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Eased Mortgage-Risk Rule to Be Proposed by U.S. Agencies

As a way to simplify the mortgage market, six federal agencies have proposed revised regulations that oversee how banks finance mortgages. By easing requirements on lenders under the softened qualified residential mortgage rule, banks won’t have to retain a stake in mortgages with down payments of less than 20 percent when they bundle mortgages into securities. The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development are the regulators behind the proposal.

Making sense of the story

  • The first draft of the qualified residential mortgage rule faced opposition from housing industry participants and consumer groups. The rule was intended to prevent the type of risky loans that contributed to the subprime credit crisis, but opponents said it would impede home lending.
  • Under the new draft, the qualified residential mortgage rule would be aligned with the qualified mortgage, or QM, rule. The QM stems from the Consumer Financial Protection Bureau and contains no down payment requirement. Such alignment provides a clearer roadmap to banks.
  • Before regulators vote to finalize the rule, they are requesting public feedback on the full proposal by Oct. 30. Feedback is also encouraged for an alternative arrangement that would require lenders to keep a stake in any loan with a down payment of less than 30 percent.
  • Commenting on the revision, NATIONAL ASSOCIATION OF REALTORS® President Gary Thomas stated the following: “The new standards, which align with those applied to Qualified Mortgages, are stringent enough to protect consumers from unscrupulous lending practices while also creating new opportunities for private capital to reestablish itself as part of a robust and competitive mortgage market.”
  • Under the revisions, borrowers who spend less than 43 percent of their income on debts will have an easier time getting a loan.

Source: Bloomberg

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On April 1, fees for low-down-payment mortgages insured by the Federal Housing Administration (FHA) rose for the third time in two years. The hike in fees serves a two-fold purpose: to help shore up the FHA’s sagging mortgage insurance fund, which is dangerously low; and to reduce the government’s footprint in the mortgage market. Making sense of the story
  • The FHA has always been the first choice of low down payment-borrowers who couldn’t meet the private sector’s more rigid underwriting standards. And, as the housing market descended, the FHA picked up the slack as private insurers backed out of the market.
  • As of April 1, the FHA raised its annual premium by 0.05 percentage points to 0.1 percent, depending on the loan amount and the loan-to-value ratio. That increase is in addition to an earlier increase of 0.1 percentage points in the annual fee instituted in April 2012, as well as the hike in the upfront mortgage insurance premium, to 1.75 percent of the loan amount, up from 1 percent.
  • Lenders require insurance, either private or government-based, on mortgages in which there is a down payment of less than 20 percent. Such loans are considered more likely to default than those in which borrowers have more of their money on the line.
  • Currently, the FHA will allow borrowers to cancel PMI coverage once their loan-to-value ratio reached 78 percent of the original loan balance, and the borrower has made payments for five years. Starting June 3, the FHA will require borrowers to pay the premium as long as the loan is in force. In other words, the only way to stop paying PMI is for the borrower to refinance or otherwise pay off the loan.


  • In addition to a down payment, borrowers also have to set aside money for closing costs, which can run into the hundreds or sometimes thousands of dollars.
  • Lenders charge all manner of fees, some of which are negotiable, while others are not. Lenders are required to itemize all fees required to close the deal, so borrowers should review them carefully.
  • Lenders may charge borrowers to cover items such as credit reports, appraisals, documentation, and administrative costs. The total expense will vary depending on the particulars of the situation.

FHA Trims Waiting Period for Borrowers Who Experienced Foreclosure

The FHA is reducing the amount of time a borrower must wait in order to receive an FHA-insured mortgage, according to a new mortgagee letter from the Dept. of Housing and Urban Development. Currently set at three years, the FHA now allows eligible borrowers to receive an FHA-insured loan in as little as one year. Eligible borrowers include those who experienced unemployment or other severe reduction in income and were unable to make their monthly payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure.

FHA is allowing for the consideration of borrowers who have experienced an economic event and can document that:

  • Certain credit impairments were the result of a loss of employment or a significant loss of Household Income beyond the borrower’s control;
  • The borrower has demonstrated full recovery from the event; and,
  • The borrower has completed housing counseling.

The guidance in the mortgagee letter is applicable to purchase money mortgages in all FHA programs, with the exception of Home Equity Conversion Mortgages.

Borrowers who may be otherwise ineligible for an FHA-insured mortgage due to FHA’s waiting period for bankruptcies, foreclosures, deeds-in-lieu, and short sales, as well as delinquencies and/or indications of derogatory credit, including collections and judgments, may be eligible for an FHA-insured mortgage if the borrower:

  • Can document that the delinquencies and/or indications of derogatory credit are the result of an economic event as defined in the mortgagee letter,
  • Has completed satisfactory housing counseling, as described in this ML, and
  • Meets all other HUD requirements.

