If you were reading our blog about two months ago, you may remember an article about Upcoming FHA Changes. Well, these changes are going into effect on Monday, October 4^th.  Here’s what you need to know.

Will these changes affect me? Why are they changing the FHA program?

First of all, it’s important to note that these changes are not retroactive. If you have an existing FHA loan, or your FHA case number was requested before October 4th, your mortgage insurance will be calculated using the current rules, with a larger up-front premium and a smaller monthly premium. If you apply for a mortgage through the FHA program on or after October 4th, 2010, these changes apply to you.

These changes were implemented to increase HUD’s Capitalization ratio, or the amount of funds that it has in reserve to cover the number of mortgages that it takes on. This is a good thing, because if HUD were to stay undercapitalized, FHA loans could be harder to come by.

FHA Insurance Changes – Effective Oct. 4th, 2010

Currently, FHA Mortgages require an up-front mortgage premium of 2.25%, or $4,500 for a $200,000 house. This is a cost that you pay (usually financed into the loan) “up-front” in order to get the FHA mortgage. You then pay an ongoing annual mortgage premium of somewhere between 0.5% and 0.55%, depending on your down payment and loan to value ratio. You pay this premium monthly, so we figure out the annual premium and divide by 12. On a $200,000 mortgage, your monthly mortgage insurance would be between $83 and $92. If you apply for a 15 year FHA mortgage, these premiums will actually be lower.

These changes, effective on Monday, will decrease the up-front mortgage premium to 1% (or $2,000 on a $200k home) while increasing the annual premium to 0.85% to 0.9%. Again, your annual premium rate depends on the size of your down payment and loan to value ratio. On a $200,000 mortgage, this increases your monthly mortgage insurance to between $142 and $150, an increase of about $58 monthly.  Again, a 15 year FHA mortgage will have reduced mortgage insurance costs.

The FHA Reform Bill that passed two months ago allows FHA to increase its annual premium to a new cap of 1.55%, so a year from now we may only have fond memories of 0.9% annual premiums.

Seller Concession changes?

A “Seller Concession” takes place when a seller pays (through their proceeds of sale) some or all of the closing costs & prepaid expenses for the buyer of their property. In the current market, it has become common for a seller to pay some or all of the third party fees for a buyer, to help them reduce the total cost of purchasing.

Using a $200,000 purchase on a 30 year fixed FHA loan, the minimum downpayment is 3.5%, or $7000.  Closing costs & prepaids could easily amount to another $6000-8000 depending on the taxes, insurance costs, time of year, etc.  Being able to cover these additional cost for a buyer can help the seller find more qualified borrowers or lower the total purchasing costs for a buyer of their home. Currently seller concessions are capped at 6% (of the sale price of the home) for FHA Mortgages.

There has been speculation, but no official statement, that this percentage could be lowered. This could make things much tougher for consumers, because in smaller markets where real estate is much cheaper, the 6% concession is needed cover all of the buyer’s costs.

If HUD decides to lower the amount that a seller is allowed to contribute towards a buyer’s closing costs & prepaids, it could slow down some already-troubled markets.

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Geoff Boyd – PrimeLending – Clackamas, OR

What is it about making sequels to bad movies? You have to agree, it’s one thing to remake an old movie, or make a sequel/prequel to a good movie, but there is nothing worse than sequels to movies that were junk to begin with.

So, when I heard a few higher-ups in HUD and the Obama administration floating the idea of a second home-buyer tax credit, I was understandably surprised. Considering that the first credit showed little to no measurable positive effect (especially in retrospect) and may be responsible for the recent record lows in new and existing home sales, you would think that we had learned our lesson about these types of interventions.

Now look, I’m all for stimulating home buying, but I think we are getting into “Honey, I Shrunk the Baby” territory here. This is, at this point, rumor – but if you will bear with a bit of speculation, but I have to agree with our friends over at Calculated Risk – the best thing for housing would be for our administration to definitively say “There will be no more Housing Tax Credits”. In a market with this much volatility, we need our leadership to help this market stabilize before we can grow. The financial doctors on Wall Street and in DC are ignoring the heart attack and treating the arm pain – as any good doctor will tell you, you fix the problem first and deal with the symptoms second, and you never give a junkie a prescription for drugs.

Any other failed government policies that you think need a sequel? Or perhaps some ideas of how the government can be helpful to the market?

Edit: Calculated Risk found this CNBC report from Diana Olick: HUD now says that “there are no discussions underway to revive the credit.”

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Geoff Boyd – PrimeLending – Clackamas, OR

A long time ago, almost 3000 years ago to be precise, Greece was the ruling power in the Mediterranean. Their rich mythology and language are still around, thanks to some scholars who remembered the first rule of any task, Write It Down. Many of you who can still remember middle school will recall the story of Sisyphus; a King who angered the Gods so greatly that he was given a simple but impossible task. Sisyphus was to roll a boulder up a mountain, but every time he got close to his goal, it would roll right back down and he would have to start over. A lot of effort for no net result.

