Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – October 23, 2009

3rd Quarter Earnings Elude The Truth

The Psychological 10,000 Dow Mark

Generally, when Stocks move up, bonds move down.  When Bonds move down, their rates (or yields) move up.  So, stock market investors keep relying on the expectation that stocks will continue to “surprise” with corporations 3rd Quarter Earnings Reports.  79% of S&P 500 Companies (that have reported their earnings, so far) have reported better than Wall Street Expected, according to Thomson Reuters. So Mortgage-Backed Securities have been trading in a very narrow range supported by the 50-Day Moving Average, and being rejected by the 200-Day Moving Average.

Why The Surprise

It’s interesting to note that we still are reporting better than expected numbers by corporations, into the 3rd Quarter.  I’m still leery of these numbers, as I feel that corporate sales are still weak, and that corporations can only cut costs, lay off, close plants, and skimp for so long.  We expected to see this in the 3rd Quarter, but I’m not so sure we may, until  the 4th Quarter.  Scrimping and scraping by is not true economic growth, period!

Housing Starts & Building Permits

Housing Starts, which accounts for approximately 85% of the homebuilding industry, increased 3.9% last month.  Multi-family units, fell by about 15%.  Total permits, which obviously gives us insight into future housing starts, fell by 1.2%.  However, it’s getting better than what’s been reported in the past.  The big picture, here, is that homebuilding is slowly, but surely, healing itself.  On a side note, just be careful not to expect that this trend is certain.  Keep in mind that the $8,000 Tax Credit is ending in just five weeks.  If Congress doesn’t extend the program, how will that effect new building?

Producer Price Index

The PPI fell 0.6% in September, compared to August’s 1.7% increase.  This primarily fell due to lower energy prices, however, as you have felt at the pump, watch out for this figure in the future, as oil, natural gas, and therefore overall energy costs are expected to rise.  So, for now, it looks as though inflation is tame.  This generally helps interest rates, but I think the market’s knowledge that inflation is right around the corner, when the government stops borrowing money.  To state the facts:  Better than expected corporate earnings and the slowly scaled back plan of the Federal Reserve buying of Treasury debt, will lead to higher rates.

Applications for Loans Shrinking

Mortgage Bankers of America indicated that applications were down 13.7%, last week.  Applications to purchase homes dropped 7.6%.  This, also, is more than likely due to the $8,000 Tax Credit Ending in about five weeks.

China’s Own Problems

China has their own economic problems, however, they feel as though their $4 Trillion Yuan government stimulus program is helping them get out of their woes, as the United States feel similarly, that our government stimulus program is benefiting us.  So, similarly, they have warned their country’s leading banks to be ready for a money tightening policy that will influence lending standards, negatively.

Unemployment Benefits Ignored

The Labor Department reported that the number of people filing for unemployment benefits rose 11,000 last week.  The four-week moving average was down 750, so even though claims are back up, the average claims actually fell 750.  Again, somewhat misleading, as even though these numbers are coming in less than expected, the market is absorbing that as good news, while in reality, it’s still very ugly!  For example, the number of people collecting unemployment benefits dropped by 98,000.  Wall Street seems to be under the impression that things in the Labor Arena are looking brighter.  I don’t see it.  I think people are just running out of time, in their benefit period, and dropping off the charts.  This seems to be evidenced by the fact that the number of people collecting emergency benefits from states and federal programs rose 0.8%, just the week before.  Until we see a strong hiring position by empoyers, these numbers will continue to be misleading.

What’s Your Credit Rating?

OK, my rating has been about 720 for years.  I haven’t checked it in a while, however, I would hope it would be about the same, as that rating gets me better pricing on loans, gets me qualified for better rates on car loans, etc.  Steven Hess, lead analyst for ratings agency Moody’s, said that the United States needs to cut its deficit, or lose it’s “AAA” rating, that it’s had since 1917.  He stated that if the US doesn’t, “get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy.”  So, just like you and me, if the score is lower, so are the rates to borrower money for homes and cars.

$123 Billion Treasury Auction

That’s right.  A new record!  The Treasury will offer $7B in TIPS, on Monday, $44B in 2-year notes on Tuesday, $41B in 5-year notes on Wednesday, and $31B in 7-year notes on Thursday.  All of this $123 Billion Loan is for the country to carry on for just two weeks.  Unbelievable!  Coupled with the Treasury winding down its purchase program of Treasuries…I just cannot fathom the future of the country and the plan to pay this debt back.

HVCC Changes?

