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Will Fannie Mae and Freddie Mac’s Low Down Payment Loans Cause Another Housing Collapse?

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Fannie Mae and Freddie Mac both recently introduced programs to clearly define their lending standards and give homebuyers loans with as little as 3% down. This has prompted criticism from many people as to the safety and responsibility of this type of loan. After all, didn’t the abundant availability of low down payment loans contribute to the housing collapse?

While that’s definitely been true in the past, things are a little different this time around. There is a right way and a wrong way to let people become homeowners without a lot of cash up front, and it looks like Fannie and Freddie are getting it right this time.

The new loan programs
Fannie Mae’s 3% down loan program is available right now, and is limited to first-time homebuyers, which are defined as anyone who has not owned a home in the past three years. And even if a borrower does not meet the “first-time” standard, a conventional mortgage can be obtained with as little as 5% down.

Freddie Mac’s 3% down program is called Home Possible Advantage, and will be available for settlement dates on or after March 23. Unlike Fannie Mae’s program, the Home Possible Advantage loan program is not limited to first-time buyers.

Both programs limit the low down payment options to single-unit primary homes. So, investment properties, second homes, and properties such as duplexes are disqualified.

What’s different this time around?
Low down payments all by themselves aren’t necessarily a bad thing, if used correctly. And Fannie and Freddie are taking steps to make sure things are different this time around.

One big difference is that the low down payment loans are limited to standard (up to 30-year) fixed-rate mortgages. The “exotic” loan options that used to be widely available with little or no money down, such as interest-only and negative amortization loans, are a thing of the past. And adjustable-rate loans are not eligible for this option, to prevent cash-strapped borrowers from finding themselves in over their heads when the interest rate jumps.

The level of documentation required is another big difference from the housing collapse. Prospective homebuyers are now expected to be able to document every detail of their financial situation. In fact, it’s not uncommon for a mortgage application packet to consist of more than 100 pages of various income, employment, and financial documentation.

And finally, credit standards have relaxed in recent years but are still much higher than they ever were in the years leading up to the collapse. This is especially true for low down payment loans. According to Fannie Mae’s loan-eligibility matrix , a borrower needs a minimum credit score of 680 in order to qualify for a down payment of less than 25%, which is significantly higher than the 620 required for loans with higher down payments.

In a nutshell, the difference is that even though you can once again buy a home with a low down payment, borrowers are being held to a higher standard in order to do so.

If you want to become a homeowner
If you’re a renter and have been thinking of taking the plunge into homeownership, this could be the opportunity you were waiting for. In order to make the process go smoothly, there are a few things that you should do before applying for a loan.

For starters, you need to know where you stand credit-wise since the new loan programs require reasonably good credit. And, if your score is a little bit low, here are some suggestions on how to improve it . And, you should know exactly what to expect throughout the mortgage process and what lenders are looking for. You’ll not only need credit, but enough income to justify the loan, a solid employment history, and the ability to document your savings and other financial assets.

It could be a good catalyst for housing in 2015
Along with the already popular FHA loan options, there are now plenty of ways for people to become homeowners without large amounts of money down. And the new programs prompted the FHA to significantly lower its mortgage insurance premiums in order to remain a competitive loan option.

These loans seem to me to be less likely to contribute to another housing collapse, and could actually do a lot of good for the housing market. First-time homebuyers currently make up a much lower share of the market than they have historically, and if these new programs are successful, an influx of first-time buyers could go a long way toward a healthy U.S. housing market.

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The article Will Fannie Mae and Freddie Mac’s Low Down Payment Loans Cause Another Housing Collapse? originally appeared on Fool.com.

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[…]

Low down payment mortgages back for buyers

Potential homebuyers who don’t have a lot of cash to put down now have a cheaper way to get a loan.

Mortgage giants Fannie Mae and Freddie Mac announced guidelines Monday for loans with down payments as low as 3 percent under a new program largely aimed at first-time homebuyers.

“These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” said Federal Housing Finance Agency Director Mel Watt in a release.

Read More The top 10 housing markets for growth in 2015

The loan must be fixed rate, and the home must be a borrower’s primary residence, so this would not apply to investors, according to FHFA officials on a conference call with reporters Monday morning. At Fannie Mae, at least one of the borrowers on the loan must be a first-time homebuyer, defined as not having owned a home in the past three years. Freddie Mac is allowing the low down payment loan for any borrower who meets its underwriting standards.

Full documentation of a borrower’s income and credit history is required, as is mortgage insurance. Freddie Mac will require credit counseling for its borrowers, while Fannie Mae will in certain cases.

Fannie Mae has a 3 percent down payment product already through state housing finance agencies, but this loan may go through any lender interested in the program. At a conference in November, Bank of America CEO Brian Moynihan said his bank would not participate in a low down payment program and reportedly suggested that if borrowers didn’t have 10 percent to put down, they should probably rent. That was before these details were announced.

