Mortgage News

Thursday, January 31, 2008

Real Estate Lenders Declining Market Value Guidelines Affecting Thousands

Back on December 5, 2007 Fannie Mae quietly released mortgage-underwriting guidelines that would affect thousands of homebuyers and owners and further test the current real estate market. Now the full impact of this change will be felt almost immediately.

The guidelines updates the maximum loan to values (LTV - here is a LTV calculator) that Fannie Mae will purchase from mortgage lenders whom are selling loans to the GSE (which is just about everyone currently since the Wall Street MBS fiasco)

In summary, all maximum loan amounts are cut by 5% across the board if your property is in a “Declining Property Value Area” as deemed by the following:

A) Automated underwriting systems from Fannie Mae and Freddie Mace return a declining property value notice

B) Property falls into MSA, CBSA or Zip code considered a declining according to the written guidelines from PMI companies.

C) Real estate appraiser notes property as located in a declining market.

Some individuals where already affected via the Fannie Mae automated underwriting system which had its own set of areas built in but now, many more will be since the major PMI companies are enforcing their own guidelines.

Following are some of the notices and start dates from the major PMI companies:

AIG United Guarantee – 5% per automated underwriting system – Jan. 5

MGIC – all properties in California & Florida – Jan. 14

Radian – Download the attached 200 page PDF for areas – Feb. 1

RMIC – as per Automated Underwriting - Jan. 28

So a buyer who saved up his $15,000 to equal the 5% down payment requirement of $300,000 will now need $30,000 to purchase if he wants the same mortgage financing to purchase the home.

Additionally the cost of PMI coverage itself is going up in most of the areas further pushing up the total monthly payments for buyers.

Since the business has been slow and many real estate agents and mortgage lenders have not had any transactions they are going to be caught off guard by this update, leading to many recent pending transactions being cancelled.

So what is a homebuyer supposed to do?

The current options for home buyers is to now use government loan programs such the FHA home loans which requires down payments as little as 3% or for veterans the VA home loan program which allows for 100% financing.

There are other available options but all are more expensive. For example buyers may qualify for the conforming 100% financing options which carry a significantly higher interest rate and PMI rate and be required to put down only 5%.

As a result of these changes, I believe that property value declines maybe further accelerated in these areas and you will see the NAR’s Pending Home Sales Index drop dramatically over the next few months directly due to these changes.

Those homeowners who have been thinking about refinancing should seriously consider doing so now as not only will are they affected by actual property value dropping but now also the decrease in maximum loan to value amounts.

Have any of you reading this had this experience yet? What do you think the impact will be in these areas?

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Thursday, March 01, 2007

Freddie Mac - Dropping the Bomb on Sub-Prime Loans and Possibly Real Estate Prices

Couple days ago, Freddie Mac announced changes to it guidelines which will take effect on Sept. 1, 2007. This is due to the demands of OFHEO the Interagency Guidance on NonTraditional Mortgage Products release from October last year. Freddie reponded, Fannie as yet to do so?

So regrading the Freddie Mac response, which may be a very good indicator of things to come from all other lenders and it's impact will be felt everywhere. Here is one of the two main highlights:

Freddie Mac’s new requirements cover what are commonly referred to as 2/28 and 3/27 hybrid ARMs, which currently comprise roughly three-quarters of the subprime market. Specifically, the company is requiring that borrowers applying for these products be underwritten at the fully- indexed and amortizing rate, as opposed to the initial "teaser" rate.

What's important.

A) Borrowers must qualify for loans that are underwritten at the fully-indexed and fully amortized rate... not the "Teaser" rate.

How big is this. Here is where I commented on this in the past but we will review it again because the new guideline is saying "fully amortized" AND "fully indexed" on 2/28 & 3/27 which previously qualified at the "start rate", within the last month at the fully amortized rate but now at the fully indexed.

So, using a scenario: 2/28 Interest Only, 600 FICO score can go 50% income to debt ratio, 80% LTV.

Current start rate would be: 7.750% interest only. The LIBOR index as of today is 5.032 and a margin of 5.5%.