Just like Sisyphus, the Federal Reserve Bank is trying to push our economy out of the recession. Their most recent strategy? Buying more treasuries. By purchasing these securities, they will decrease the supply of treasuries, raising the price and driving down the required return, you know the drill. This is Economy 101 stuff, and interest rates will go down as a result.

There is just one problem; our economy is going to come rolling right back down the hill. What I mean, of course, is that this plan to stimulate the economy doesnt address the problems that the economy is facing. With unemployment through the roof and the savings level rising, a very large portion of our population is changing how they “do” money – if they have extra, they save for when things get worse. You can look at the economic reports and they tell the whole story – new and existing house sales are at all-time lows, building permits and materials have not recovered either, but savings are up and spending is way down.

So, the solution is to make lending more affordable, right? Wrong. In the state of our economy, with a true unemployment rate assuredly over 12% and possibly near 18%, even the least savvy of Americans understands that you don’t rearrange the deckchairs on the Titanic. If the economy is going down the drain (and for some, its reached rock bottom), it doesn’t matter how low an interest rate you can get, you won’t have money in the bank or food in the pantry. Unemployment is an anchor that will continue to pull our economy down until the joblessness problem is solved.

The Fed seems to believe that low rates are the key to recovery. This is where they must have skipped the chapter in the economics 101 book; “the economy doesn’t work if people don’t have jobs”. Unfortunately, the answer is right in front of them. Thomas Hoenig, Kansas City’s Fed President, has repeatedly dissented with the Fed’s continuing decision to keep the Fed Funds rate near 0. His most recent statement is that the Fed is making a “dangerous gamble” by continuing to force rates down.

The Fed refuses to listen, perpetuating the Boom / Bust cycle that reminds me of that ancient boulder rolling up and down the mountain. Unfortunately, the only way to get some footing is find a bottom…..a real bottom, and this would be very painful.  Our country can create and maintain growth, real growth, but the interventions that we have seen in the past 2-5 years have made it hard to get any traction because they create the illusion that we are experiencing a recovery.  The Stimulus Checks, New Homebuyer Tax Credit, Auto Incentives, and all the rest of the government interventions, do not seem to be helping create any lasting growth.  This is because they are not creating foundations upon which the market can stand and build from.  For now, they are simply fluff to make it appear as if the Fed is doing something.   The real truth is that we will come right back to where we started unless the American people are able to start working again.

Happy Friday the 13th!

Friday the 13^th occurs at least once and as many as nine times a year.  Superstition holds today to be a day of bad luck.  The fear of Friday the 13^th is called “friggatriskaidekaphobia”, which I understand is the name of the upcoming Kanye West album as well.  This fear of the number 13 and especially Friday the 13^th was officially named in 1911, but it wasn’t until 1953 that it was recognized as a common “phobia”.  In numerology, the number 12 is considered completeness as reflected in 12 months of the year, 12 hours on the clock, 12 tribes of Israel, 12 gods of Olympus, 12 bottles of beer in a twin pack, 12 bottles in a case of good Oregon Pinot………….the list goes on.  Many people are scared to death of the number 13, especially Friday the 13th; in fact, some cannot even get out of bed.  For the bond market however, today is a lucky day.  Also, with a beautiful weekend ahead (in the 90’s), Portland, Oregon is truly a great place to be!  Just don’t go to Camp Crystal Lake, especially if your tour guide’s name is Jason.

Earlier today, CPI, inflation at the consumer level, hit the tape plus .3% while the core index was up .1%.  Auto prices and gasoline were all “to do” about the increase, which in the big picture is quite tame.  Actually, our bigger concern is about deflation as the economy cools.  Retail Sales were also in the mix, up .4% with the ex-autos component up .2%.  Auto sales were behind most of the push here as well, rising 1.6%.  While the numbers look encouraging on the surface, we see the loss of Census workers, loss of emergency unemployment benefits, and the withdrawal of various forms of stimulus starting to drag on the consumer.  Retailers will need a great holiday season to make it a good year.  Business Inventories completed the economic trifecta, rising .3% as sales fell .6%.