“[Mr. Moynihan] made those comments several weeks ago as a broad characterization,” said Bank of America spokesman Terry Francisco on Monday. “We will evaluate this program.”

Read More Self-employed? Good luck getting a mortgage

Fannie Mae, which is significantly larger than Freddie Mac, will also offer a cash-out refinance through the program, but only on existing Fannie Mae loans, and the amount of the cash out is limited to the lesser of 2 percent of the loan or $2,000. It is designed to help cover closing costs only. Freddie Mac is offering a no cash-out refinance.

Fannie Mae’s minimum FICO credit score cutoff is 620, while Freddie Mac’s is 660, but both are subject to so-called, compensating factors, so if a borrower has a credit score on the low side, he or she may need to show more assets to mitigate the added risk.

The move to offer these low down payment loans is clearly in response to an industry cry that credit is too tight and stifling demand from first-time homebuyers. These buyers, usually up to 40 percent of the homebuying market, have been stuck at less than a third of today’s market. Income growth has not been keeping pace with rising home prices, and as rents continue to rise, potential buyers are having a much tougher time saving for a large down payment.

Read More Unsteady incomes keep millions behind on bills

Fannie Mae will allow these loans starting Dec. 13, while Freddie Mac will begin underwriting for loans with settlement dates beginning March 23, 2015.

FinanceLoansFreddie MacFannie Mae […]

The Nation's Housing: Cash-outs stage a comeback

WASHINGTON — The name itself conjures up images of ATMs: cash-outs.

You may associate the term “cash-out refinancing” with the frothy and dangerous days of the real estate boom, when some owners turned their hyperinflating houses into money mills, leveraging their equities to the hilt. That didn’t end up too well for many of them.

But now that equity holdings in homes are surging again, cash-out refinancings are coming back into vogue — this time under much tighter controls by lenders and used for saner purposes by borrowers than they were last decade.

Giant mortgage lender Quicken Loans estimates that about one-quarter of new refinancings are cash-outs. Federally chartered investor Freddie Mac reports that cash-outs grew to 17 percent of all refinancings in the first quarter of this year compared with 14 percent the same period in 2013.

A cash-out refi means that the homeowner extracts more money in a replacement mortgage than the current balance, rather than simply lowering the rate and keeping the principal amount the same as it was before the transaction.

Say you have an existing loan with a $200,000 balance. Thanks to rising home values, your property is worth $400,000. If you have a need for cash and good to excellent credit scores, you might be able to negotiate a refinancing into a $250,000 or $300,000 new fixed-rate mortgage. Putting aside transaction costs, you’d end up with roughly $50,000 to $100,000 in cash at closing for whatever use you have in mind.

During the height of the boom years, according to Freddie Mac data, in 80 percent or more of all refinancings borrowers opted to pull out some cash. Freddie defines a cash-out refi as one where there is an increase in the principal balance of at least 5 percent over the previous balance. In the wake of the bust and recession, when owners in this country lost close to $6 trillion in equity, cash-outs have been far fewer and tougher to obtain.

Even this spring they’re just a fraction of total refinancing volume, but the purposes that borrowers plan for the cash they’re extracting have changed dramatically. Whereas a decade ago people were pulling out extra money to pay for consumer spending — cars, boats, vacations — bankers say today they’re focused on more financially sound uses.

Bob Walters, chief economist for Detroit-based Quicken Loans, says his firm is seeing “a lot of debt consolidation” using cash-out refinancings. The same is true at Insignia Bank in Sarasota, Fla. CEO and Chairman Charles Brown III says “sophisticated” borrowers concerned about rising interest rates are consolidating high-cost credit card, mortgage and other floating-rate debt into fixed-rate home loans. The replacement mortgages often carry 30-year rates anywhere from the low 4 percent range to just below 5 percent, depending upon the borrowers’ credit and income profiles.

Cyndee Kendall, Northern California regional mortgage sales manager for Bank of the West, says a typical cash-out refi client today has a floating-rate second mortgage or equity credit line plus a first mortgage with an above-market rate and wants to roll those debts into a single, fixed-rate jumbo mortgage. They do it, she says, to better manage their cash flow and protect against anticipated interest-rate increases as the Federal Reserve tapers its Treasury securities purchases.

Paul Skeens, president and owner of Colonial Mortgage Co., a lender in Waldorf, Md., is seeing another frequent use of cash-outs: Recession-era real estate investors now cashing in their chips. People who bought a house for little or no cash at bargain prices during the recession, and who have built up equity during the past few years through loan amortization and property appreciation, now want to extract cash to make new investments.