The National Association of Mortgage Brokers reported that an amendment was made, which would effectively kill HVCC, and it looks good that this will pass.  If passed, we’ll revert back to the ability to order our own appraisal through our own appraisers.  Keep watch of this on this blog!

Related Must Reads

HVCC-What’s It All About?
Hello, Is This Thing On?

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Time is Money…Now More Than Ever

HVCC-AMC's, TILA changes via MDIA, All Due To HERA!

Do NOT Read This If You Have Heart Complications

If you don’t understand the particulars of the HVCC laws and their use of AMC’s, MDIA changes to TILA, or how HERA effects when you get paid; you’re in trouble.

A Nightmare On Elm Street

Let’s say you have a client living on Elm Street and they just cannot afford to stay in their home.  You know buyers that are looking for just the right home, to retire in, and this meets their criteria.  Problem is, they’re retiring in about six months, so you have to use their income in San Francisco, to qualify.

The Perfect Set-Up

So, your expert loan officer structures a second home purchase with twenty percent down.  The purchase price is $450,000, so, cash to close, with closing costs and an impound account will be approximately $100,000.  Perfect!

First Sign Of Trouble

Remember; this is a short sale.  So, the bank is ready to foreclose in 45 days.  So, you must make certain that your escrow is ready to close prior to this sale date.  So, you disclose to the client all of their truth-in-lending forms and Good Faith Estimates via e-mail.  This will enable you to order the appraisal in 24 hours.  You get on-line with the Appraisal Management Company (AMC), and order the appraisal.  You specify that you truly desire a local appraiser that knows this community well.  It’s important because this is a unique property, due to its location and value.  The appraisal is ordered.

First Sign Of Bigger Troubles

The appraiser if from out of town.  But they have filed with the AMC that they appraise and know our town.  The appraisal comes in at $415,000!  Oh no!  You scramble and get information to the appraiser to support a higher value.  You even find out that just five months earlier, the same appraiser appraised the property for $525,000 for the selling bank!  That’s right…the same appraiser appraised the property for the bank, so that the bank knew what to accept for a short sale offer.  You don’t have to read this three times.  You read it correctly.  But the appraiser does not budge.

Options?

-  The buyer can come in with the shortage with cash, but they just don’t have the additional $35,000.

-  You can’t go FHA because this is a second home, not owner occupied…yet.

-  Your loan officer can move the file to another lender, AND re-order the appraisal to get higher value, but you’re running out of time.

-  You can change the file to a 10% down loan.  That way you’re financing 90% of $415,000, or only coming up with $41,500 down.  The payment’s higher, you’ll have mortgage insurance, and the buyer will have to come up with the $35,000 difference, however, you already know the borrower has $100,000.

Next Problem

There is only one Mortgage Insurance (M.I.) company left in the United States that will finance 90% financing on a second home.  And it’s NOT with the lender that you originally ordered the HVCC compliant AMC appraisal through.  So, here’s how you save the day.

How We Saved The Day

First, you must get a decline letter from the existing lender.  The only way that you can transfer an appraisal from one bank to another, is with a decline letter from the original lender.  The new lender MUST be approved with the same  AMC.  So, we had to find a lender that used the one M.I. company that allowed 90% financing on a second home, AND used the same AMC.  We found it!  You’ll need a letter from the original lender that the appraisal was orderred in an HVCC compliant manner.

Now, You MUST Re-Disclosue

Due to Home Economic Recovery Act changes, that went into effect on July 30, 2009, you must re-disclose any changes in Annual Percentage Rate, to the borrower, that effect the APR by .125%.  So, obviously, with 10% down, as opposed to 20% down, and now having M.I., your APR will change.  How you disclose is critical.  And, since we couldn’t fund the loan through Access’ Warehouse Line (my bank), I had to broker the loan.  So, we immediately had to upload the file to the new lender and have the lender e-mail disclosures to the buyer.  The buyer had to confirm that they received the e-mail’d disclosures, so that delivery was documented.

We met all deadlines and funded the loan prior to the short selling banks’ foreclosure date.   The buyer is preparing to retire, sell their $750,000 home in the Bay, Pay off the 90% loan with M.I. in about a year.  And everyone’s happy.

Why The Buyer Would Pay More Than Value

Everyone felt as though the value of the property was, in fact, $450,000.  The problem was the AMC’s appraiser not adjusting for views, location, and other desirable factors.  The buyer’s because aware that this particular appraiser appraised the property for $75,000 more, just six months prior to his second appraisal, and the buyer was planning on paying off the loan, within a year, anyway.  So, this totally made since to our buyer.