More info  (document number 13-26)

California Home Sales Higher in July

California’s housing market bounced back after a slight dip in June to reach the highest level since May 2012, as home prices continued to post strong annual gains and home sales recorded the first annual increase in six months, C.A.R. recently reported.

Sales of existing, single-family detached homes were up 7 percent in July compared with June and up 1.5 percent compared with a year ago. The year-to-year sales increase was the first since December 2012, following six consecutive months of declines.

The statewide median price of an existing, single-family detached home inched up 1.2 percent from June’s median price of $428,620 to $433,760 in July.  July’s price was 29.8 percent higher than the revised $334,220 recorded in July 2012, marking 17 straight months of annual price increases and the 13th consecutive month of double-digit annual gains.

The available supply of existing, single-family detached homes for sale held steady in July at 2.9 months, unchanged from June’s Unsold Inventory Index. The index was 3.5 months in July 2012.  The index indicates the number of months needed to sell the supply of homes on the market at the current sales rate.  A six- to seven-month supply is considered typical in a normal market.
More info

FHA Trims Waiting Period for Borrowers Who Experienced Foreclosure

Borrowers who went through a bankruptcy, foreclosure, deed-in-lieu, or short sale can now reenter the market in as little as 12 months under a new guideline established by the Federal Housing Administration. The more lenient approval process does have some eligibility requirements, such as documentation of “certain credit impairments” and economic hardship.
Source: DSNews.com

How Important Is Down Payment in Determining Default?

The Federal Housing Finance Agency (FHFA) recently released a working paper on the impact of down payment amounts on loan performance at the GSEs and Federal Housing Administration (FHA). In light of new regulations and increased focus on underwriting standards, the agency issued the findings, and overall found a nonlinear relationship between loan-to-value (LTV) ratio and foreclosure rates.

Making sense of the story

  • For loans with FICO scores of 620 and debt-to-income (DTI) ratios of 31 percent, the foreclosure rate for GSE loans with 100 percent LTV is a little more than twice that of loans with 80 percent LTV.
  • When it comes to FHA loans with the same credit characteristics, the foreclosure rate is almost three times as much among loans with LTVs of 100 percent compared to loans with LTVs of 80 percent.
  • LTV ratios hold a stronger relationship with foreclosure rates among FHA loans than GSE loans.
  • The FHFA found that the LTV-foreclosure rate relationship is sensitive to FICO. This finding was evident when observing various LTV ratios among different classes of FICO scores.
  • According to the FHFA, once LTV rises above 95 percent, the foreclosure rate tends to correlate less with LTV ratio.
  • The relationship between LTV and foreclosure is most dramatic between LTVs of 90 and 95 percent when it comes to FHA loans.

Read the full story

Talking Points …

  • According to the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.), an increase in home prices, coupled with higher interest rates, put downward pressure on housing affordability and led to the fourth straight month of sales declines in November.
  • The available supply of existing, single-family detached homes for sale edged up in November to 3.6 months, up from October’s Unsold Inventory Index of 3.4 months. The index was 3 months in November 2012.  The index indicates the number of months needed to sell the supply of homes on the market at the current sales rate.
  • The median number of days it took to sell a single-family home also increased to 36.7 days in November, up from 33.1 days in October, but was down from 37.5 days in November 2012.

Americans ready to spend money…especially on housing

As a positive sign for the U.S. economy and housing conditions, Americans are reportedly more optimistic about buying a home, according to the PulteGroup Home Index survey. Overall attitudes toward buying a home is trending positive, and Margaret Gramann, senior vice president of sales for PulteGroup, Inc., commented, “For the first time in years, Americans have a growing sense of optimism that the housing market is improving, and that these positive changes may be sustainable.”

Making sense of the story

  • The survey found that 67 percent of people say they plan on purchasing a home, and of that amount, 32 percent are looking to buy within the next two years.
  • Twenty-one percent would move up their buying timeline if they were able to sell their current home at a higher price point/break their lease without penalty.
  • The results indicate that 57 percent of adults think now is a good or excellent time to purchase items they want or need, especially when it comes to entering the housing market.
  • Millennials and move-up buyers represent the most engaged consumer segments, 85 percent and 71 percent, respectively, intending to purchase a home in the future.
  • As for baby boomer trends, 50 percent of those aged 55 and older are looking to purchase a home in the future.
  • Seventy percent of home shoppers plan to spend more or as much money on their next home, and 64 percent prefer to spend more on a home that’s move-in ready rather than spend less and renovate.

