FICOs and FHA: 2 Big Lenders Loosen Up

There is some good news for home buyers, especially first-timers according to Ken Harney of Inman News.  With no fanfare or public announcements, two of the largest FHA-approved lenders – Wells Fargo and Quicken Loans – have backed off their controversial "overlay" requirements on FICO scores (lender overlays are qualification requirements that can be more stringent than FHA's own requirements).

Both these large lenders confirmed last week that they will now lend to applicants with 580 FICOs and 3.5 percent down payments. These revised standards conform in most respects to FHA's own minimums, and open the agency's financing to large numbers of buyers whose credit scores have sagged during the recession.

Along with most other major lenders, both companies previously had insisted on minimum FICOs of 620 for otherwise qualified borrowers seeking 3.5 percent down payment loans. If your score came in even slightly lower, they wouldn't even look at your application. An estimated one third of Americans now have FICO scores below 620, according to one consumer group's estimate.

The lending industry's rationale for imposing a higher bar than FHA's own: They need an extra cushion of protection against potential defaults by borrowers with subpar credit scores. Many of those defaults, they said, could prompt indemnification demands by the Federal Housing Administration -- essentially punitive repayments for insured loans that go belly up. Similarly, FHA lenders want to avoid the costs of servicing nonperforming defaulted mortgages.

Wells' newly revised policy actually dips the FICO score cutoff line well below 580 -- all the way down to deep subprime 500 -- but also sets strict underwriting hoops and snares to weed out unqualified applicants. For example, borrowers with scores in the range of 500-579 will need a 10 percent down payment from their personal resources. They will not be able to use gift money from relatives, friends or a charitable down payment assistance program to meet the 10 percent upfront equity test.

Home buyers with scores of 580-599 will need 5 percent down payments, and will be prohibited from supplementing their own cash with gifts. Borrowers with FICOs above 600 will qualify for 3.5 percent down payment FHA deals, but will be allowed to use gift money.

Contributions from home sellers to defray buyers' closing or loan origination costs will be limited to 3 percent. Debt-to-income ratios will be tight: 31 percent for monthly housing-related expenses, and 43 percent for total household debt service.

If the mortgage industry adopts the Wells and Quicken guidelines in some form, tens of thousands of consumers -- along with the real estate professionals assisting them -- could be beneficiaries in the weeks immediately ahead.

NAR: Existing-home sales rise again in January

WASHINGTON – Feb. 23, 2011 – The uptrend in existing-home sales continues, with January sales rising for the third consecutive month. Sales numbers are now at a pace that is above year-ago levels, according to the National Association of Realtors®.

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 2.7 percent to a seasonally adjusted annual rate of 5.36 million in January from a downwardly revised 5.22 million in December, and are 5.3 percent above the 5.09 million level in January 2010. This is the first time in seven months that sales activity was higher than a year earlier.

Lawrence Yun, NAR chief economist, said the improvement is good but could be better.

“The uptrend in home sales is consistent with improvements in the economy and jobs, which are helping boost consumer confidence,” Yun said. “The extremely favorable housing affordability conditions are a big factor, but buyers have been constrained by unnecessarily tight credit. As a result, there are abnormally high levels of all-cash purchases, along with rising investor activity.”

A parallel NAR practitioner survey shows first-time buyers purchased 29 percent of homes in January, down from 33 percent in December and 40 percent in January 2010 when an extended tax credit was in place. Investors accounted for 23 percent of purchases in January, up from 20 percent in December and 17 percent in January 2010; repeat buyers made the remaining purchases.

All-cash sales rose to 32 percent in January from 29 percent in December and 26 percent in January 2010.

“Increases in all-cash transactions, the investor market share and distressed home sales all go hand-in-hand. With tight credit standards, it’s not surprising to see so much activity where cash is king and investors are taking advantage of conditions to purchase undervalued homes,” Yun said.

All-cash purchases are at the highest level since NAR started measuring these purchases monthly in October 2008, when they accounted for 15 percent of the market. The average of all-cash deals was 20 percent in 2009, rising to 28 percent last year.

The national median existing-home price for all housing types was $158,800 in January, down 3.7 percent from January 2010. Distressed homes edged up to a 37 percent market share in January from 36 percent in December.

NAR President Ron Phipps said the median price is being dampened by unusual market factors. “Unprecedented levels of all-cash purchases, primarily of distressed homes sold at deep discounts, undoubtedly pulls the median price downward,” Phipps said. “Given the levels of inventory we see today, we believe that traditional homes in good condition have held their value.”