I tell this story becuase of the time-line in which we had to disclose, order appraisal, re-evaluate, decline at my bank, broker the loan to another bank, re-disclose, transfer AMC appraisal, re-underwrite the file with another bank, and close all in a specific time period.  It wasn’t easy, but we got it done.

Related Must Reads

HVCC Laws regarding AMC’s, MDIA Changes to TILA
Understanding FHA

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Fannie Mae and FHA Announce New Automated Underwriting Criteria

Hey Realtor…What This Means To You!

Any change in underwriting criteria is a change to where, when, and how your escrow will close.  Probably the biggest change…FHA is moving to a conventional-type style of appraisal ordering…HVCC type requirements. 

Also, when a property is located in a declining area, the appraisal report must be accompanied by a form addressing this concern.  This, from Fannie Mae’s website concerning FHA:

“The Uniform Residential Appraisal Report (URAR) and the form HUD-92800.5B, Conditional Commitment/DE Statement of Appraised Value are required. Also, a Market Conditions Addendum is required (Fannie Mae Form 1004MC/ Freddie Mac Form 71).”

DO/DU/TOTAL Mortgage Scorecard…Uh…What’s That?

You really want to know?  DO is an abbreviation for Desktop Originator.  DU is an abbreviation for Delegated Underwriting.  Both are internet-based automated underwriting engines for Fannie Mae.   FHA TOTAL Mortgage Scorecard is FHA’s Interent-Based Automated Underwriting Engine.  Here’s how it works:

First, an application is taken.  Second, a credit report is ordered.  A credit report is assigned a re-issue number.  Third, you combine the application and the credit report.  Fourth, you import your application into Fannie Mae’s Website, insert your re-issue number for your credit report (this enables you to use the same report, avoiding another inquiry on a client’s credit report), and submit to the website’s automated engine (DO or DU) to ask for an approval.  The website breaks down the information on the credit report and application and determines if the client is eligible for financing.  When running government loans like FHA or VA, an additional layer of underwriting criteria is applied (FHA TOTAL Mortgage Scorecard), to determine eligibility. 

Gift Funds

The source of the down payment will effect the type of approval that you receive from FHA TOTAL Mortgage Scorecard.  In the past, the website’s automated engine couldn’t determine the difference between a non-profit organiztion, a family member, an employer, or Government Assistance Program;  like a city’s Down Payment Assistance Program (DAP).  Now, FHA Total Mortgage Scorecard is able to determine these differences and apply them to the decision.

Less Than 10 Months On Installment Loans

In the past, whenever someone had less than ten payments left, on any installment debt, FHA would NOT calculate that payment against a borrower qualifying ratios (percentages of income going toward a borrower’s monthly obligations).  So, if someone owed $4,280 on a car loan, and their monthly payment was $430, the $430 would NOT hit their qualification requirements.  Now, since the payment is greater than $100 per month, the less than ten month rule would NOT apply.  This is a major change. 

Condo Conversions

FHA is removing the requirement that an apartment building, that has been converted to a condo project, be existing as a condo project for one year before an FHA application is taken to finance one of the condo units.  Nice…a good change!

Related Must Reads

FHA Update
Why You Can’t Close A Loan In Six Days Anymore

 

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FHA Update

FHA announces credit policy changes

Fri, 2009-09-18 09:10 —

HUD’s Logo

Federal Housing Administration (FHA) Commissioner David H. Stevens has announced plans to implement a set of credit policy changes that will enhance the agency’s risk management functions. Stevens also announced his intention to hire a chief risk officer for the first time in the FHA’s 75-year history. Both actions come as the agency’s annual independent actuarial study is being completed. The study will be sent to Congress in November and is expected to show the capital reserve ratio dropping below the congressionally-mandated threshold of two percent. The changes announced today will strengthen the FHA’s reserves and better manage risk.

No Taxpayer Assistance

“To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action,” said Commissioner Stevens. “That said, given the size and scope of the FHA and its importance to today’s market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections.”

“By keeping affordable loans flowing, particularly to the growing ranks of first-time homebuyers, the FHA has been critical to our nation’s economic and housing market recovery,” said U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan. “As we begin to move from recession to recovery, these changes will not only ensure FHA’s financial strength but they will also help to further strengthen our nation’s economy.”

