemnification appeals process, issue regulations and report the number of fraudulent or improperly underwritten loans. The housing agency would also be required to report about how indemnification is impacting the FHA Mutual Mortgage Insurance Fund.

FHA lenders would have to report to HUD within 15 days of discovering that another lender is committing fraud or material misrepresentations.

The bill additionally expands HUD’s ability to terminate the authority of poorly performing mortgagees and requires performance tracking by servicer.

One section of the bill provides for the establishment of a chief risk officer for the Government National Mortgage Association, or Ginnie Mae.

Another section directs the HUD secretary to provide Congress an emergency capital plan for the restoration of the FHA’s fiscal solvency within 30 days of the bill’s enactment.

“The plan would provide a detailed explanation of how the FHA’s capital assets are monitored and tracked; how to ensure the FHA’s financial safety without borrowing funds from the U.S. Department of Treasury; and describe how, if necessary, the FHA would draw down funds from the Treasury,” the summary states.

Monthly reports to Congress are required as long as FHA’s capital reserve ratio is less than 2 percent.

Between 2013 and 2017, implementation of the bill is expected to cost $11 million.

“We are pleased that the bill passed by the House includes provisions that will allow FHA to continue its efforts to strengthen its enforcement capabilities in order to protect its insurance fund and American taxpayers,” Acting FHA Commissioner Carol Galante said in a statement. “We look forward to continuing to work with both chambers to enact final legislation to provide FHA with the tools it needs to build on the vital reforms implemented by this administration.”

 

Fannie Mae Lowers LTVs For ARMs and Raises Min Credit Scores

August 25, 2012

Loan-to-value ratios on loans with adjustable rates are being reduced by Fannie Mae, while the ratios are being increased on some fixed-rate transactions. Fannie is also making changes to some of its credit score requirements. The maximum LTVs on adjustable-rate mortgages used for purchase or limited cashout transactions on one-unit primary residences have been lowered to 90 percent for both manually underwritten and Desktop Underwriter loans. The current maximum LTV is 97 percent through DU and 95 percent with manual underwriting. On the majority of other ARM transactions, LTVs are being cut by 10 percent, though the lowest LTV will be 60 percent.

The updates were outlined in Selling Guide Announcement SEL-2012-07 and are part of Fannie’s process of reviewing eligibility policies to determine that they are appropriate based on new data and loan performance. ARMs originated in conjunction with community seconds are no longer eligible for a 105 percent combined LTV ratio. But on fixed-rate mortgages used for purchase or limited cashout on two-unit primary residences, the Washington, D.C.-based company is increasing the LTV ratio from 80 percent to 85 percent. Fannie is also eliminating the lower LTV requirements for certain co-op share loans. The same goes for HomeStyle Renovations loans, though they will be capped at 95 percent. Four counties in Hawaii will see LTV ratios rise from 80 percent to 90 percent on fixed-rate loans in excess of $625,500.

The minimum credit score for manually underwritten ARM borrowers is being raised to 640 from 620, though some transactions will require even higher scores. Specific credit score requirements on high-balance loans are being eliminated from DU, and the standard DU minimum credit score will now apply. If at least one borrower on a loan is qualified solely on the basis of nontraditional credit, then the property must be a one-unit primary residence. The loan purpose in such cases is restricted to limited cashout or home purchase. Loans underwritten through DU 9.0 on or after Oct. 20 are subject to the new requirements, while manually underwritten loans with applications dates on or after Oct. 20 will need to be underwritten based on the new requirements. Source: Mortgage Daily


FHA Addresses Using Social Security Income to Qualify For a Mortgage

August 23, 2012

Documentation requirements have been released for Social Security income used to qualify borrowers for loans insured by the Federal Housing Administration. In addition, the minimum term that the income must continue has been addressed.

Questions from lenders about using Social Security income to qualify borrowers for FHA mortgages prompted the Department of Housing and Urban Development to issue clarification about the requirements in such situations.

Lenders can consider all types of earnings from the Social Security Administration when qualifying a borrower for an FHA loan as long as the income has been verified and is likely to continue for at least three years from the date of the application. According to Mortgagee Letter 12-15, eligible Social Security earnings includes supplemental security income, Social Security disability insurance and Social Security income. Income must be verified from either a federal tax return, the most recent bank statement or a proof of income letter.  In addition, the applicant’s Social Security Benefit Statement SSA-1099/1042S is acceptable.

The term of the income needs to be documented through the last notice of award letter or an equivalent document that establishes award benefits to the borrower. If the start date is in the future, then the borrower needs to have other income until the start date such as worker’s compensation or private insurance to qualify for the loan. When no expiration date is indicated, then the lender can use the Social Security income in the loan qualification without limitation. Social Security income that won’t continue for three years can only be considered as s compensating factor. If re-evaluation is pending of medical eligibility, the lender should not take that as an indication that benefit payments will stop.

“The lender should not request additional documentation from the borrower to demonstrate continuance of Social Security Administration income,” HUD stated. “Under no circumstance may lenders inquire into or request documentation concerning the nature of the disability or the medical condition of the borrower.”

The requirements are immediately effective. Source: Mortgage Daily