A recent client, for example, did a $170,000 cash-out refinancing on a house he purchased with a 3.5 percent FHA-backed mortgage in 2011. The client paid off the $147,000 FHA loan balance and took out a new conventional mortgage of $170,000. After transaction costs, he walked away from the refi with about $20,000 in cash, which he plans to use for a down payment on another investment house. The rate on the new loan: 4.875 percent for 30 years.

Cash-out refis aren’t the right financial option for everybody, of course. A home equity line of credit may be more flexible and cheaper. But for fixed-rate debt consolidation or pulling money out of a successful investment, a cash-out refi is worth a serious look.

[…]

Cash-outs stage a comeback

Nation’s Housing

WASHINGTON — The name itself conjures up images of ATMs: cash-outs.

You may associate the term “cash-out refinancing” with the frothy and dangerous days of the real-estate boom, when some owners turned their hyperinflating houses into money mills, leveraging their equities to the hilt.

That didn’t end up too well for many of them.

But now that equity holdings in homes are surging again, cash-out refinancings are coming back into vogue — this time under much tighter controls by lenders and used for saner purposes by borrowers than they were last decade.

Giant mortgage lender Quicken Loans estimates that about one-quarter of new refinancings are cash-outs.

Federally chartered investor Freddie Mac reports that cash-outs grew to 17 percent of all refinancings in the first quarter of this year compared with 14 percent the same period in 2013.

A cash-out refi means that the homeowner extracts more money in a replacement mortgage than the current balance, rather than simply lowering the rate and keeping the principal amount the same as it was before the transaction.

Say you have an existing loan with a $200,000 balance. Thanks to rising home values, your property is worth $400,000.

If you have a need for cash and good to excellent credit scores, you might be able to negotiate a refinancing into a $250,000 or $300,000 new fixed-rate mortgage.

Putting aside transaction costs, you’d end up with roughly $50,000 to $100,000 in cash at closing for whatever use you have in mind.

During the height of the boom years, according to Freddie Mac data, in 80 percent or more of all refinancings borrowers opted to pull out some cash.

Freddie defines a cash-out refi as one where there is an increase in the principal balance of at least 5 percent over the previous balance.

In the wake of the bust and recession, when owners in this country lost close to $6 trillion in equity, cash-outs have been far fewer and tougher to obtain.

Even this spring they’re just a fraction of total refinancing volume, but the purposes that borrowers plan for the cash they’re extracting have changed dramatically.

Whereas a decade ago people were pulling out extra money to pay for consumer spending — cars, boats, vacations — bankers say today they’re focused on more financially sound uses.

Bob Walters, chief economist for Detroit-based Quicken Loans, says his firm is seeing “a lot of debt consolidation” using cash-out refinancings.

The same is true at Insignia Bank in Sarasota, Fla. CEO and Chairman Charles Brown III says “sophisticated” borrowers concerned about rising interest rates are consolidating high-cost credit card, mortgage and other floating-rate debt into fixed-rate home loans.

The replacement mortgages often carry 30-year rates anywhere from the low 4 percent range to just below 5 percent, depending upon the borrowers’ credit and income profiles.

Cyndee Kendall, Northern California regional mortgage sales manager for Bank of the West, says a typical cash-out refi client today has a floating-rate second mortgage or equity credit line plus a first mortgage with an above-market rate and wants to roll those debts into a single, fixed-rate jumbo mortgage.

They do it, she says, to better manage their cash flow and protect against anticipated interest-rate increases as the Federal Reserve tapers its Treasury securities purchases.

Paul Skeens, president and owner of Colonial Mortgage, a lender in Waldorf, Md., is seeing another frequent use of cash-outs: Recession-era real-estate investors now cashing in their chips.

People who bought a house for little or no cash at bargain prices during the recession, and who have built up equity during the past few years through loan amortization and property appreciation, now want to extract cash to make new investments.

A recent client, for example, did a $170,000 cash-out refinancing on a house he purchased with a 3.5 percent FHA-backed mortgage in 2011.

The client paid off the $147,000 FHA loan balance and took out a new conventional mortgage of $170,000.

After transaction costs, he walked away from the refi with about $20,000 in cash, which he plans to use for a down payment on another investment house. The rate on the new loan: 4.875 percent for 30 years.

Cash-out refis aren’t the right financial option for everybody, of course.

A home equity line of credit may be more flexible and cheaper. But for fixed-rate debt consolidation or pulling money out of a successful investment, a cash-out refi is worth a serious look.

Ken Harney’s email address is kenharney@earthlink.net

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Low Cash-Out Share, Shorter Terms Point to Equity Build-Up

MCLEAN, VA–(Marketwired – Apr 30, 2014) – Freddie Mac (OTCQB: FMCC) today released the results of its first quarter 2014 quarterly refinance analysis, showing that borrowers will save on net more than $1 billion in interest payments over the coming year as they continue to shorten their payment terms and build equity in their homes.

News Facts

Of borrowers who refinanced during the first quarter of 2014, 39 percent shortened their loan term, up slightly from the previous quarter and the highest since 1992. In the first quarter, an estimated $6.5 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages, largely unchanged from the previous quarter and $2 billion less than the same time one year ago. The peak in cash-out refinance volume was $84 billion during the second quarter of 2006. In aggregate, U.S. home equity grew by an estimated $2.1 trillion during 2013, according to the Federal Reserve Board’s Flow of Funds data. Much of this gain was attributable to home value gains. The average mortgage interest rate reduction in the first quarter was about 1.4 percentage points — or a savings of about 24 percent. On a $200,000 loan, that translates into interest savings of about $2,800 during the next 12 months. Homeowners who refinanced through HARP during the first quarter of 2014 benefited from an average mortgage interest rate reduction of 1.6 percentage points and will save an average of $3,200 in interest payments during the first 12 months, or about $260 every month. About 83 percent of those who refinanced their first-lien home mortgage maintained approximately the same loan amount or lowered their principal balance by paying in additional money at the closing table. The peak was 88 percent during the second quarter of 2012. The median age of the original loan outstanding before refinance increased to 7.3 years during the first quarter, the most since the analysis began in 1985.

Quotes
Attributed to Frank Nothaft, Freddie Mac vice president and chief economist:

“Roughly 17 percent of borrowers who refinanced in the first quarter chose to extract home equity versus 14 percent from the same time last year. This is well below the peak cash-out share of 89 percent the market experienced in the third quarter of 2006. However, even with the slight increase in the cash-out share, it’s still $2 billion less compared to first quarter of last year simply because the refinance share of originations continues to plummet.”

About the Quarterly Refinance Report
These estimates come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. The analysis does not track the use of funds made available from these refinances. The analysis also does not track loans paid off in entirety, with no new loan placed. Some loan products, such as 1-year ARMs and balloons, are based on a small number of transactions.

With the report for the first quarter of 2013, the calculation of the principal balance at payoff of the previous loan has been modified. Previously, the payoff balance was calculated as the amount due based on the loan’s amortization schedule, and “cash-in” was defined as a new loan amount that was less than the scheduled amortization amount. Data for 1994 to current have been recalculated using the actual payoff amount of the old loan, with an allowance for rounding down the principal at refinance; thus, from 1994 to present, “cash-in” is defined as a new loan amount that is at least $1,000 less than the payoff principal balance of the old loan. Data are presented under both methods for 1994 for comparison purposes.

First Quarter 2014 Refinance Statistics

Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Today Freddie Mac is making home possible for one in four home borrowers and is one of the largest sources of financing for multifamily housing. Additional information is available at FreddieMac.com, Twitter @FreddieMac and Freddie Mac’s blog FreddieMac.com/blog.

LoansInvesting EducationFreddie Mac […]

All-cash crushing first-time homebuyers

Tough credit is also hitting younger buyers hardest. Today’s mortgage lenders require higher down payments, and while first-time buyers used to get help from their parents, that well has dried up for some, as older Americans lost much of their savings in the recent financial crisis.

First-time buyers often turn to FHA loans, the government mortgage insurer, but premiums and fees there have gone up dramatically in the past year, and FHA’s share of the market has dropped accordingly.

(Read more: Construction up, but are we building too many houses?)

On the brighter side, another report from Inside Mortgage Finance shows Fannie Mae and Freddie Mac easing the doors open a bit more to first-time buyers. The share of Fannie Mae/Freddie Mac financing for first-time homebuyers hit 19.5 percent in December. That compared with 14.1 percent a year earlier.

Credit aside, there is still the simple fact that house prices shot up like a rocket in 2013, well into the double digits nationally.

“Below the surface of last year’s market, a number of unsettling trends started to emerge as a result of rapid and ultimately unsustainable appreciation, setting up a bit of a mixed bag for 2014,” said Zillow‘s chief economist, Stan Humphries.

“Affordability issues will help put the brakes on many markets that saw huge appreciation rates, like California and the Southwest, creating volatility that could potentially cause whiplash for homebuyers and sellers.”

(Read more: For the billionaire who wants it all: A fully loaded home)

By CNBC’s Diana Olick. Follow her on Twitter @Diana_Olick.

Questions? Comments? facebook.com/DianaOlickCNBC

[…]

The new mortgage rules that are likely to affect your next home purchase

The policies require lenders to better verify that borrowers can afford the houses they are seeking to buy and can repay the loans. Some are intended to protect borrowers while holding lenders more accountable for their business practices.

For instance, one set of rules requires mortgage servicers to provide consumers regularly with accurate information about their loan balances and fix mistakes quickly. The rules also prohibit servicers from starting the foreclosure process until 120 days after the borrower’s last payment.

“By bringing back these basic building blocks of responsible lending and servicing the customer, we will improve conditions for consumers seeking to enter the market and for all those who are still struggling to pay down their existing loans,” Richard Cordray, director of the Consumer Financial Protection Bureau, said in prepared remarks made last week to the Consumer Federation of America.

“By making the mortgage market work better, we will build consumer confidence and strengthen this essential foundation of our economy,” he added.

Another big change affecting the Washington region is a Federal Housing Administration (FHA) plan to decrease the maximum loan amount for borrowers in this area beginning Jan. 1.

The agency announced this week that its mortgages will be limited to a maximum of $625,500, down from $729,750. Metropolitan Washington has high-priced housing — about one in four homes in the region sells for $600,000 and above, according to RealEstate Business Intelligence, a subsidiary of Rockville-based multiple listing service MRIS. The FHA’s new loan limit next year will match the caps for conventional loans purchased by Fannie Mae and Freddie Mac.

The FHA said in a statement that the agency wants to reduce the government’s role in mortgage lending to borrowers who are “underserved” — who either are low-income or have difficulty obtaining loans. The higher limits were put in as an emergency measure in 2008 and were supposed to last one year but were allowed to continue because of the lack of private loans.

Borrowers who need a loan of more than $625,500 will have to get a jumbo loan, which typically requires a down payment of at least 20 percent. FHA loans are not only a little more flexible in terms of their qualification guidelines, but, more important for many people, they require a down payment of just 3.5 percent.

“Switching on the fly from a down payment of 3.5 percent to 20 percent or more of the purchase price is not really an option for most people,” says Patrick Cunningham, vice president of Home Savings and Trust Mortgage in Fairfax.

“It could be a $100,000 difference in money needed,” Cunningham adds. “Not something most people just pull out of the couch cushions.”

Ability-to-Repay rules

On Jan. 10, the Consumer Financial Protection Bureau will implement a new set of rules designed to address predatory lending practices that spurred a wave of foreclosures the past five years.

Authorized by the Dodd-Frank Act, the “Ability-to-Repay” regulations are aimed at preventing lenders from approving mortgages for borrowers with questionable credit scores and poor debt-to-income ratios, and steering them into adjustable-rate loans or interest-only loans with little or no money down.

The housing crisis emerged in part when rates on ARMs were reset upward. Millions of homeowners who were not completely qualified for their mortgages lost their properties in foreclosure because they could no longer afford them.

The good news for borrowers is that the new rules will cap loan origination fees — they will be no more than 3 percent of the amount for mortgages of $100,000 and above. Currently, loan origination fees are not capped. However, to stay competitive, most lenders keep their fees low enough to attract customers yet high enough to make their business profitable.

The rules establish a standard for what the government considers a “qualified mortgage.”

Risky mortgages — negative-amortization, interest-only or balloon-payment loans — fall outside the qualified-mortgage standard.

Lenders will be required to thoroughly verify consumers’ income, assets and obligations — or otherwise risk a lawsuit from borrowers who default on their mortgages.

But while the regulations are intended to benefit consumers, some experts say that, like the Affordable Care Act, the changes may lead to complications and unintended consequences.

One example they cite is a provision in the rule that requires borrowers’ debt to make up 43 percent or less of their gross income.

“People who are right on the line of qualifying right now may not qualify in 2014” because of the policies set by Dodd-Frank, says David Zugheri, executive vice president of Envoy Mortgage in Houston.

In his prepared remarks, Cordray called it a myth that the new standard will prohibit lenders from issuing mortgages to borrowers who don’t meet the 43 percent debt-to-income ratio. Lenders, he said, would still have flexibility to make exceptions for buyers with excellent credit scores, significant assets or extenuating circumstances that make it difficult to verify income.

This “particular claim is wrong in three ways,” Cordray said. “First, lenders can also rely on the standards for loans backed by [Fannie Mae and Freddie Mac] or federal housing agencies. Second, smaller local creditors can make the same kinds of solid loans they have always made if they choose to keep those loans in their own portfolio, as they often have done in the past. Third, lenders can simply use their own judgment when looking at your ability to repay, just as they always have done.”

But some experts assert that lenders will be unwilling to make loans that don’t meet the qualified-mortgage standard. Because Fannie Mae and Freddie Mac won’t buy those mortgages, the lenders would be forced to keep them on their books.

More expensive mortgages?

Another criticism cited by some experts is that borrowers seeking conventional mortgages meeting the criteria of Fannie Mae and Freddie Mac may face higher fees.

Fannie Mae and Freddie Mac announced this week that guarantee fees they charge to lenders for servicing their loans will rise an average of 14 basis points on 30-year fixed-rate loans, on top of the 10 basis point increases in both December 2011 and August 2012.

Since lenders indirectly pass on the cost of paying the guarantee fees to consumers, Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, asserted that the change could have a negative impact on consumers’ ability to borrow money.

The fees charged to consumers used to be roughly 11 to 13 basis points, and now they are about 50 basis points, says Green. A basis point equals 1/100th of 1 percent, so 100 basis points would be equal to a one percentage point change in an interest rate. He says they could go as high as 70 to 75 basis points in the coming year or two.

Since borrowers are limited by qualified-mortgage rules to a debt-to-income ratio of 43 percent or less, higher mortgage rates and higher fees that increase the size of their housing payment make it more difficult for some borrowers to qualify for a loan.

Zugheri says that new regulations and higher expectations for compliance with rules established by Fannie Mae and Freddie Mac are hitting some groups of borrowers harder than others, such as low- to moderate-income consumers.

“If you have slightly spotty credit, your income isn’t clearly defined, your assets are hard to verify or the value of your home is difficult to appraise, you’ll have a hard time getting credit and you may not qualify at all,” Zugheri says.

Difficulties for the self-employed

Doug Benner, vice president and sales manager of 1st Portfolio Lending in Rockville, says the hard line requiring a maximum debt-to-income ratio of 43 percent will make it especially harder for self-employed borrowers who have trouble documenting their income.

“If you don’t have a W-2 to prove your income, it’s very difficult to get a loan, but the data shows that a larger percentage of the population is self-employed or doing contract work and they should be able to get loans,” Benner says.

Benner says loans with reduced documentation were a good fit for self-employed borrowers, but regulations have eliminated those programs. Benner says he knows of borrowers with high net worth, perfect credit and a home valued at $2 million with $1 million in home equity who were unable to qualify for a mortgage because they lacked the documentation to prove their income meets the debt-to-income ratio.

“It won’t get better, either, because state legislation in Maryland and the QM [qualified-mortgage] rules all say that borrowers need to prove their ability to repay a loan based on cash flow,” Benner says.

Zugheri says the bigger problem right now in the housing market is that overregulation and capped compensation mean that many lenders will drop out of the business. Ultimately, he says, less competition among lenders will lead to higher fees and higher mortgage rates, which will hurt the housing market and particularly affect low- to moderate-income borrowers who have a harder time affording a loan.

“As the rule is written, the most a lender can charge for an $80,000 loan is $2,400, while the most they can charge for a $500,000 loan would be $15,000,” says Zugheri. “Some of the fixed costs are the same no matter what size loan you make, so some mortgage companies will just stop making smaller loans or will do fewer of them because they may even lose money on them.”

“The biggest issues that bite everyday people are rising guarantee fees, the difficulty of self-employed people to get a loan and the concern about loan buybacks,” says Green. “Unfortunately, nothing’s changing those things anytime soon.”

Michele Lerner is a freelance writer. Freelance writer Sheree R. Curry also contributed to this report.

[…]

Few Cash-Out Equity When Refinancing, More Shorten Term

MCLEAN, VA–(Marketwired – Jun 6, 2013) – Freddie Mac (OTCQB: FMCC) today released the results of its first quarter 2013 quarterly refinance analysis showing that borrowers continue to strengthen their fiscal house by taking advantage of near record low mortgage rates to lower their monthly payments, shortening their loan terms, and overwhelmingly choosing the safety of long-term fixed-rate mortgages. However, the refinance boom that has occurred over the past three years has peaked as the market begins shifting toward more purchase activity.

News Facts

Borrowers who refinanced in the first quarter of 2013 will save on net approximately $7 billion in interest over the next 12 months. Additionally, the net dollars of home equity converted to cash as part of a refinance, adjusted for consumer-price inflation, remained at a low volume. In the first quarter, an estimated $8.1 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, about the same as the previous quarter and substantially less than during the peak cash-out refinance volume of $84 billion during the second quarter of 2006. Of borrowers who refinanced during the first quarter of 2013, 28 percent shortened their loan term, while 68 percent of borrowers kept the same term as the loan that they had paid off; 3 percent chose to lengthen their loan term. Likewise, 85 percent of those who refinanced their first-lien home mortgage maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table. That’s just shy of the 88 percent peak during the second quarter of 2012. More than 95 percent of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless of what the original loan product had been. For example, 87 percent of borrowers who had a hybrid ARM chose a fixed-rate loan during the first quarter, the highest share since the first quarter of 2010.

Property-value change, loan age, and rate reduction differed between refinancings under the Home Affordable Refinance Program (HARP) and other refinances.

HARP has enabled many borrowers who traditionally would not have had access to refinance to obtain low rates and significantly reduce their interest rate and monthly payment. The program has helped about 2.5 million refinancing borrowers since its inception through March 2013. HARP loans made up just over 20 percent of first quarter refinance loans purchased by Freddie Mac and Fannie Mae. For loans refinanced during the first quarter through HARP, the median depreciation in property value was 28 percent, the prior loan had a median age of about 6 years (to be eligible for HARP, the prior loan had to be originated before June 1, 2009), and the HARP borrower with a 30-year fixed-rate refinance (no product change) had an average interest-rate reduction of 2.1 percentage points. For all other (non-HARP) refinances during the fourth quarter, the median property had very little change in value between the dates of placement of the old loan and the new refinance loan. The prior loan had a median age of 4.1 years, and borrowers who refinanced a 30-year fixed-rate into the same product had an average interest-rate decline of 1.6 percentage points.