So let's see the impact of this for borrowers who have $500 in revolving debt and makes $60,000 a year. Note that I'm not including property taxes and insurance as this varies around the country and this example is to simply show the impact.

Qualifying at start rate as done for the last three years:

50% income to debt means they qualify for payments of $2,500. From this we deduct the $500 in revolving.

$2000 is the interest only P.I. payment the borrower qualifies for a maximum loan of: $309,000 at 7.75% interest-only.

Now, under new Freddie Mac Guidelines at the fully-amortized and fully indexed rate.
First let's calculate the fully indexed rate. We must perform this calculation:

Index + Margin = fully indexed rate.

6 month LIBOR - 5.032% + Margin - 5.50% = 10.32% fully amortized and fully indexed rate vs. 7.75% interest only.

So assuming the same $2,000 monthly payment the borrower now qualifies for a maximum loan of: $221,980

A max of $221,980 vs. $309,000... ouch.

As you can see from this, it drops the borrowers qualifying by 28%, less loan... less house.

So again, buyers will qualify for loans that are 28% less... that's a huge number.

So now onto the second main point from the release:

The company also will limit the use of low-documentation products in combination with these loans. For example, the company will no longer purchase "No Income, No Asset" documentation loans and will limit "Stated Income, Stated Assets" products to borrowers whose incomes derive from hard-to-verify sources, such as the self-employed and those in the "cash economy." There will be a reasonableness standard for stated incomes.

Many buyers over the last three years of used the "stated income" loans, especially borrowers whom are actually employed with a company and receive w-2's. Many of this borrowers who technically have verifiable income used these "stated income" loans in order to be able to qualify for a large loan amount by falsely stating an inflated income.

Hence the reason why these types of mortgages are often called "liar loans".

My personal feeling is that this was the fuel to the dramatic increase in real estate prices over the last three - four years.

So recent homes buyers who really made $45,000 a year used a "stated income loan" and stated that they made $60,000 in order to be able to qualify for the required larger loan amount.

If we apply this to the above scenario that same borrower would now have to state an income of over $78,000 to qualify within the 50% income to debt ratios.

That is an increase of over $18,000 or a 30% increase in the income actually necessary to qualify... not going to be very believable or smart.

This causes another problem, where all the salaried people that have used this type of loan to purchase a property above their means, may no longer qualify for any type of refinancing, as they technically no longer qualify for a mortgage if they must go full doc. and verify their income. This makes them stuck with fully-indexed at 10% or higher.

From the sub-prime wholesale loan representatives in California and data I've seen, the stated income 2/28 loan made up as much as 60% of all subprimes loans funded in California.

This is especially true in high-cost areas where home prices are so high, these programs where the only way for people to buy a home... unforetunately a home they cannot afford.

So what is the impact?

Real estate prices are driven by basic supply and demand principals.

From 2001-2004 there was low inventory (supply) of homes for sale and high demand (due to low mortgage rates and relaxed guidelines) - prices go up.

Today, supply is high and demand is low - prices should go down.

Supply of homes for sale is skyrocketing across the nation. You still have the builder supply of approximately 1 million "must sell" homes and the massive inventory of existing homes for sale.

Soon you will have additional "must sell" inventory of bank REO properties to add to the equation.

With the tightening of mortgage credit such as the Freddie Mac guidelines you will also see the drop in demand from borrowers because they can no longer qualify for homes at the current prices based on the new mortgage financing guidelines.

This means that home prices will drop.

How far? Who really knows but in order for home sellers to reach the 20-30% of the buyers market represented by the sub-prime loans, they will need to drop 25% or more.

This is not out of the question considering Sarasota-Bradenton Florida has already dropped 18.2% in one year.

Additionally, keep in mind that in the last three years millions of borrowers have purchased homes using these "stated income" loans... take away the stated-income loan and how are these people going to refinance to avoid the increase payments of the adjusting 2/28 mortgages?

How are home buyers going to react when they have to use traditional mortgage qualifying guidelines and they realize they cannot afford a home?

Share your thoughts on this situation.

View the entire Freddie Mac Response

Here is a video from PBS commenting on the issue.

Use these mortgage calculators to help you calculate your payments.

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