About Government Refinance and Home Purchase Programs

The great interest rates we are now enjoying are not going to last long. A Fed official indicated this week that when the Fed raises rates to stave off inflation it will happen sharply. We get this from a recent AP article:

To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the economy is back on firmer footing, Fed officials warned Tuesday.

“I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity” to when the Fed was slashing rates to battle the recession and the financial crisis, said Richard Fisher, president of the Federal Reserve Bank of Dallas.

Although Fisher has a reputation for being one of the Fed’s toughest inflation fighters, it marked the second such warning by a central bank official in recent days. Fed member Kevin Warsh on Friday said the central bank will need to move swiftly when the time comes to raise rates.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia and also a hawk against inflation, waded into the debate in a speech Tuesday in Easton, Pa., saying the Fed may need to act “well before” unemployment — now at a 26-year high of 9.7 percent — returns to normal. The Fed, he said, will need to be on guard “to prevent the Second Great Inflation.”

If you have been thinking about a refinance contact us today in the sidebar. The sooner you lock your rate the better if you would like to refi before rates shoot back up. Rates for most loans this week have been hovering between 5 and 5.5%. We expect them to be much higher soon.

Housing Wire had a story recently saying that six more mortgage servicing companies have come on board with the Obama loan modification program. Here is an excerpt from the story:

Six more servicers joined the Home Affordable Modification Program (HAMP), pushing the total number of participants to 63, according to the most recent Troubled Asset Relief Program’s (TARP) transaction report.

AMS Servicing leads the new inductees with $4.3m in cap incentives. Bay Federal Credit Union receives a $410,000 cap; Schools Financial Credit Union receives a $390,000 cap; Yadkin Valley Bank gets a $240,000 cap; Glass City Federal Credit Union receives a $230,000 cap; and Central Jersey Federal Credit Union is allocated $30,000 in capped incentives.

It is no surprise that the Fed will be winding down its efforts to compress mortgage interest rates over the next few months. The announcement this morning simply noted that they plan to spread the remaining fund out more thinly between now and the end of Q1 2010 instead of shutting the program down entirely by the end of this year. In any case, the end result will likely be that mortgage rates will be higher soon than they are now. If you have an ARM or need cash out or have a fixed rate above 5.75% contact us in the sidebar now before rates end up in the high 6’s again.

The FHA released the details on its policy changes regarding FHA streamlines (see mortgagee letter 09-32). The new policies go into effect November 18, 2009. Here are what we consider the most significant changes:

A. Seasoning

At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.

This means there is a minimum 7-9 month waiting period one must wait between FHA streamlines. It used to be that one could get an FHA streamline and if rates improved thereafter get another streamline immediately.

II. Revised Streamline Refinance Transactions WITHOUT an Appraisal

The maximum insurable mortgage cannot exceed:

– The outstanding principal balance minus the applicable refund of the UFMIP,

PLUS

– The new UFMIP that will be charged on the refinance.

This is the most major change. Right now, most FHA streamlines allow a borrower to roll closing costs into the new loan (thus bring no money to closing), skip one month of mortgage payments, and reduce interest rates. With this new rule closing costs will not be able to be rolled into the new loan so as a result it will be much more difficult to get a streamline with no money at closing. The requirement for money at closing will mean many families will not be able to streamline their FHA loan soon.

If you have an FHA loan at 5.75% or higher contact us in the sidebar today. Getting a streamline will be more expensive and difficult starting in November 2009.

As part of the steps the FHA is taking to bolster its cash reserves, it appears that FHA streamlines are about to get harder to qualify for. Right now people with FHA loans can refinance to a better FHA loan without needing an appraisal no matter what their current income is or how upside down they are on the home as long as they have not been 30+ days late on a mortgage payment and have a credit score above 620. According to this report over at Housing Wire the requirements for FHA streamlines will be tightening in significant ways soon:

The new policies revise current procedures to streamline refinance transactions. FHA will establish new requirements for seasoning, payment history, income verification and demonstrate a net tangible benefit to the borrower. The new changes provide for a collection of credit score information when available and caps the maximum loan-to-value (LTV) ratio at 125%.

Also, new guidelines will be provided on ordering appraisals for FHA-insured mortgages and supports the agency’s policy requiring appraiser independence. While FHA’s current policies continue to comply with the Home Valuation Code of Conduct (HVCC), FHA will adopt language from the Code to align with GSE standards.

These changes potentially do away with some major benefits of the FHA streamline process. If you have an FHA loan with a rate of 5.75% or higher contact us today about streamlining to a lower rate while the procedure is still relatively inexpensive and easy. Tell your friends and neighbors with FHA loans as well. FHA streamlines are about to become significantly less streamlined and significantly more expensive and difficult to come by.

Reports came out today that in the face of increasing foreclosures on homes insured by the Federal Housing Administration, the cash reserves for the FHA will soon be dipping below mandated levels. We get this from a recent AP story:

The Federal Housing Administration said Friday its cash cushion will dip below mandated levels for the first time, but officials insist it won’t need a taxpayer rescue.

The agency, a growing source of funds for first-time homebuyers, faces mounting concerns that it will soon need a taxpayer bailout. As of this summer, about 17 percent of FHA borrowers were at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.

Rising defaults mean the FHA’s reserves may sink below the 2 percent mark required by federal law. The FHA says a study being sent to Congress in November is expected to show that ratio dipping below required levels for the first time.

David Stevens, the agency’s commissioner, however, said in an e-mailed statement that FHA “will not require taxpayer assistance.”

Banks still have the final say on who they help and who they don’t help, but the FDIC is at least encouraging banks to help unemployed people. We get this from a recent CNNmoney.com article:

Some unemployed homeowners at risk for foreclosure could get a temporary break on their mortgage payments under a plan being pushed by the FDIC.

The Federal Deposit Insurance Corp. said on Friday it is encouraging certain banks to reduce mortgage payments for the unemployed or underemployed for at least six months.

Overall, relatively few of the unemployed will benefit from this recommendation because the effort would only apply to a handful of institutions. Specifically, it would affect those that bought failed banks and participate in loss-share agreements with the FDIC. In such deals, the agency covers some of the losses incurred on the assets of the failed banks. Some 53 institutions, mainly regional or community banks, have entered into such arrangements since January 2008.

“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures,” said Sheila Bair, FDIC chairman, who has led the efforts to have loan modifications be based on income.

It appears we are not out of the woods with the housing crisis just yet. The Treasury expects there to be millions more foreclosures coming in the coming months and years. Here is an excerpt from the recent Reuters story on the subject:

Only 12 percent of U.S. homeowners eligible for loan modifications under the Obama administration’s housing rescue plan have had their mortgages reworked, and millions more foreclosures are coming, the Treasury Department said on Wednesday.

A Treasury report showed 360,165 people had their monthly payments reduced through August, up from 235,247 through July, but a senior Treasury official conceded much more must be done to soften the impact of a severe and prolonged housing crisis.

FHA loans have some wonderful benefits. They also have some unique costs. The costs are related to the mortgage insurance that that funds the FHA program so if a borrower has great credit, plenty of cash on hand, or plenty of equity in a house an FHA loan is not needed. For everyone else FHA can be a tremendous way to reduce interest rates and get into a stable 30-year fixed loan.

I was reading about another benefit of FHA loans at Steve Lines’ excellent blog bestfhalender.com recently. He points out that in addition to giving access to low rates to folks with little cash, little equity, and lower credit scores, FHA loans also are assumable. Here is an excerpt:

What is an Assumable Loan?

Investopedia.com defines an assumable loan as follows:

“A type of financing arrangement in which the outstanding mortgage and its terms can be transfered from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid having to obtain his or her own mortgage.”

The result of a home purchased through a loan assumption is that the person assuming the loan will simply begin to make the payments as they come due when the title is transferred.

FHA Mortgages Are Assumable.

All FHA loans are assumable when processed using HUD’s guidelines. However, mortgages closed on or after December 15, 1989 require credit qualification of those borrowers wishing to assume the mortgage. See FHA Handbook 4155.1 REV 5, Sections 4-1 and 4-4 and Handbook 4330.1 REV 5, Section 6-6.

What Is the Benefit of an Assumable Loan?

The main benefit of an assumable FHA loan is that the interest rate is transferable upon assumption of the loan. If you are financing your home today, this may not seem like a big deal to you. But if you plan to sell the house you are currently financing in a few years from now (or later), it could be. Consider the competitive advantage that you will have as a seller if your house is on the market with at 5.5% fixed assumable interest rate at a time when the market rates are at 9 or 10%. Because your house is much more affordable to a prospective buyer, it will have a higher likelihood of selling.

So if you plan to sell your home in the next few years and currently are in an ARM or an interest rate above 6% you may want to contact us about refinancing into an low rate FHA loan. The fact that a buyer could assume your FHA loan at a low interest rate may be a major selling advantage in the years to come as interest rates go way up to stave off inflation.