Total housing inventory at the end of January fell 5.1 percent to 3.38 million existing homes available for sale, which represents a 7.6-month supply at the current sales pace – down from an 8.2-month supply in December. The inventory supply is at the lowest level since December 2009.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 4.76 percent in January from 4.71 percent in December; the rate was 5.03 percent in January 2010.

Single-family home sales rose 2.4 percent to a seasonally adjusted annual rate of 4.69 million in January from 4.58 million in December, and are 4.9 percent higher than the 4.47 million level in January 2010. The median existing single-family home price was $159,400 in January, down 2.7 percent from a year ago.

Existing condominium and co-op sales increased 4.7 percent to a seasonally adjusted annual rate of 670,000 in January from 640,000 in December, and are 7.9 percent above the 621,000-unit pace one year ago. The median existing condo price was $154,900 in January, which is 10.2 percent below January 2010.

Regionally, existing-home sales in the Northeast fell 4.6 percent to an annual pace of 830,000 in January from a spike in December and are 1.2 percent below January 2010. The median price in the Northeast was $236,500, which is 4.0 percent below a year ago.

Existing-home sales in the Midwest rose 1.8 percent in January to a level of 1.14 million and are 3.6 percent above a year ago. The median price in the Midwest was $126,300, which is 3.2 percent below January 2010.

In the South, existing-home sales increased 3.6 percent to an annual pace of 2.02 million in January and are 8.0 percent higher than January 2010. The median price in the South was $136,600, down 2.1 percent from a year ago.

Existing-home sales in the West rose 7.9 percent to an annual level of 1.37 million in January and are 7.0 percent above January 2010. The median price in the West was $193,200, down 5.7 percent from a year ago.

© 2011 Florida Realtors®

Foreclosures to Eclipse 2 Million This Year

            In case you missed the news the other day, Nobel Prize-winning economist Joseph Stiglitz dropped another bombshell on the nation’s real estate industry. He expects an additional 2 million foreclosures to hit the U.S. this year – adding to the whopping 7 million that have occurred since the economic crisis of 2008.

            “U.S Foreclosures are continuing apace,” Stiglitz told a packed news conference near Port Louis, the capital of Mauritius. “A quarter of U.S. homes are underwater.”

            Why the gloomy forecast? Because the number of U.S. homes worth less than their outstanding mortgage jumped in the fourth quarter as prices dipped and lenders seized fewer properties from delinquent borrowers.

            Currently 15.7 million homeowners had negative equity, also known as being underwater, at the end of 2010, according to Seattle-based Zillow Inc. That’s a 13 percent increase over the 13.9 million in the previous three months.

            That total represented 27 percent of the mortgaged single-family homes, the highest in Zillow data dating back to the first quarter of 2009.

            The news on the local front appears just as bleak.  The Orlando Sentinel reported in its February 12th edition that the number of foreclosed homes on, or about to hit Metro Orlando’s resale market has more than doubled in the past year – forcing down the prices of other houses that have already lost more than half of their value since before the recession.

            The four-county metro area of Orange, Seminole, Osceola and Lake counties had 13,712 bank-owned properties in January – up from 5,874 a year earlier, according to figures from California-based RealtyTrac. This has contributed to a record statewide glut of foreclosed properties that now stands at 104,759 and counting.

            “Americans today are worse off than they were 10 to 12 years ago,” Stiglitz said, adding that the U.S. faces “increasing inequality,” with the “upper 1 percent controlling 40 percent of wealth. Instead of trickling down, it has trickled up.”

            There are, however, some significant positives that have come to light.

First, foreclosures did slow down in the fourth quarter. Lenders, including Bank of America Corp. and Ally Financial Inc., halted many home seizures after accusations they used improper documentation and processes. Attorney generals in all 50 states are investigating.

But, more importantly, the wave of foreclosures, especially here in Central Florida, has created a tidal wave of opportunities for both homebuyers and investors alike.

Prospective buyers who previously were priced out of the housing market are using this opportunity and taking advantage of lower property values to purchase their first home and begin a new chapter toward their futures. Lower property values also have been a boon to investors who are adding to their real estate portfolios.

Take Larry and Janelda Minor, for example. They purchased a vacant eight-unit apartment complex in Kissimmee valued at $350K for just $200K. Within a few months all eight units were fully rented – a property lemon was turned into lemonade.

