Forecasting What May Be Ahead for Home Loan Rates

Fairfax, VA – The good news–despite what the Mayan calendar may say–is that the world probably won’t be coming to an end in 2012. But like 2011, this coming year may bring some significant challenges here in the US and around the world. Read on to learn more about what could be ahead for home loan rates.

First, let’s take a minute to recap 2011. While home loan rates finished the year at historically low levels, the housing market did not see a major improvement in the second half of the year as some experts expected. The labor market did make some modest improvements, but it is still persistently weak and this is one area of the economy in particular that we need to see consistent improvement in to help our long-term economic outlook.

Also weighing on consumer confidence and thus the economy in 2011 was the first downgrade of US Debt in history, thanks in part to our very divisive government body. Finally, the worsening and spreading debt crisis in Europe capped a year filled with financial and political uncertainty. The situation in Europe is the perfect place to begin a 2012 outlook.

Eurozone Debt Crisis
What may happen with the US economy and home loan rates in 2012–not to mention with inflation, the housing market, the job market, and even the Presidential election–may be dramatically influenced by how the Eurozone handles their debt crisis. In the simplest of terms, the issue is that like much of the developed economies around the world, Europe has way too much debt. And a lot of this debt sits on the books of the banking sector throughout the Eurozone.

In good economic times, banks could potentially “grow” their way out of their recapitalization problem by doing a lot of business and writing a bunch of loans. But that is not likely to happen with the Eurozone slipping into a recession in the first half of 2012.

Ultimately, Europe needs to provide a large financial backstop for their banks and sovereign debt in order to fix their problems longer-term. And this is something that Germany, who holds the cards in this negotiation, strongly opposes. Germany prefers to have each country shore up their own individual finances, act responsibly, and pay down their debt. Yet, Greece, Italy and other highly indebted countries have struggled to invoke tough austerity measures that would help them do so.

The situation in Europe is definitely a wild card headed into 2012. The bottom line is that as long as the uncertainty continues, the US Dollar and US Bonds should benefit, as investors will see our Bonds (including Mortgage Bonds, upon which home loan rates are based) as a safe haven for their money. This could help keep our home loan rates relatively low in 2012.

Inflation
One factor that we can’t ignore when it comes to home loan rates is inflation. Why? Inflation is the arch enemy of Bonds and home loan rates, because if inflation rises, investors in Bonds demand a higher yield to offset the lost buying power inflation imposes on a fixed payment. And as home loan rates are tied to Mortgage Bonds, this would mean home loan rates move higher. That’s why sometimes even hints or whispers that inflation is on the rise causes Bonds and home loan rates to worsen.

So what’s ahead for inflation in 2012? In the Fed’s Policy Statement from the December 13, 2011 meeting of the Federal Open Market Committee (FOMC), the Fed stated that inflation is moderating…which would be good news for home loan rates. However, it’s important to note that core consumer level inflation actually inched higher in 2011.

Last year, consumer inflation and the expectation of inflation rose as the Fed embarked on a second round of Quantitative Easing (QE2) in the fall of 2010, whereby they bought Mortgage Bonds to help boost the economy and the housing market. If inflation remains at current levels or pulls back a little, the Fed may just do another round of QE3 in the spring. Also paving the way for another round of QE is the change of guard at the Fed. Several hawkish (i.e., tough on inflation) voting members are being replaced by more dovish (i.e., softer on inflation) voting members in 2012.

The bottom line is that if the Fed does another round of QE, this could cause inflation to rise. And if inflation does rise in 2012, it could have a negative impact on home loan rates. However, if the uncertainty out of Europe continues to lead to a safe haven trade in our Bond markets–and remember, this helps Mortgage Bonds and therefore home loan rates–this could essentially balance out the negative impact inflation usually has on Bonds and home loan rates. Only time will tell whether inflation or the events in Europe have a bigger impact on the markets and home loan rates.

The Big Picture
In many ways, 2012 may feel a lot like 2011. Inflation and events in Europe will continue to play a big part in the direction home loan rates move in 2012. What’s more, history has shown that Bonds move higher (which means home loan rates move lower) in anticipation of QE, but then selloff once the official announcement is made…think “buy on the rumor and sell on the news.”

If that does happen, the first half of 2012 could be an especially great time to purchase or refinance a home. But even if the Fed does not move forward with QE3, we begin 2012 with home loan rates near historic lows, which already makes this year a great time to purchase or refinance a home. If you have any questions about how you can benefit from this situation, give me a call at
703-830-9808 or email me at jeff@lendingsolutions.net

Fairfax, VA – When was the last government shutdown? 1995 was the year. What happened? It was very painful to get through, but no one panicked. And we shouldn’t panic this time. I can assure you 1st Commonwealth Bank of Virginia has prepared all of the loans in our pipeline and we preparing for a worst case scenario, so the disruption will be minimal. If a shutdown would occur, these would be the top six areas that can affect us during a government shutdown:  

FHA Case Numbers: For each FHA loan, we are required to order a FHA case number.
This number is generated before an appraisal can even be ordered. With a shutdown, we may not be able to order case numbers. Because of this, it is critical to let us know if there is a contract executed on any loan, so that our office can go ahead and order a case number without risking the loan being on hold during a shutdown. Note: with the new FHA guidelines, a contract must be executed before a case number can be ordered.

(The ability to close FHA loans is questionable, depending if HUD keeps its website running to obtain FHA case numbers and CAIVRS (During the November 1995 shutdown, case numbers could not be obtained, but this was prior to the internet and was a manual process). The shutdown in 1995 mainly caused a delay rather than a drop in FHA loan origination, but if lenders decide to stop accepting FHA applications, it could be a problem. I think we will see delays but not a complete shutdown of the FHA.)
 
4506 IRS Transcripts: Each loan requires the verification of at least one Federal tax return by the IRS to verify the financial numbers that each customer presents us on their tax returns. During a shutdown, this process would be delayed as the IRS wouldn’t be at work to verify the transcripts. (This might be a minimal delay, since the internet / phone fax is used to order tax transcripts.)

Verifying Employment (VOE) of a Government Employee: We are required to verify the employment of each customer. If the customer is a federal government employee, we might not be unable to verify his or her employment during a shutdown. (Again some VOE’s are ordered via the internet, we are not sure if there would be a delay in receiving VOE’s)

FEMA: Homes in a Flood Zone: Homes that are determined to be in a flood zone would not be able to close as flood insurance could not be obtained.

USDA: During a shutdown, the USDA office would be closed because they have government underwriters that insure behind the lender.  With a shutdown, we would see delays with all USDA loans.

VA: Like the FHA, the disruption is possible — but not absolute — during a shutdown. This would all depend on if they continued to allow their website to function. A disruption would cause delays in VA appraisals and the issuing of certificates of eligibility.  If the website was closed during a shutdown, we would see delays in all VA loans.

Fairfax, VA – When the property in question is an FHA flip. Seller has been on title for less than 90 days.

If the sales price is 20% or more above seller’s acquisition cost and the increase in value is due to improvements/renovation to the property: 

1. The appraiser is required to verify the repairs or work to the property in order to substantiate the increase in value.
 
2. The seller must supply a list of improvements made to the property and the appraiser adds the list to the appraisal along with comments to justify the increase.

3. Before and after pictures are welcome.

4. Although not required on FHA flips, most lenders will automatically order a second appraisal to help justify the value.

If the appraiser cannot warrant that legitimate work was done to the property to substantiate the increase in value:

1. Then a second appraisal will be required.
  
2. This part could cause issues: The lower of the two appraisals will be used for the appraised value.

3.  A second appraisal will be required.

If the increase in value is not due to any significant improvements:

1. The appraiser will be required to provide explanations for the increase in
property value.

2. The appraiser must provide sales comparables to support that value increase since the prior title transfer.

3. OR, if the appraiser cannot justify the increase in value, a second appraisal will be required.

4. The lower of the two appraisal values will be used for the appraised value.

Fairfax, VA – The House of Representatives approved the Federal Housing Administration Reform Act.   The purpose of FHAR is to bring stability to the FHA lending program. Currently, FHA loans make up about 30 percent of the loans originated in the US. This is a far cry from early to mid 2000’s when real estate agents frowned on any government loan of any type.
 
The FHAR Act is a two-step process which was designed to shore up the crumbling foundation of FHA’s capital reserve account.  The first step to increasing the reserve account occurred in April of 2010 as the up-front MIP (mortgage insurance premium) premiums collected from the borrower was increased from 1.75 percent to 2.25 percent of the loan amount.  But the bigger plan was for FHA to increase the monthly mortgage insurance premium which is currently .55 percent for purchase loans with less than 5 percent down payment or refinance loans with at least 5 percent equity to .50% for homes or loans with at least 5 percent or more equity.  Under the law passed today, the agency will be allowed to increase its annual premium to 1.55 percent of the unpaid balance of the loan. The change or increase is expected to be a two part process. The first change is expected to increase annual MIP to from .55 percent to between .85 percent and .90 percent, then increase the annual MIP to the full 1.55 percent later in the year.  The thought from FHA and Capital Hill is that the increase in the annual MIP will allow for FHA’s capital reserves to increase, but with less impact to the consumer since the annual MIP is paid over the life of the loan instead of a lump sum addition to the loan amount at the time of closing. But this is incorrect.

The FHA reserves were getting hammered by homes going into foreclosure or just plain scammers at work with straw buyers or however mortgage fraud is perpetrated.  This is fact. What I am not sure is taken into account is the effect of the higher monthly mortgage insurance will have on the home buying public. How can tripling the monthly mortgage insurance have no impact to the consumer or to the nation’s housing market?  I read a Freddie Mac article in the early 1990’s that stated for every .25 percent increase in interest rates 250,000 home buyers are priced out of the market. To show this is not true see the example below. Using a $300,000 loan amount as the example, the numbers don’t look good for home buyers after September 7^th.   This date can change, call me if you have any questions. 

Fairfax, VA – With the increased role FHA has taken in the lending world since 2007, FHA has experienced an increase of foreclosures which caused FHA to tighten lending guidelines, increase down payment requirements and institute minimum credit score requirements to qualify for an FHA loan.  Here are some changes that have been made or are on the horizon.

Credit Scores – A minimum credit score of 500 is required.  Borrowers with credit scores below 580 would have to put at least a 10% down payment on the property.  Although FHA has minimum scores of 500 and 580, most lenders have score requirements of at least 620 or higher.

Underwriting – Underwriting is a tool lenders use to document information about the property (value) and the borrower (income, credit score, debt).  The underwriting process is used to assess whether the borrower is likely to repay the loan.  Most lenders today use an automated underwriting system (LP - Freddie Mac or DO/DU – Fannie Mae) to get approval of the loan.   If the automated system flags the loan, a more in-depth manual underwriting procedure would take place to ensure the borrower qualifies for the loan.  The underwriter could require additional funds for cash reserves equal to one mortgage payment or explanations or documentation to further clarify certain aspects of loan file. 

Cash-out Refinancing – Is when a homeowner removes equity from the home in the form of a higher loan amount than before the refinance.  Currently a borrower can take up to 85% of the home’s current value.  Previously, this amount was 95% of the home value.  In order to be eligible for a cash-out, you must have excellent credit and have at least 15%  equity after the refinance. (Example: Value $100,000, Owe: $50,000, Equity available is $35,000 less any applicable closing costs.

Seller Concessions – This is a big one.  A seller concession is an amount that is negotiated in the sales contract that the seller will pay towards the buyers closing costs.  The FHA wants to slash allowable seller concessions in half, from 6% to 3%.  Some buyers want to roll in their closing costs, appraisals, etc. into the loan amount. This is not allowed with FHA loans. But this doesn’t ban concessions of over 3%.  What the new guidelines require is a dollar for dollar reduction in the home’s sale price and reduce the amount of the allowable loan.

Short Refinancing – If a borrower has no equity in their home,  they would be allowed to refinance into an FHA loan.  This is on the first loan only.  If there is a second mortgage, the two loans combined cannot exceed the current value of the home by more than 15% once the first loan is refinanced. Not every lender will allow a short refinance since the current service could be losing money by reducing the loan amount.

The Federal Housing Administration (FHA home loans in Virginia) is eliminating one of the mainstays to its program sometime this summer. Gone will be the 6 percent seller concession and in will be the 3 percent seller concession. The reason for eliminating the concession according to FHA is the 6 percent seller concession exposes them to too much risk. This has been one of the key selling points with FHA for decades. But if sellers and buyers move fast there is a possibility they can still take advantage of the higher seller concession.

The buyers must still save or be gifted the money for the down payment to purchase the home. The current minimum down payment is 3.50% of the sales price. The current guidelines on seller concession allow sellers to pay for all of or part of buyers closing costs when purchasing a property.  Items connected with the transaction such as — loan origination and discount points, state and county transfer stamps and fees, an appraisal, inspections, attorney and title closing costs.  

When it comes to lower priced homes, closing and loan expenses typically represent a higher percentage of the total loan closing costs than on higher prices homes. In Fairfax, Virginia and Northern Virginia, closing costs typically run between 2.50% and 3.50% of the sales price of the home. So on a $300,000 home purchase, that could be an extra $7,500 to $10,500 of out of pocket expenses for a home buyer. Current with FHA financing rules, the contract can be structured so the seller agrees to pay all closing costs up to 6% ($18,000) at settlement. This amount could even include some small required repairs.  Once the rule change takes effect, the max concessions will be a flat 3% of the sales price.

If you use Fannie Mae or Freddie Mac financing, seller concessions is generally limited to 3%  for down payments below 20% of the sales price. Although concessions can be much higher when larger down payments are being used.

Bottom line is this: the helping hand of an FHA home loan is getting smaller and smaller. First the down payment was increased from 2.25% (3% in the new home) to a flat 3.50% down payment. Then a minimum credit score, now a decrease of seller concessions from 6% to 3% of the sales price.

Fairfax, Virginia – Bankruptcy is an uncomfortable subject for a variety of reasons. I have been talking with clients since the economy and housing crisis began over two years ago about bankruptcy. But because I am in the mortgage business and filing for bankruptcy affects one’s ability to get a mortgage I get tons of calls.  The most obvious is the potential havoc it can wreak on your finances. Running a close second is the negative stigma which is often attached to the process. This negativity is important to mention because strong emotions can sometimes lead to unsound financial decisions with devastating results.

Bankruptcy in Fairfax, Virginia becomes a viable option for someone who is “upside down” in terms of cash flow. In other words, when a person has more money going out each month than coming in, bankruptcy should be considered if no reversal of this negative cash flow is within sight. The longer someone waits to explore the various options available, the more serious his or her situation may become.

One of the worst things people can do in this situation is to borrow more money to try and pay off their debts. On paper, this is clearly an unwise financial decision. In the real world, however, it is very common for individuals to pursue this strategy in an attempt to buy time and hold off on filing for bankruptcy. On the surface, this is certainly a noble notion; however it can often compound the problem and serves only to delay the inevitable.

For many homeowners in the midst of this upside down cash flow, speaking to a qualified mortgage professional is a much better option. An experienced loan officer can objectively look at your finances and help you determine if restructuring your mortgage would not only help, but possibly even alleviate any need for bankruptcy.

If bankruptcy is the only option, seek out a reputable bankruptcy attorney and credit counselor. A qualified mortgage specialist can provide references for you as well, as he or she works with these professionals on a regular basis. Reliable references are essential in this case because experienced professionals greatly increase the odds of a successful bankruptcy experience. It’s that simple.

When filing for bankruptcy in Fairfax, Virginia, be completely honest and accurate regarding every aspect of your financial situation. This includes any changes to your income which may occur throughout the process. Bankruptcy is a federal procedure, adjudicated by real judges, and scrutinized by representatives who coordinate with the Department of Justice, the FBI, and the IRS.

Here are some additional steps you can take to make the bankruptcy process as painless as possible:

• Save all paperwork regarding your bankruptcy, and keep it organized. This will prove beneficial after your bankruptcy as you now have all of the pertinent information in one place. Also, be sure to write down your discharge date. It’s surprising how many people forget to do this.
• Establish a household budget. This can be accomplished in many ways, but there are several inexpensive computer programs available which do an excellent job.
• Throughout the bankruptcy, do your best to not only live below your means, but to save as much cash as possible. You never know what you may need it for once the process is completed.
• Be prepared for a barrage of junk mail. There will be sharks on the loose who are hoping to capitalize on your need for credit.

Tips for Rebuilding Credit in Fairfax, Virginia:

• If you must buy a car, focus on transportation as opposed to style. Buy an inexpensive, used car, and try to get a loan for it. It’s a good idea to figure out what your budget allows in terms of a dollar amount first. This means obtaining financing prior to looking for a car.
• Get a secured credit card. Secured credit cards allow for the cardholder to deposit a said amount of money into an account, thus establishing the spending limit of the card. Missed payments result in deductions from the account. Some of these cards will reward responsible borrowers by upping the limit without an additional deposit. Some will even convert the account into a traditional credit card. (Be wary of offers of “easy credit” or any card which asks you to call a 900 number. You will be charged for the call.)
• Meet with a credit repair specialist. Not only can they help you clean up the damage to your credit report, they can advise you on specific ways to rebuild the credit you lost as well.

While it does take time, there is definitely life (and credit) after bankruptcy. Some mortgage lenders will even lend to you within a year or so after a bankruptcy. If you’re in serious financial trouble, the trick is to get the help and advice you need from professionals you trust.

Waiting a few extra days or weeks to purchase a home this spring could cost buyers thousands of extra dollars as the office of Housing and Urban Development (HUD) implements several changes for loans guaranteed by the Federal Housing Authority (FHA).

Coming just weeks before the April 30 deadline for the Home Buyer Tax Credit and just days after the March 31 expiration of the Federal Reserve Board’s mortgage backed securities purchase program (which has kept home loan rates artificially low for over a year), these FHA changes make it even more important to act now to save big.

Here are a few reasons why:

On April 5th, the cost of required up-front mortgage insurance for loans guaranteed by the FHA will increase from 1.75% to 2.25%. For a borrower purchasing a $200,000 home with a $7,000 down payment, the up-front mortgage insurance will increase by $965. Up-front mortgage insurance is typically financed in the final loan amount so the impact to a monthly payment will be minimal but overall, the increase is still borne by the borrower both upfront and monthly.

Later this spring, the amount of money that a seller can return to the buyer from their sale proceeds will be reduced from 6% to 3%. The reduction in these “seller concessions” can increase the amount of cash a buyer will be required to pay at closing by $6,000 for a home purchase of $200,000.

There is only one way to avoid being affected by all of these costly changes that lie ahead – submit all FHA mortgage applications by the last week of March.

90-Day Seasoning Waiver Expanded

Fairfax, Virginia: This update from FHA Virginia Loans was released on Friday January 15th, 2010, as an excerpt from the CFR (Code of Federal Regulations) without a corresponding Mortgagee Letter and contains information about FHA’s policies regarding the waiver of the 90-day seasoning required for sellers.

Here are the 6 things you need to know about these changes:

1. Waiver takes effect February 1st, 2010 for a period of one year unless extended.
2. Investors are now exempt from the 90-day seasoning rule.
3. All transactions must me arms-length.
4. No identity of interest can exist between buyer and seller.
5. If sale price is 20% or more of the seller’s acquisition cost, the lender must:

            a. provide supporting documentation and/or a second appraisal and
            b. order an inspection of the property and provide it to the buyer.

6.  The waiver is limited to forward mortgages only. 

To read the text of this waiver and specific details: http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf

This is going to help a lot of home buyers get into a home. The seasoning rule was essentially locking people of bidding for certain homes. The next item that must be addresses is sellers and listing agents from eliminating all government loans (FHA, VA and UDSA loans) from submitting purchase bids.