FHA’s congressionally mandated capital reserve ratio, which is determined by the independent actuarial study, measures excess reserves above and beyond projected losses over the next 30 years. FHA continues to hold more than $30 billion in its total reserves today, or more than 4.4 percent of its insurance in force. Additionally, FHA’s full faith and credit insurance means that there is no risk to homeowners or bondholders, even in the event that the capital reserve ratio drops below the two percent threshold mandated by Congress. With the FHA’s higher average credit scores and tighter credit policies announced today, the FHA fund is expected to produce revenue for the U.S. Treasury.

The FHA’s risk management functions are currently dispersed across a number of offices. The chief risk officer will oversee the coordination of FHA’s efforts to concentrate risk management in a single division devoted solely to managing and mitigating risk to the FHA’s insurance fund – across all FHA programs.

In addition to adding a chief risk officer, the FHA is proposing specific credit policy changes that are largely focused on ensuring responsible lending and risk management for FHA-approved lenders. These changes build on lessons learned in the credit crisis and seek to align the FHA with the Administration’s goal of regulatory reform. As the FHA’s stable of lenders grows, these lenders must have “skin in the game.” These credit changes will do that by ensuring they have long-term interest in the performance of the loans they originate.

Changes being pursued by Mortgagee Letter, effective Jan. 1

Require submission of audited financial statements by supervised mortgagees

Requires supervised mortgagees to submit audited annual financial statements to FHA. This new requirement is a prudent safeguard that permits FHA to ensure that those entities with which it does business are adequately capitalized to meet potential needs. FHA is aware that the majority of supervised and non-supervised mortgagees are already required to prepare audited financial statements for various regulatory bodies, Government Sponsored Enterprises (GSEs), and investors. Given these existing requirements, FHA’s new policy will help to reduce risk at limited new costs for approved mortgagees.

Modify procedures for streamline refinance transactions

Revises current procedures for streamline refinance transactions to establish new requirements for seasoning, payment history, income verification, and demonstration of net tangible benefit to the borrower; provide for collection of credit score information when available; and to cap maximum LTV at 125 percent. An appraisal will be required in all cases where a borrower wants to add closing costs to the transaction. These revisions bring documentation standards for streamline refinance transactions in line with other FHA loan origination guidelines, ensures the borrower’s capacity to repay the new mortgage, and prohibits the dangerous practice of loan churning, where borrowers raise cash through successive cash-out refinancings that put them further in debt.

Require appraiser independence in loan origination

Provides new guidelines on ordering appraisals for FHA-insured mortgages and reaffirms existing policy on FHA requirements regarding appraiser independence and geographic competence. Mortgage brokers and commission based lender staff are prohibited from ordering appraisals. FHA does not require the use of Appraisal Management Companies or other third party providers, but does require that lenders take responsibility to assure appraiser independence. While FHA’s existing policies regarding appraiser independence are consistent with the Home Valuation Code of Conduct (HVCC), FHA will adopt language from the Code to ensure full alignment of FHA and GSE standards.

Modify appraisal validity period

FHA’s appraisal validity period will be reduced to four months for all properties including existing, proposed and new construction. Previous validity periods were six months for existing properties and up to twelve months for proposed and under construction properties. This provides for more accurate home values used for underwriting FHA-insured mortgages during volatile housing market conditions.

Appraisal portability

Provides new guidelines that allow a second appraisal to be ordered under a limited set of circumstances when a borrower switches from one lender to another and restates the requirement that the first lender must transfer the appraisal to the second lender at the request of the borrower. This will prevent delays in closing that often occur when a loan is transferred to a new lender.

Changes being pursued by rule-making process

Modify mortgagee approval and participation in FHA loan origination

Lenders seeking approval to originate, underwrite, or service an FHA loan must meet the eligibility criteria for a supervised or non-supervised mortgagee. Mortgagees with this approval status must assume liability for all the loans they originate and/or underwrite. Loan correspondents (mortgage brokers) will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees; however they will no longer receive independent FHA approval for origination eligibility. These policy changes will require the FHA approved mortgagee to assume responsibility and liability for the FHA insured loan underwritten and closed by the approved mortgagee. These changes align FHA with the GSEs and will potentially increase the number of loan correspondents (mortgage brokers) who are eligible to originate FHA-insured loans while providing for more effective oversight of loan correspondents through the FHA approved mortgagees.

Increase net-worth requirements for mortgagees

The FHA plans to propose to increase the net-worth requirement for approved mortgagees to meet industry standards. The requirement is currently at $250,000 and has not been increased since 1993. HUD is proposing an initial increase of approximately $1 million that would be in place within one year of the enactment of this rule. To maintain consistency with industry standards, HUD may propose that the net worth requirements be increased further in future years to a level comparable to those required by GSEs and other market institutions. These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund.