CAAR Blog

FHA last week announced major underwriting changes to strengthen its reserves while maintaining the agency’s critical position in the mortgage market at a time when its federally backed loans comprise about 40 percent of the market. Among the changes: an increase in the up-front mortgage insurance premium by 50 bps to 2.25 percent; a FICO credit score floor of 580 for borrowers to qualify for the agency’s 3.5 percent minimum down payment (other borrowers must put down a 10 percent minimum); and a reduction in seller concessions from 6 percent to 3 percent of the mortgage amount. Access NAR’s brief on FHA credit issues. Separately, the increase in the FHA up-front mortgage insurance premium and efforts to heighten enforcement against bad lenders are fleshed out in Mortgagee Letter 2010-02 and Mortgagee Letter 2010-03, respectively.

NAR is contributing $550,000 to relief of victims of the Haiti earthquake, and is calling upon its 1.2 million members to help. “REALTORS® help build communities and there is no better time than now to do that in Haiti,” says NAR President Vicki Cox Golder. NAR is donating $500,000 to the Clinton Bush Haiti Fund and another $50,000 has already been donated to The Harvest of Haiti, founded by a 2007 winner of REALTOR® Magazine’s Good Neighbor Awards, Patrick Moore. Moore’s humanitarian outreach program in Haiti supports orphans, delivers clean water, and provides medical care to more than 3,500 people a year.
Part of the NAR fund came from Lowe’s, a partner of NAR’s REALTOR Benefits® Program, who contributed $100,000 that was matched by NAR.

Make a donation.

IRS Releases New Forms, Instructions

The IRS has released IR-2010-006 providing a revised Form 5405 to reflect the changes to the tax credit made in the extension and expansion legislation enacted in November 2009. The release reminds taxpayers that all tax returns claiming the tax credit must be filed manually (i.e., they cannot utilize the IRS E-File automatic system). The revised form includes a section for those repeat buyers who are eligible to claim the $6500 tax credit. The HUD-1 or evidence of the transaction must be filed with all returns claiming the credit (both the $8000 and $6500 credits). Individuals who claim the repeat buyer credit must also provide evidence that they have owned and used the prior residence for 5 consecutive years. The instructions indicate that property tax or homeowners insurance records are sufficient for this purpose.
IRS release, instructions, and forms >
The Home Buyer Tax Credit >

FHA Announces Policy Enhancements to Better Manage Risk

On January 20, 2010, the Federal Housing Administration (FHA) announced major changes to ensure its long-term financial soundness. NAR has met with the FHA Commissioner on several occasions to discuss the state of the housing market and to underscore FHA’s invaluable role. By all accounts the new changes are a victory for home buyers. FHA has carefully balanced the need to make financial reforms with the need to keep FHA available to a large segment of consumers. This is evident by retaining the 3.5 percent minimum down payment requirement and allowing the upfront mortgage insurance premium to be financed.
FHA announced changes in the following areas: 1) The upfront mortgage insurance premium (UFMIP) will increase but may be financed; 2) Borrowers with a credit score below 580 will be required to have at least a 10 percent down payment, however, the minimum down payment will remain at 3.5 percent for all other borrowers; 3) FHA will seek legislative authority to increase the annual premium (currently capped at .55 percent); and 4) Seller concessions will be reduced to 3 percent from 6 percent.
On January 21, 2010, FHA released Mortgagee Letter 2010-02 and 2010-03, which provide details on the UFMIP increase and new procedures for terminating lenders underwriting authority for FHA insured mortgages. The UFMIP increased to 2.25 percent up from 1.75 percent for purchase mortgages and streamline refinances. ML 2010-03 states that HUD will review defaults and claims of approved lenders every 3 months. Lenders will be evaluated based on their default rate within the geographic area served by a HUD office and a default rate that also exceeds the national rate.
NAR Regulatory Issues Brief >
HUD Announcement on Policy Changes to Address Risk and Strengthen Finances >
Mortgagee Letter 2010-02: Increase in Upfront Premium for FHA Mortgage Insurance >
Mortgagee Letter 2010-03: Extended Procedures for Terminating Underwriting Authority >

In October 2009, FHA announced that its capital reserve fund had fallen below the congressionally mandated level of 2 percent. The drop in capital reserves has led Congress and the Administration to call for changes to strengthen FHA.

The  week  of  January  18,  2010, FHA will announce major changes to ensure its long-term financial soundness.  FHA is trying to balance three fundamental objectives: 1) financial soundness – ensuring that its capital ratio returns above 2 percent, 2) fulfilling its mission of serving borrowers not adequately served by the private sector  and 3) facilitating the recovery of the housing industry and the over-all economy.

NAR  has  met with the Commissioner on several occasions to discuss the state of the housing market and to underscore FHA’s invaluable role. In looking for solutions to FHA’s financial concerns, replenishing the insurance fund and lowering loan-to-value ratios have the most significant impact on the FHA’s actuarial soundness.  We expect changes in the following areas:

Improve FHA loan quality:
Increasing “upfront cash” that a borrower has to bring to the table by:
      Eliminating the ability to finance the upfront premium
      Increase the cash investment required above 3.5 percent by:
         o  Reduce seller concessions from 6 percent to as low as 3 percent
         o  Impose a minimum FICO score
      Down payment requirement will remain at 3.5 percent
      Impose a loan-to-value (LTV) maximum ratio by FICO score

Increase the Mortgage Insurance Premiums:
FHA can increase the MIP as follows:
      Up-front premium may be raised to 2-2.25 percent, up from 1.75 percent
      Higher premiums may be introduced for certain FHA products (such as refinance transactions)

FHA Lender Eligibility Changes
FHA is requiring significant changes for lenders.  Many changes recommended were published as a proposed rule on lender eligibility changes in late November.  Final rule has not yet been published. There are several proposed changes for FHA lenders:
      Elimination of loan correspondent approval process
      Increase net worth requirements of lenders to $2.5 million over the next 3 years
      Lenders will be required to have a net worth of $1 million within one year, of which 20 percent must be liquid assets
      Implementation of Credit Watch for underwriting lenders to monitor defaults and claims
      Codification of Mortgagee Letter 2009-31, which places additional requirements on FHA lenders

Risk Management Improvements
FHA will be overhauling its approach to risk management throughout 2010. FHA will likely begin targeting early payment defaults for reviews and loans that result in claims in the first couple of years.

Risk Management Improvements (Continued) This change will likely increase indemnification requests since FHA will be targeting their reviews on early payment defaults (i.e. loans with potential problems).

FHA will be highlighting “poor performing” lenders more prominently on their website and in press releases. This started in January when FHA and the HUD Inspector General announced subpoenas to 15 mortgage companies demanding data and documentation on failed loans.

The Commissioner has frequently discussed the development of a Lender Scorecard, which is expected in the near future.

FHA Budget Proposals (Requires Legislation) As part of the Administration’s FY 2011 budget proposal there will be several FHA legislative initiatives. They could include:
      Increase the current cap for annual premiums, currently at .55 percent (FHA has said that raising the annual premium is the “most effective means of raising capital for the fund w/ least impact per borrower”)
      Obtain  a legislative change to Credit Watch to facilitate the suspension of an FHA lender’s entire operation not just individual branches
      Increased accountability of FHA lenders for fraud or misrepresentation

These changes will require congressional action, the timetable for enacting and implementing any legislation is subject to the Congressional schedule.

Conclusion
FHA  will  be transformed over the next few years. The changes outlined above are the beginning of the process with additional changes expected during the tenure of FHA Commissioner Dave Stevens. Going forward, FHA will continually evaluate programmatic changes and will likely withdraw them when the capital ratio returns above 2 percent. However, it is unlikely FHA will relax risk management and lender monitoring enhancements.

2009 Year-End

Where Are We Now?

Home sales, compared to 2008, continued to show improvement in the second half of 2009. At mid-year, sales were down 28%, but by year-end sales were only 8.7% below the 2008 levels. In the 4^th quarter of 2009, sales (696) were up 34.1% from the same period in 2008 (519). This is the first year-over-year increase in sales we have seen in several quarters in the Charlottesville area. While it is certainly exciting to see such a significant increase in sales, it is important to remember that the 4^th quarter of 2008 was the height of the economic and housing crisis. As predicted, the 4^th quarter of 2008 (and the 1^st quarter of 2009) appear to be the bottom of the housing downturn in the Charlottesville area.

As reported for the past two quarterly reports, significantly lower home prices (down 20% or more) are driving the pick-up in sales. In addition, the $8,000 tax credit for first time buyers supercharged the sale of starter homes (below $300,000) in 2009. 67.5% of home sales for the year were in this starter home category, which is approximately a 10% increase in this category.

To read the entire report, CLICK HERE!

Why they sold, what they sold, how they sold it, and how they found a real estate professional are among the details about sellers that NAR Research looks at in its latest Home Buyer and Seller Survey.

Here’s a link to the podcast of the 2010 Officer & Director Installation that took place on Thursday, January 7th at the DoubleTree Hotel. Great speech by Greg Slater, our new 2010 President.

 
You can better understand temporary FHA condo rules released a few weeks ago through FAQs the agency has released. The temporary rules ease concentration and owner-occupancy requirements and make changes to pre-sale rules and to the agency’s spot loan approval process.

Commercial real estate will see negative absorption, higher vacancies, and declining rents, NAR’s latest commercial analysis shows. Financing still poses the main challenge to stabilization. The market for commercial mortgage-backed securities (CMBS) has improved, but volume is insufficient to match maturing debt. Read more in an NAR Research commentary.

  Despite a slow market and a slight decrease in the resale value of most remodeling projects, the smartest home improvement investments may also be some of the least expensive. Results from the 2009 Remodeling Cost vs. Value Report show that small-scale exterior projects are the most profitable at resale. On a national level, eight out of the top 10 projects in terms of costs recouped were exterior replacement projects that cost less than $14,000. The annual survey is conducted through a partnership with Remodeling Magazine and REALTOR® Magazine, and is based on value estimates provided by REALTORS® around the country. Read the full report.