About Government Refinance and Home Purchase Programs

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.

Comments earlier this week from some folks at the Fed made it sound like the Fed was planning to get out of the business of compressing mortgage interest rates in the next few months. That would possible result in mortgage rates moving toward 7% next year. Well today a Fed official essentially said “Not so fast”. See this from a MarketWatch report:

It is too early to contemplate an end to the Federal Reserve’s unconventional easing strategy, said William Dudley, president of the New York Federal Reserve Bank, in a television interview Monday. “My own personal view is, I think it’s a little premature to be so confident that you want to pull all these things back right now,” Dudley said in a CNBC interview. Julia Coronado, an analyst with BNP Paribas, said Dudley appeared to be trying to throw cold water on comments from two other regional Fed presidents last week that the central bank may not purchase as many mortgage bonds as planned because the economy is leveling out. Dudley said he was not worried about the Fed’s monetary policy strategy causing inflation.

The Fed has been spending money in two ways to compress mortgage interest rates in 2009. The first way is to buy U.S. Treasury Bonds. By purchasing these bonds the yield on the bonds stays low. This is important because mortgage interest rates have traditionally tracked to about 2% higher than the yield on the the 10 year treasury bond. The second way the Fed is compressing mortgage rates is by purchasing large amounts of Mortgage-Backed Securities (MBS). These securities are basically mortgages that have been bundled together and sold as investments. When the Fed purchases these securities in large numbers the banks have more money to lend for new mortgages and the easier it is for banks to sell the MBS the lower the interest rates they can charge to compete for mortgage business (while still turning a profit). The purchases of the MBS are partially what is keeping the interest rates on mortgages just 2% or so above the yield on the 10-year treasury bond. (Last year the spread grew significantly greater than 2% until the Fed started buying MBS.)

Well a few weeks ago the Fed announced that it will stop buying treasury bonds by October 2009. That could mean that the yield on the 10-year note could go up to 4-5%+ again. If the spread remains at about 2% that would mean we would be looking at mortgages between 6-7% again. Then this week the Fed hinted that it may be soon slowing down on the MBS purchases as well. That could also push interest rates back toward that 7% range.

The takeaway should be this: If you need a refinance get it soon. The signs are pointing to the end of the sub 6% mortgage rate sooner rather than later. Right now a 5.5% rate without points is not difficult. But next week? Nobody knows.

There was an interesting article over at Forbes.com recently outlining some of the painful realities associated with trying to get mortgage loan modifications with banks. Despite the pressure the Obama administration is trying to apply getting a decent loan mod is often difficult or even impossible. Here are some excerpts:

The mortgage industry claims it has provided relief over the last two years to 4 million homeowners who were having trouble paying their mortgages. But all help is not created equal.

Take Brooklyn resident Marcia Brown, an emergency room nurse who has received two loan modifications from her Santa Ana, Calif.-based mortgage servicer, Carrington Mortgage Services. With her husband disabled from a stroke, Brown couldn’t make the payments on her adjustable-rate mortgage (ARM) after the monthly payment more than doubled to $4,000 in 2006.

So when Carrington offered her a second ARM that would temporarily lower her payments, she took it. “We had no choice but to accept the modification terms that left us with payments too high and an interest rate that is adjustable,” she says. When her payment jumped up again earlier this year, Carrington offered another ARM. In June, Brown reluctantly accepted. “It has been a very difficult process with very few options,” she says.

According to counselors at ACORN Housing, a nonprofit that tries to prevent foreclosures, if Carrington had given Brown a modification under the Obama administration’s Home Affordable Modification program, she would be paying a fixed rate of $1,600 a month for 30 years. Instead, Carrington gave her a modification with an initial monthly payment of $2,800. “Under the Obama plan, our payments would have been much lower. This doesn’t seem fair,” Brown says.

Here is a video of the interview with Karen Weaver of Deutsche Bank from the guys over at Yahoo News:

The number of Americans falling more than 30 days behind on their home mortgages is ever-increasing and reached record levels in the second quarter of 2009 according to recently released report. We get this from a Washington Post article on the subject:

Record levels of homeowners were behind on their mortgage or in the foreclosure process during the second quarter, according to industry data released Thursday that illustrate the challenges facing government efforts to stem the housing crisis.

The problem has continued to shift from the subprime loans that helped spark the foreclosure crisis to prime borrowers that are struggling under the impact of the declining economy, including rising unemployment, according to the Mortgage Bankers Association. Foreclosure rates are likely to continue to rise until late next year, said Jay Brinkmann, the group’s chief economist.