Lastly, I wanted to share some thoughts that come straight from my big bald head!  We have been hearing lots of talk about the slowing recovery….or something along those lines.  Well, here’s my take on this….and the “bears” out there will love it.  I don’t think that we are seeing a slowdown in the recovery or a loss of momentum.  What we are seeing is that there really was no recovery at all.  If you strip out the effects of the home buyer tax credit, the 1.25 trillion of mortgage debt purchased by the Fed, unemployment extensions, and a few other pricey gems…………the economy itself hasn’t recovered at all.  In fact, the real numbers show that the “gains” that we have seen have all been stimulus related, or created by the Fed and not really generated by the markets.  It’s like taking a huge advance on your credit card and putting that money in the bank……….and then saying that you made money this month.   Sorry, that doesn’t count as generating income.    I’m not trying to be negative here, just realistic.  Right now, the economy is running on fumes and spinning the numbers won’t help it get better.  Politicians are used to spinning the truth, but this is one of those times, when a dose of reality is needed.  To fix a problem, you first have to acknowledge it.  It really sounds like our economy needs a 12 step program!

The silver lining?  There isn’t one……….it’s a gold or platinum lining!  I truly believe that, as a people we are one of the most creative, hardy, and persistent cultures on the planet.  We have a very dynamic political system that often creates change, even when people don’t want it (but may need it).  Historically, more millionaires per capita were created after the great depression, than in any other time in our history.  I guarantee you, that 5 – 7 years from now, almost every “rags to riches” story told will find their roots in our current economic situation.  So, for those of us that embrace the “new reality” (and not the fluff presented on CNN, MSNBC, or Fox) there will be amazing opportunities for growth.  I have a small “mastermind group” that I belong to, and you wouldn’t believe some of the incredible ideas that people have come up with in the past year.  With that in mind, keep your head up, dig deep into your creative side, and find new ways to grow during this “downturn”.

Fun fact? Pictures and title included, the number 13 appears 13 times in this article!

Have an amazing weekend!

Geoff

If you follow the news, you might have seen recently that a lauded FHA reform bill recently passed into law and has been sent to the President. This bill, H.R. 5981, allows FHA to raise it’s mortgage insurance premium (MIP) also known as monthly mortgage insurance (MMI) from the current cap of .55% to a whopping 1.55% – this increases the monthly amount that you pay for insurance if you opt for an FHA loan. This was partially balanced out by a decrease in the upfront MIP to 1%.

This is, from our perspective, a mixed bag. It doesn’t completely destroy the benefits of FHA over Conventional Mortgage (low down payment remains the same) but it is a net downturn when it comes to marketing this type of loan. This change was made because FHA is critically under-capitalized (0.5% capitalization as opposed to the 2% required of them) and they needed to make changes to insure that they can stay liquid if things get even worse.

Why are they under-capitalized in the first place? As you can see below, HUD (the government entity responsible for FHA) has seen a spectacular spike in demand since 2007. Since their growth was so quick, the funding that they had and the loans currently adding money into their system were not enough to maintain a healthy capitalization ratio. Their solution? Up the monthly mortgage insurance across the board for new loans (many of their older loans no longer require the MMI). This will increase their liquidity, but ends up costing the consumer more in the end. Here is a chart that we threw together to show just how quickly their demand changed.

Today we got the newest unemployment data, and it’s not pretty. The Jobs report was expected to come in near -90,000 jobs in July, and instead we got -131,000. Worse than that, the revision for June shows an additional 100,000 jobs lost. Lets just call it a “margin of error”. This report, coupled with an increase in consumer saving, tells us that we are a long distance away from true recovery in our economic climate; many people do not have jobs and those that do lack consumer confidence and probably fear that they will be the next one to get axed; hence, they save more.

The one thing you wont see anywhere on this jobs report? Emergency unemployment recipients. these people, who have been taken off the normal structure of unemployment, magically disappear as far as this report is concerned, so instead of having a clear, concise view of hire/fire in our economy, this economic indicator is severely compromised, and may actually present a rosier picture than reality dictates.

So, the Fed is “fluffing” the numbers to make things look better.  9.5% is not good………..we all know that.  But the reality is much worse.  Scary huh? That’s one big reason why the Personal Saving Rate in the US jumped back above 6%….because consumers are afraid that more bad news is on the way.

I do have some good news though………..your weekend is almost here. ☺

So, primary research time. I decided to take a look through the records and see who was still in the game, lending-wise, in Oregon. What I found, may not surprised you – about 7 out of 10 licenses are inactive at this point; a virtual exodus from what used to be a overcrowded business. Without being too rude,…. at the peak of the housing boom, I could have sworn that some lenders were hiring monkeys to take loan applications!  So, I guess the moral of the story is that nowadays you have to be a true professional to make it in this business.

For all of our readers in the Real Estate, Construction, Mortgage and Housing fields, what do you think? Is your profession becoming less popular? Are you having a harder time finding customers? Have old colleagues jumped ship? Answer our poll and leave a comment!

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Follow us on twitter for current news, advice and market status updates.

Have a question or something to add? Leave a comment or send us an email

Geoff Boyd – PrimeLending – Clackamas, OR