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.

—–

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

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.”

—–

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

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.

The Shakespeare Festival is still going strong in Ashland Oregon, but I often wonder what “The Bard” would write about the comedy of errors going on in Washington DC. Ben Bernanke made his second appearance today to talk to the “Apple Dumpling Gang” about the state of our economy.  In one day, Ben’s vision of the economy has gone from “doom and gloom” to “hey, things aren’t all that bad”.   Maybe he needs some Prozac ?  If not Big Ben, then the markets do for sure.  Yesterday was a “down day”, and today…..well the Dow is up over 200 points.

Think about it this way, the intrinsic value of the companies that make up the Dow can’t have changed that much in a 24 hour period.  If a company is worth a billion dollars, it doesn’t all of a sudden lose 5% or $50,000,000 in value in 24 hours.  Did their products lose that much in value?  Did their real estate holdings drop that much in one day?  Of course not.  But watching the markets, you would think that they did.  So, what’s my point?  The market is scared and is just as likely to believe that the sky is falling (from Big Ben’s testimony yesterday) as it is to believe that everything is all rainbows and prancing unicorns (based on Ben’s testimony today).

We talked about it yesterday, but the impact of the new FinReg (Financial Regulations) placed on the Ratings Agencies has already begun to show up. If you recall, now that Ratings Agencies can be held liable for inaccurate or misleading information, newly issued debt will no longer include their “official” ratings. In short, the three major ratings agencies no longer feel comfortable rating issuances if they can be sued if they “miss” on a bond rating.  Another way to look at this is to compare it to car shopping.  It’s sort of (in a very simplistic way) like saying that if I take advice from Consumer Reports on a particular car, and if that car turns out to be a lemon, then I can sue Consumer Reports?  Well, that’s silly.  Shouldn’t I test drive the car first? Shouldn’t I look under the hood? Shouldn’t I have my mechanic look at the car?  Well, large investment banks that buy these bonds have skyscrapers full of analysts, attorneys, and traders that review these transactions………but now the ratings agencies are liable.  Don’t get me wrong, I think that (in many cases) the ratings agencies missed the mark on quite a few bond issues over the last few years, but that doesn’t mean that we don’t want them doing their jobs……………and the new FinReg is causing them to step out of the market to protect themselves.

Case in point, last night Ford Motor Company pulled back a financing deal because they could not get a printed rating on the debt offering. Rumor has it, that there are a number of other bond offerings that are being scuttled because of this.  We will continue to follow the fallout from this part of the new FinReg.  We will also begin to see how this impacts mortgage financing.  No matter what happens, it will be interesting to say the least.

Since “they” say that a picture is worth a thousand words, I recommend that you check out this article (especially the graphs) from The Big Picture – it speaks volumes. Now, remember, recoveries and recessions never happen in straight lines, so trend-lines could tell the whole story or be completely useless.  In this case, I think the trend lines tell a very cautionary tale.  Many of the traders that I know have “gone to cash” as they are very concerned that we are not done with an overall decline.

Which brings us to the biggest surprise of the day – we are going to agree with Bernanke. He said yesterday that the economy is “Unusually Uncertain”. At this point, hindsight needs glasses to see well and foresight is running into walls left and right. With government intervention doing a number on our financial reports, we can barely see our proverbial hands in front of our faces. Next up to bat is the Unemployment Extension bill which, politics aside, will make it even harder to see the trend, since at this point a jobless recovery is about as likely as BP making a good public relations move.

The next few months will see a slight decline in housing numbers, but I personally believe that we will see a slight upturn in the fall and then another drop during the December-February months.  Also, keep an eye on consumer savings rates.  A big increase will signal a scared consumer and project less movement of housing inventory.  A drop will indicate a more comfortable consumer and a possible increase in housing activity.

As always, thanks for checking us out and please pass us on to anyone that could use some insight from us.

—–

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

And you’d better start swimming or you’ll sink like a stone,
For the times they are a changing.
- Bob Dylan

Mortgage Bonds are down this morning in what appears to be some profit taking by the market. Stocks on a whole seem to have rebounded from yesterday’s major dip, but that recovery has been largely tempered by some negative financial data released today.

Job Growth below Expectations

But at least it’s still growth! The ADP job report, which is based on a view of roughly 12% of the private-sector payrolls, shows a growth of only 13,000 jobs in the last month. The ADP data is often skewed, and we will see much more accurate numbers on Friday, when the June Jobs Report is due. I wont even tell you what economists expect this report to show, but I will tell you that it is expected that 250,000 census jobs were lost in June, so any positive underlying number will be swallowed up by that.

Homebuyer Tax Credit Extension Revived Again

This controversial Tax Credit Extension has been pulled from the edge of death so often that its starting to resemble Dick Cheney. Seriously though, the House tacked this on to an Unemployment Extension bill and pushed it through quickly yesterday. The senate already has a version of this bill in the works, its expected that they will vote on it today in time for the President to sign it into law.

Europe Surprises Everyone with some Good News!

The ECB released data early this morning that shows less reliance on it’s lending programs than originally expected, a much-needed boost to confidence in EU liquidity that got investors attention. The overall gain in stocks this morning is mostly attributed to this piece of news, which basically shows that the EU members, as a whole, had more stable legs under them than was originally expected.

—–

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