“It is unlikely we will see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves,” he said.

About 13.16 percent of mortgage loans were delinquent or in the foreclosure process during the quarter, according to the group. That is the highest level ever recorded by the survey, which has been conducted since 1972, and breaks a record set last quarter.

The majority of the problem remains in the Sunbelt states, such as California and Florida, which accounted for about 35 percent of the foreclosures started during the second quarter. “Florida continues to establish itself as the worst state in the union for mortgage performance,” Brinkmann said.

We get this interesting note from a recent article over at CNNmoney.com:

The average 30-year fixed rate mortgage inched up to 5.67% from 5.65% the week prior, and the 15-year fixed fell to 4.93% from 4.97%, according to the weekly national survey from Bankrate.com.

Mortgage rates have held within a narrow range for almost two months, despite some economic improvement, the report noted.

“With the Federal Reserve beginning to wean the markets from its repurchases of Treasury debt, there will be less to restrain mortgage rates if the economic data continue to improve,” the report said. Bond yields tend to influence mortgage rates. …

Current mortgage rates remain much lower than last year’s levels, when the average 30-year fixed was 6.74%, according to Bankrate.com.

The Fed announced today that it will be easing off the gas on some of its programs that have pushed mortgage interest rates to record lows in 2009. By October the Fed will stop buying treasury bonds. This is important because buying treasury bonds kept the yields low on those bonds and that was keeping mortgage rates low. Here is an excerpt from an AP article on the subject:

The Fed said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities so that it will shut down at the end of October, a month later than previously scheduled. It has bought $253 billion of the securities so far.

The program is aimed at lowering rates on mortgages and other consumer debt, a move to spur Americans to spend more. But its effectiveness has been questioned by some on Wall Street and on Capitol Hill who worry that the program makes it look like the Fed is printing money to pay for Uncle Sam’s exploding deficits.

The minutes from the Fed’s June meeting showed officials “saw little point in extending it because a small increase in purchases would probably have little impact on yields, while a big increase might be misinterpreted as a willingness to monetize the budget deficit,” according to Capital Economics senior U.S. economist Paul Ashworth.

The upshot is this: With the Fed getting out of the business of compressing mortgage interest rates soon we will likely be seeing rates in the 6’s again. If you have been holding out waiting for rates to drop before refinancing you might want to look at contacting us now while rates are in the 5’s still. They may be back in the 6’s before we know what hit us.

Last week we linked to a report that said by 2011 up 50% of American homeowners would owe more on heir homes than the home will be worth. Well today a report from the folks over at Zillow.com estimates that we are already half way there. See this from the Bloomberg article on the subject:

Almost one-quarter of U.S. mortgage holders owed more than their homes were worth in the second quarter and that figure may rise to as much as 30 percent by mid-2010 as job losses and foreclosures climb, Zillow.com said.

Homeowners are being hurt by price declines. The estimated median value for single-family houses slid to $186,500 in the period, a 12 percent drop from a year earlier and the 10th consecutive quarterly decrease, the Seattle-based real estate data service said in a report today.

If you have an FHA loan now you can refinance even if you owe more than the house is worth. If you still have equity in your home and an interest rate higher than 6.25% we recommend you contact us about refinancing now while rates are still in the mid 5’s.

If you still have equity in your home and have an ARM or a fixed interest rate above 6% now would be a good time to look into refinancing while rates are still in the mid 5’s.

A new report from the analysts over at Deutche Bank predicts home values will drop another 14% in the next 16 months or so and that reported would put nearly half of all US homeowners “underwater” on their homes. Here are some bits from the recent Reuters write up on the subject:

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

…

Of prime conforming loans, 41 percent will be “underwater” by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties’ value, up from 29 percent, it said.

“The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding,” the analysts said. Prime jumbo loans make up 13 percent of the total market.

See these quotes from a recent LA Times article:

In its first report on the Obama administration’s efforts to prod lenders to help as many as 4 million homeowners by reducing their mortgage payments, the Treasury Department said just 9% of eligible loans had been changed.

Loans were modified even less often by the two mega-banks that dominate the mortgage market: Wells Fargo & Co. reduced payments for only 6% of its eligible home loans under the government’s program, and Bank of America Corp. modified just 4%.

Sooner or later the federal government is going to have to use stronger tactics with banks than the pretty please approach if the pace of loan modifications is ever going to pick up significantly. However that kind of government intervention is a potentially dangerous precedent to set so who knows how this will pan out.