Quotes
Attributed to Frank Nothaft, Freddie Mac vice president and chief economist:

“Borrowers continue to strengthen their fiscal house by taking advantage of near record low mortgage rates. In total, borrowers who refinanced in the first quarter of this year will save approximately $7 billion in interest payments over the next 12 months, which they can put towards savings, paying down debt or to support additional expenditures. Further, the estimated $8 billion in ‘cash-out’ activity will further augment borrowers’ investment and consumption spending.”

About the Quarterly Refinance Report
These estimates come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. The analysis does not track the use of funds made available from these refinances. The analysis also does not track loans paid off in entirety, with no new loan placed. Some loan products, such as 1-year ARMs and balloons, are based on a small number of transactions. During the first quarter of 2013, the refinance share of applications averaged 79 percent in Freddie Mac’s monthly refinance survey, and the ARM share of applications was 5 percent in Freddie Mac’s monthly ARM survey, which includes purchase-money as well as refinance applications.

With the report for the first quarter of 2013, the calculation of the principal balance at payoff of the previous loan has been modified. Previously, the payoff balance was calculated as the amount due based on the loan’s amortization schedule, and “cash-in” was defined as a new loan amount that was less than the scheduled amortization amount. Data for 1994 to current have been recalculated using the actual payoff amount of the old loan, with an allowance for rounding down the principal at refinance; thus, from 1994 to present, “cash-in” is defined as a new loan amount that is at least $1,000 less than the payoff principal balance of the old loan. Data are presented under both methods for 1994 for comparison purposes.

First Quarter 2013 Refinance Statistics

Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Today Freddie Mac is making home possible for one in four home borrowers and is one of the largest sources of financing for multifamily housing. For more information please visit www.FreddieMac.com and Twitter: @FreddieMac.

Contact:

MEDIA CONTACT:
Chad Wandler
703.903.2446
Chad_Wandler@freddiemac.com

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When a condo association messes up a home sale

If you own a condominium or a property within a homeowners association, the association’s behavior could derail your home sale.

The lender looks not only at your financial situation, but also at the financial condition of the condo association or HOA. When selling your home, you could face delays or even a canceled sale because of the association’s problems, including:

Delinquencies on association dues. Lawsuits. Limited cash reserves. Too little insurance. Too many renters.

Any one of these issues could prevent a prospective buyer from getting a mortgage to buy your home, particularly if it is a condo.

Sellers within a condo or an HOA should ask questions before selling their homes, or they could face these unexpected financing issues.

“Homeowners should investigate the security of their association before listing their home, so they know what issues may or may not come up during negotiations with buyers,” says Amy Tierce, regional vice president of Fairway Independent Mortgage in Needham, Mass. “Fannie Mae, Freddie Mac and (the Federal Housing Administration) all have guidelines in place to protect consumers from financial difficulties within an HOA or condo.”

While conventional, FHA and Veterans Affairs loans all require condo associations to meet a variety of standards, owners within homeowners associations have just one issue that could delay buyers’ ability to obtain financing.

“HOAs must have a master insurance policy that covers common areas and community amenities for liability issues,” says Doug Benner, a senior loan officer with Embrace Home Loans in Rockville, Md. “Lenders require proof of adequate coverage before they’ll approve a loan. I recently worked with a buyer in a community where the management was shopping for a new insurance policy. We had to push them to get the policy papers ready because the renewal date was the same day as the closing, and the loan couldn’t close without the insurance document.”

Tierce says Fannie Mae and Freddie Mac require at least $1 million in a master liability insurance policy for an HOA. She suggests the seller track down a copy of the master insurance policy before listing a home to check the amount and the renewal date.

“Most HOA and condo-management companies are willing to upgrade the insurance policy because they know it will impact every owner trying to refinance or sell,” Tierce says.

Condominium issues for sellers

Condo financing rules have other requirements in addition to the master insurance policy, such as limiting the number of fee delinquencies to less than 15 percent of homeowners.

“The biggest issues that can prevent someone from obtaining financing on a condo are too many fee delinquencies, low cash reserves and the existence of a lawsuit for more than $100,000 in which the association is a defendant,” says Ellen Hirsch de Haan, an attorney with Becker and Poliakoff in Clearwater, Fla., and a member of the Community Associations Institute. “The other big issue is the number of renters compared to owners.”