Source: HousingWire

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Talking Points …

  • Homeowners largely have not extracted any recovered equity in their homes, according to a survey by Freddie Mac. Borrowers with conventional loans pulled just $6.5 billion out of their homes during the first quarter through cash-out refinancing, down from $6.7 billion during the prior quarter.
  • Cash-out refinancing has been lower only in three quarters since mid-2000, and when adjusted for inflation, cash-out refinancing since 2010 has been near its lowest levels since 1997.
  • Cash-out refinancing surged during the housing bubble, reaching a high of $84 billion during the second quarter of 2006. But many borrowers ended up in a position where they owed more than their homes were worth, resulting in a painful pay-back that continues today.

Forty-percent of Home Sellers Plan to Price Higher Than Market Value

Home sellers are kicking off the spring real estate season with what might be considered a risky pricing strategy: 40.3 percent say they plan to price their homes above market value, despite warnings from their agents, according to the latest Real-Time Seller Survey from Redfin.

More than half (51.3 percent) of home sellers surveyed said they plan to price their home in the middle of the range based on local comparable sales. An analysis by Redfin found that a home listing gets nearly four times more visits on real estate websites during the first week on the market than it does a month later.

In the second quarter, 52.4 percent of sellers were confident that now is a good time to sell their home, compared with 37.5 percent in the first quarter. Nevertheless, home sellers are not free from worry. In the second quarter, 40.9 percent of sellers said they are worried about being able to afford their next home.
More info


Short sales in California are generally not subject to state or federal income tax for cancellation of debt. The Franchise Tax Board (FTB) issued a letter yesterday stating that, as nonrecourse obligations, short sales in California are not subject to state income tax for cancellation of debt. The FTB’s position conforms with the federal treatment of short sales stated in an IRS letter as we previously reported on November 15. These letters will provide welcome relief for short sale sellers given that the tax break for a qualified principal residence under the federal Mortgage Forgiveness Debt Relief Act of 2007 will expire at the end of this year, and similar protection under California law already expired in 2012. The FTB letter includes transactions that closed in 2012 but, as always, sellers should consult with their own tax professionals.

According to the recent FTB letter, “a California taxpayer would not have cancellation of indebtedness where the taxpayer was involved in a short sale pursuant to CCP section 580e.” Section 580e of the California Code of Civil Procedure (CCP) generally protects borrowers from owing a deficiency after a short sale of a residential property with one-to-four units, including both first and junior trust deeds. Exceptions include fraud, waste, cross-collateralized loans, and borrowers that are corporations, LLCs, or limited partnerships. For more information, C.A.R. members may refer to our legal article on Short Sale Deficiencies.

As with the IRS letter, the FTB letter states that even if no cancellation of debt income is owed, a taxpayer may nevertheless have capital gains to the extent that the outstanding debt exceeds the tax basis for the property. A principal residence, however, is generally excluded from capital gains tax up to $250,000 for single taxpayers and $500,000 for married couples filing joint returns (under 26 U.S.C. § 121).

Mortgage Lenders Ease Rules for Home Buyers in Hunt for Business

As a sign of mortgage lenders’ rising confidence in the housing market, restrictive lending standards are beginning to ease, and the credit freeze is starting to thaw. Lenders have started to accept lower credit scores and to reduce down-payment requirements.

Making sense of the story

  • Lenders recognize that refinancing old mortgages will no longer be a huge profit center for banks, so competing for borrowers will be needed for business and future profits. As a result, lenders will have to open up to borrowers who may not have perfect credit or large down payments.
  • For example, the lender TD Bank began accepting down payments as low as 3 percent through an initiative called “Right Step” for first-time buyers. A year ago, the program required at least a 5 percent down payment.
  • Mortgage originations are expected to reach $1.1 trillion this year, which is down from $1.8 trillion last year and $2 trillion in 2012 due to less refinancing.
  • While private lenders have shied away from low-down-payment mortgages in the past few years, in the past year, more than one in six loans made outside of the FHA included down payments of less than 10 percent.
  • Credit scores for borrowers seeking conventional mortgages also are easing, as scores on purchase mortgages stood at 755 in March, down from 761 a year earlier.
  • Smaller lenders are trying to appeal to first-time buyers while many larger lenders are gradually reducing down payments for jumbo loans in order to attract wealthy customers.

Source: Wall Street Journal

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Talking Points …

  • As a sign that the housing recovery is in for a promising spring, homebuilders picked up the pace of new construction in March. Single-family housing starts increased construction by 2.8 percent, to a seasonally adjusted annual rate of 946,000 units, according to the Census Bureau and the Department of Housing and Urban Development.
  • Regionally, production rose strongly in the Northeast and Midwest, with gains of 30.7 percent and 65.5 percent, respectively. However, construction dropped 9.1 percent in the South and 4.5 percent in the West.
  • Multifamily construction fell 6.1 percent, to 292,000 units during the month of March.
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