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

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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Geoff Boyd – PrimeLending – Clackamas, OR

Here are some great links to get you started.

Housing Market Data for Portland, OR

Barry Riholtz (The Big Picture) Interviewed about the Housing Market

House and Senate Pass Unemployment / Homebuyer Tax Credit Extension

Pending Home Sales drop 30% month-over-month

This is about as good (bad?) as it gets, folks.

Rates are back to all-time lows today. The recent dip in stocks has helped drive Mortgage Bond buying, even at rates that would have been laughed at 5 years ago. Don’t expect rates to move much further down, because we can already see diminishing returns setting in. If you have been waiting for the right time to buy and you are positioned to make that leap, now is the right time. The housing market is full of opportunity for buyers, many people are (almost) literally giving away their homes through short sales and even banks are looking at ways to get rid of their foreclosed-upon REO properties.

One of the classic indicators for mortgage rates are treasury bond prices. At these low levels, we see how shaky those ties are, as treasury bonds are still being pushed higher on international and domestic concerns, while mortgage rates seem to have bottomed out.

Holden Lewis over at Bankrate wrote today in his Blog that the Bankrate Rate Survey showed an all-new low for rates.  Check out that article (and some shameless promotion of his Twitter account) here.

Do you Feel Stimulated Yet?

We are finally getting to see the “real” state of housing, as reports roll in for purchases during May, the first data we’ve had in a while that was not colored by the new homebuyer tax credit – I’ll give you a hint, it’s not pretty.

When Bloomberg News surveyed 36 different economists, they predicted a month-over-month drop of 4% – 25% in pending home sales. If you read through the links above, you know that the actual drop in pending home sales was 30% – which shows that, even this far into the recession, the calculations that economists use are fairly worthless is predicting reality.

I’m seriously considering writing a book entitled “accurately predicting economic factors in a recession” – it would only be 1 page, and that page would say “keep calculating until you get a negative result, and then double that negative result”.

The long-term effects of the homebuyer tax credit are as-of-yet unknown, but we do know that it has not been a magic bullet for the housing market, and that it has been an excellent source of income for inmates.

Jobs Report Due Tomorrow – Do we even want to know?

Here are the basics. Earlier this week, ADP released their National Employment Report for June, which showed a gain of 13k, much less than the estimate of 61k or May’s 57k gain. Today we see that jobless claims are up to 472k, again worse than estimates and worse than the previous months number.

So, the best data we have shows that we lost about 250,000 jobs from the first phase of the census operation ending. The government will continue to employ a skeleton crew of census workers to complete wrap-up operations, but for most areas, the initial push (and most of the jobs) has ended. This means that to break even, we need to have created a quarter of a million jobs. Its not going to happen.

But, how much are we going to miss? The general consensus that I’ve seen (which is optimistic in my opinion) is only 100k-130k jobs lost. That means that 120k-150k jobs were created to “soak up” some of the census losses. Can we be pleasantly surprised tomorrow morning? Sure we can; its entirely possible that a bunch of phantom jobs will swoop in and boost the market. More likely, we will get a pretty negative report tomorrow and, moving into the weekend, we will hear a lot about double-dipping and economic uncertainty

But where do we go from there?

For the market, we are going into a 3-day weekend. This means a lot of time for sentiment and inertia to build up one way or another. If we go into this weekend after a week of bad news, its likely that we will move into Tuesday riding a wave of uncertainty and see some level of fallout from that.

So, until then, we will cross our fingers that jobs are going to come back and, with them, some sense of stability in the economy.

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Geoff Boyd – PrimeLending – Clackamas, OR

Highlighted for Emphasis

Original Chart from Calculated Risk

This is a quick one guys – just wanted to dispel some of the noise about the housing numbers that came in today. Very simply, in March and April, the housing numbers were artificially inflated by the new home-buyer tax credit. You can see that numbers rose precipitously during this period – the biggest jumps by percentage that we have seen in a while.

Now, if you look at the chart above, you can see that the May numbers are almost level with February, and a bit higher than January. A lot of people are pointing to this data as a double-dip indicator; I say that we are still reaching the bottom of our current dip. The government intervention of a home-buyer tax credit has proven itself ineffective at building or sustaining long-term growth. I tend to agree with the experts who have been saying, from the beginning, that this tax credit would attract mostly new buyers who were already planning on buying in the near future. I think the numbers that we are seeing prove this in retrospect. Instead of slow, sustained growth, we are now seeing an artificially depressed housing market; this is because many buyers who would have raised May’s number bought in March or April, and no new buyers were created.

So, yes, I will go on record and say that it is silly to get worked up over numbers that reflect very basic economic principles.

FOMC will issue its report in about 30 minutes. Stay tuned and we will offer up our analysis of this potentially major event.

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