“Our experience with Rajia Ackley with Coldwell Banker Ackley Realty while purchasing the property was very positive,” the Minors said. “Our questions and concerns were answered quickly and completely throughout the entire process. We appreciate her guidance in helping us secure this commercial property during these trying times.”

Despite the gloomy real estate predictions of Joseph Stiglitz, et al, there’s still some happiness to be found. Just ask the Minors.

            We’ll keep you updated.

           

How Buying a Home Is Likely to Change

By Rick Newman

Posted: February 9, 2011

Last year's sweeping financial-reform law revamped much of the banking system. But there's one industry it didn't touch: housing finance. For good reason. Unlike the convalescing banking sector, the housing market is still a wreck, with any false move likely to destabilize things even further and cause fresh damage.

But the system can't continue the way it is either, so policymakers in Washington are gingerly starting to propose ways to fix the way we finance the purchase of homes and assure that there's never another housing bust like the one that began in 2006—and still isn't over.

The biggest and thorniest question is what role the government should play in the housing market. The government has had a hand in housing since the 1930s, when it began to subsidize home purchases for some buyers. But today the government dominates housing finance, with our system effectively nationalized. The government backs nearly every new mortgage, bearing much of the risk that lenders would ordinarily take on. That has kept mortgage money flowing during a severe credit crunch, preventing a much bigger disaster in housing, and a deeper recession. But it has also cost taxpayers billions of dollars, created a perverse system ripe for political abuse, and crowded out private financing that might be deployed more efficiently.

So with the economic recovery gaining strength, it's finally time to address the problem-to-be-named later. The Obama administration has come up with a set of options for winding down Fannie Mae and Freddie Mac, the insolvent housing agencies that back many middle-class mortgages but suffered catastrophic losses in 2008 and were taken over by the government. Some Republicans would like to see Washington end its role in housing altogether, while many economists favor some kind of hybrid system that transfers much but not all of the government's role to the private sector. A few small changes could happen this year, with the biggest reforms probably not likely until at least 2013, after the next presidential election. Even then, changes will probably be phased in slowly, to minimize disruption—and panic.

Still, we may be on the verge of a transformation in the way Americans pay for the biggest purchase they'll ever make, which determines how millions of families prioritize their household finances. Since many families spend years saving for a down payment and preparing for the plunge into homeownership, long-term planning is prudent. Here are some of the possible changes both buyers and sellers should anticipate:

Rising mortgage rates. During the housing boom that ended in 2006, mortgage rates were artificially low because lenders failed to price in enough of a cushion to account for the kind of steep price declines that have occurred. Even the most responsible lenders figured the worst-case scenario might be a 10 percent decline in prices, and they priced their loans accordingly. So far, home values have declined by about 30 percent from the 2006 peak, and they could still fall another 5 to 10 percent. That's one reason losses at Fannie, Freddie, and other mortgage lenders were so severe. Rates are still extremely low, but that's largely because the government is effectively subsidizing them through taxpayer bailouts, Federal Reserve policies, and guarantees against losses on most new mortgages.

If the government continues to back mortgages at current levels, rates might stay low—but taxpayers will be on the hook for the cost of the next meltdown. A more likely outcome is a hybrid system in which private lenders bear more of the risk, while the government insures them against catastrophic losses and charges a fee to cover the cost—similar to the way the FDIC insures banks. A recent study by Moody's Analytics calculates that such a system would raise mortgage rates by about 30 basis points, or 0.3 percentage points. If the whole system were privatized, Moody's estimates that could push rates up by about 120 basis points, or 1.2 percentage points, compared with a government-run system. On a $200,000 mortgage, a 30-basis-point bump would add about $39 to the monthly payment; a 120-point bump would add about $159. The spread would likely be greater for borrowers with weaker credit. And remember, those hikes would come in addition to other factors likely to drive long-term rates up over the next few years.

Higher down payments. Last year's Dodd-Frank financial-reform law did contain a few provisions that affect mortgages, including one that's likely to lead to formal down-payment requirements for many traditional loans. The government hasn't yet spelled out the details, but it probably will sometime this year. It seems likely that the required down payment on the majority of mortgages could be 20 percent, and perhaps as high as 30 percent. It will still be possible to get a loan with less money down, but because of new ways that lenders will have to handle such loans, interest rates will probably end up higher than they would have under the old rules.

Of course, many borrowers can't even get a loan these days unless they come up with a meaty down payment, so formal rules may not make that much of a difference, in reality. The biggest impact might be felt by hopeful buyers without a lot of cash who have been waiting for standards to ease, so they can get into a home with just 5 or 10 percent down. It might be a long time before standards ease that much, or banks make loans affordable for buyers financing most of the value of a house.

Less backing for expensive homes. The government changed the rules during the financial crisis to allow federal backing for mortgages as high as $729,750 in some high-cost areas, which means loans up to that amount count as "qualifying" loans suitable for the lowest rates. That ceiling is set to drop back to $625,500 on September 30. Expect it to happen, since Republicans who now control the House of Representatives want to reduce the government's role in housing finance, not perpetuate it. Bigger loans will still be available—but with higher rates. And the ceiling on qualifying loans could shrink further, since that might be one way to shrink Fannie and Freddie.

Fewer fixed-rate mortgages. If the housing-finance system were to end up largely privatized, it would probably mean far fewer 30-year, fixed-rate mortgages—which are the ones most popular with consumers. Banks don't like such mortgages because consumers can refinance if rates go lower, but banks can't hike rates if they go higher. "The 30-year, fixed-rate mortgage exists because of the government backstop," says Mike Konczal, a fellow with the left-leaning Roosevelt Institute. "Getting rid of it would shift more of the risk onto households."

In countries where the government plays a lesser role in financing homes, such as Canada and many European nations, the majority of mortgages are adjustable, with rates that reset every few years. That requires more cushion in the family budget for rising costs—and more responsible homeowners. But it might be worth it, since many of those nations avoided the kind of bust that has left millions of Americans with mortgages that exceed the value of their home. The odds of Congress killing the 30-year mortgage outright are probably low, but the rules under a hybrid system could restrict access to a smaller subset of top-tier borrowers. People who once might have qualified for the best mortgages might have to settle for less. Good credit will remain more important than ever.

Fewer homeowners. Loose lending and aggressive government policies pushed the homeownership rate to a peak of about 69 percent in 2005, a level that was probably unsustainable. It's now back to about 66 percent, and with foreclosures still mounting, the homeownership rate could very well dip below the historical average of 64 percent or so—and stay below long-term norms. One bit of good news for home buyers is that a combination of steep price drops and low interest rates have suddenly made homes very affordable. But credit is obviously tight, and new rules could keep it that way.

There's one other possible change that could discourage homeownership: The reduction or elimination of the mortgage-interest tax deduction, which costs the government about $80 billion per year. That tax break has been in place for decades, as a way to promote homeownership. But with Washington running record annual deficits and facing mounting pressure to start paying down its debt, giveaways like the mortgage deduction might have to go. At least two deficit-reduction panels have recommended a lower homeowner subsidy, which would hit middle- and high-income homeowners the most. If it ever happens, the result could be smaller, less expensive homes for many—plus more renters.

Less volatility. If policymakers do their job well, they'll ultimately produce a system less susceptible to hot money, speculators, bubbles, and shocks. For buyers, that means a return to the days when you bought a home to live in for a decade or two, not to occupy for a few years and then turn a profit on. "If I were a couple looking at a home, I'd be extra skeptical about investing," says Konczal. "I'd be prepared to sit in the home for 10, 20, even 25 years." It sounds restrictive, but many Americans might decide that a home for life is better than no home at all. And that they could live with a little stability.

The Importance of Home Inspection

The importance of a formal home inspection can never be over emphasized and it is probably one of the most important aspects of the home buying process. While an appraisal provides a general market value of a property, a home inspection provides the most accurate tangible value. Home inspections are not only required as part of the home buying process in many states, but they also give buyers peace of mind about one of the biggest investments of their lifetime. It also fulfills the sellers’ obligation to provide accurate disclosure information. Most banks and mortgage servicers require a home inspection report as part of the loan closing paperwork.

A home inspection is an objective evaluation of a home’s condition by a trained expert. During a home inspection, a qualified inspector takes an in-depth and impartial look at the property.  A home inspection typically includes an examination of the building codes, heating and central air conditioning systems, interior plumbing, electrical systems, the roof, attic, visible insulation, walls, ceilings, floors, windows, foundations, and basements. Some may also include appliances and outdoor plumbing. Within five to seven days after the inspection is complete, a home inspector provides a detailed written report of the findings. The home buyer pays for the inspection.

The result of a third-party inspection not only discovers the flaws, but it also underscores the positive features of a home. This information documented will ultimately determine the final price of the home. The home owner can choose to repair or remediate any defects to increase the asking price and conversely, the buyer could use them to lower it. The inspection enables both the seller and buyer of the home to make critical decisions, which will affect the outcome of the deal.

The American Society of Home Inspectors (ASHI) is the largest professional association for home inspectors in North America. The National Association of Certified Home Inspectors is another source for identifying and locating licensed home inspectors in every state. The websites of both these organizations are a great resource to learn the various aspects of the home inspection process.

Housing Market Recovery?

The million dollar question is has the U.S. housing market hit rock bottom yet or not? While there are no sure shot answers to that question, all the economic indicators seem to predict that the market would start crawling upwards this year.

According to Fannie Mae, the largest U.S. mortgage buyer, home prices would probably start going up in the third quarter of 2011 and rise 0.6 percent for the year, which is the first annual increase since 2006. Also, based on the median forecast of 30 economists at a symposium of the Federal Reserve Bank of Chicago last month, the real residential investment, which is an inflation-adjusted measure of homebuilding, will increase 9.6 percent in 2011 after five years of declines to a record level.

Housing demand, which is another key indicator of this segment’s health, is considered to have a good chance of stabilizing this year, albeit not at a consequential level. But considering that it had plunged last year, this is certainly good news. Also, according to estimates made by the National Association of Realtors and the Mortgage Bankers Association, construction and home sales will rise in every quarter of 2011.

Experts caution however, that it is too early to rejoice because this predicted uptick is anemic at best and it is not going to give any significant boost to the economy or cause a sustainable turnaround because we are coming off 50-year lows and we continue to deal with the foreclosure fiasco.

Just last week, the Massachusetts Supreme Judicial Court upheld a judge’s decision that two foreclosures were invalid because the mortgages were improperly transferred between securities. Are these just two isolated cases or are they the proverbial tip of the iceberg? Only time will tell.

If unemployment keeps improving and if the economy continues on its slow path to recovery, the gains in jobs and income will increase the pool of qualified home buyers and this may slowly bring a measurable turnaround and an eventual recovery in the housing market.

A Category 5 Hurricane named “Foreclosure Crisis” and its ill-effects on the Sunshine State

While the U.S. was spared the wrath of the 2010 Atlantic hurricane season, many states have encountered the wrath of a man-made hurricane named “foreclosure crisis,” which in many states including Florida has reached a category 5 status in terms of its destructive power.

This gargantuan hurricane continues to wreak havoc on the mortgage industry and destroy thousands of homes in its path since the time it made landfall several months ago.

Besides Nevada and Arizona, Florida is the third hardest hit state in the nation, thanks to the deadly blend of the national financial abyss, bank failures and the foreclosure crisis. Just this year alone Florida was socked with 27 bank closures, which is a whopping 19% of the nation’s share. The ripple effect of this financial swamp has caused huge volatility in the rental and owner-occupied residency rates. Jacksonville led the nation with a 14.4% rental vacancy rate, which is almost twice the national average.

Back in September, Ally GMAC’s mortgage division stopped foreclosures in Florida and 22 other states to investigate a fraudulent practice called “robo-signing,” in which their employees were allegedly signing off and improperly filing paperwork with questionable or cursory review processes. Other banks followed suit by halting foreclosures in these 23 states.

In mid-October, this domino effect prompted the attorneys general of all 50 states and mortgage regulators in 30 states to announce a joint investigation of the foreclosure practices of mortgage servicers. Preliminary reports from the investigators indicate that the robo-singing allegations may just be the tip of the iceberg and there may be numerous other shoddy practices which could have started over 3 years ago.

The investigation committee which has 12 top legal bigwigs from various states continues to uncover deceitful practices. For example, in a deposition filed at a West Palm Beach court in December of 2009, a GMAC employee, who was a member of a 13 people team responsible for reviewing and signing 10,000+ affidavits, was many times not bothering to verify the accuracy of the documents and information given to him.

A news feature about Michael Carlson’s case which was published on November 9th in the St. Petersburg Times has the potential to push the foreclosure crisis into unchartered waters. Carlson’s home in Dunedin, FL was foreclosed in 2008 by Bank of America. Carlson is contesting the foreclosure, stating the bank’s failure to notify him about the legal proceedings until after the foreclosure was completed. The problem is Bank of America sold that home to another owner more than a year ago. The current owners had assumed they were buying a bank-owned foreclosed property. They could lose their home and be evicted if Carlson wins his case. If that happens, those owners would almost certainly file a case against Bank of America. Legal pundits believe if Carlson wins the case, this could set a national precedent and if one or more such cases are filed, the snowballing effect could create a legal tsunami which could potentially rattle the housing market even further and the put the nation’s shaky economy into a tailspin.