Condos that meet FHA requirements are on an approved list accessible by the public as well as lenders. For example, the FHA says that in addition to having fewer than 15 percent delinquencies, 50 percent or fewer of the residents can be renters, and 10 percent of condo fees must be kept for cash reserves. Conventional financing has similar requirements, although Tierce says that if the buyers intend to be owner-occupants and the condo association has been established for at least three years, a limited project review can be done that may allow a loan approval in spite of a high ratio of renters.

Hirsch de Haan recommends that sellers check the records of their association, attend condo board meetings or read meeting minutes, review the budget, and ask for financial records to check for delinquencies.

“Sellers cannot do much on an individual basis other than talk to the board about issues that can hurt financing options,” says Hirsch de Haan. “Ultimately, most of these issues require a long-term solution.”

Seller options

Benner recommends that a seller check with the condo management company to ask if the community has FHA approval, which can be a big selling point for buyers.

“You should ask if anyone is having trouble obtaining financing, and see if there’s anything you can do,” Benner says. “If, for instance, the number of delinquencies is right on the threshold, maybe you can work with the management association to put pressure on people to pay their dues since it is in everyone’s interest in the community.”

Tierce says sometimes there’s nothing to be done about delinquencies until an owner gets caught up or the home is sold.

“The best option, if conventional, FHA or VA financing isn’t available, is to find a portfolio lender who would be willing to approve a loan,” Tierce says. “The buyer would usually need a larger down payment in that case of 25 percent or more.”

Benner says portfolio lenders often charge a higher interest rate in addition to requiring a larger down payment.

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Deadline nears for foreclosure refund

Story by Jana Eschbach / CBS12 News

A federal/state settlement deadline is approaching for homeowners who lost their homes to foreclosure from five major lenders. They are entitled under the settlement to a cash claim of Florida’s portion of the record settlement of $170 million.

The deadline to file a claim for reward is January 18, 2013.

More than half of those entitled to the settlement have yet to claim their cash award.
Background on settlement from HUD:

The National Mortgage Settlement negotiated by the state Attorneys General and the federal government, and announced in February 2012, impacts borrowers serviced by the following major lenders: Ally/GMAC, Bank of America, Citi, JPMorgan Chase, Wells Fargo.

You can find out who services your loan by looking at your monthly mortgage statement or you can search for your loan??s servicer by going online to MERS® Servicer Identification.

The settlement provides assistance for:
Homeowners needing loan modifications now, including first and second lien principal reduction. The servicers are required to work off up to $17 billion in principal reduction loan modifications and other forms of loss mitigation nationwide.

Eligible borrowers will by contacted by the Servicers and will receive letters offering principal reductions or other modifications starting in June 2012. This modification process will continue for approximately 3 years.

Servicers will have to provide up to $3 billion in refinancing relief nationwide. Borrowers who lost their homes to foreclosure between Jan. 1, 2008 and Dec. 31, 2011. Cash payments will be distributed to borrowers who receive and return a claim form. There is no requirement to prove financial harm and borrowers will not have to release private claims against the servicers nor will they have to relinquish the right to participate in the independent review process being conducted by federal banking regulators.

$1.5 billion is expected to be distributed nationwide to some 750,000 borrowers.

Click here for the National Mortgage Settlement
website to find help for loan modifications and refinance options, borrowers may be contacted directly by one of the five participating mortgage servicers.

Keeping in mind the timeline above, you may contact the banks directly if you need additional information:

Ally/GMAC: 800-766-4622
Bank of America: 877-488-7814 (Available M-F 7am – 9pm CT and Saturdays 8am CT – 5pm CTCiti: 866-272-4749
JPMorgan Chase: 866-372-6901
Wells Fargo: 800-288-3212 (Available M-F 7 a.m. to 7 p.m. CST)

For borrowers who lost their home to foreclosure between Jan. 1, 2008 and Dec. 31, 2011 and whose loans were serviced by one of the five participating mortgage servicers, the National Mortgage Settlement Administrator is mailing Notice Letters and Claim Forms in late September through early October.
If you believe that you are eligible for relief and have not received a Claim Form, contact the National Mortgage Settlement Administrator at 1-866-430-8358, Monday through Friday 7:00 a.m. – 7:00 p.m. Central Time.

The National Mortgage Settlement is not the only assistance available to troubled borrowers. The following websites include valuable information for borrowers regardless of whether you are eligible for this settlement: http://www.makinghomeaffordable.govhttp://www.independentforeclosurereview.com

You may also call: 1-800-569-4287 to connect with a HUD-approved housing counselor. Loans owned by Fannie Mae or Freddie Mac are not impacted by this settlement. You may visit the following websites to learn if your loan is owned by either Fannie Mae or Freddie Mac:
www.fanniemae.com/homeaffordable www.freddiemac.com/avoidforeclosure

These sites will also include information about mortgage and foreclosure programs you may be eligible to access.Deadline nears for foreclosure refund

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