MisterVA Back to School

When to Expect FHA Changes to Be Implemented

HUD announced some big changes recently and it is important to know when these changes are scheduled to be implemented.  This can serve as a rough guideline for you as you bring homes under contract in the coming months.   Buyers should be aware that things are changing if they are using FHA.

1. Increase in the Up Front Mortgage Insurance Premium to 2.25% of the loan amount from 1.75%.  This is usually financed and HUD expects this to go into effect in the spring.

2. Down payment remains at 3.5% of the sale price unless the credit scores are below 580.  Not many lenders are approving loans with credit scores lower than 620, so this should have little effect when is goes into effect in early summer.

3. Seller concessions to be reduced to 3% from 6%.  There will be a notice in the Federal Register in February, followed by a comment period.  It is expected to take place in early summer, so those looking at the First Time Home Buyer at credit should largely be unaffected.

4. HUD hopes to have the annual Mortgage Insurance Premium increased by legislative authority.  This would affect the monthly payment.  No timetable is set for this item.

Open The Package

A couple of years ago I found a website based on the recommendation of someone else in my industry.  It was an inspirational movie from Simple Truths entitled "The Simple Truths of Service".  I watched the 3 minute video about Johnny the Bagger.  Johnny worked at a supermarket and transformed the store by making the checkout experience memorable.  I am not going to relate the story here--you can check it out from the link above.  I was so impressed by that story that I became a customer of Simple Truths and have purchased a number of these books to give away.  The story of Johnny the Bagger was so good that I did not even have to open the book,  as I KNEW it would leave a lasting memory on any reader.  And since in came with the DVD, it also could be watched.

Today, as I pulled out my copy of the book, to relive that story, in part because I have begun to give away that book in a new area, I noticed something inside.  There was MORE than Johnny the Bagger's story in that book.  There was Wally the Cabbie.  There was Billy the car salesman. There was the fix-it man. And there were others.  For two years, I had thought I knew the book.  I thought I knew the story.  I thought I knew the answers.  When I only knew a PART of the whole. Johnny the Bagger is still the key element of the book.  But there is much, much more.  In a way, this is a gift that has kept on giving.  And that is why it is important to open the package.

Call Center Mortgages

That is what is coming if the big banks have their way.  You may comment to the Federal Reserve up until December 24th, but here are some of the highlights of the proposal.  Under the guise of Loan Originator compensation, the Fed wants to cap compensation for mortgage professionals.  Bear in mind that the SAFE Act that was passed recently will register all loan officers and require educational testing for some.  The reason I say some is that the bank employees are exempt.

Many mortgage professionals have invested a lot into becoming more proficient and to be better able to offer sound advice to consumers.  Most of the bad guys have left the business.  With an investment as large as a home, wouldn't it make sense to use a professional who knows the industry, the programs, the qualifying methods and who has the background you can have full confidence in?  The call centers the big banks are promoting would not necessarily be here in the US, either.  So, further erosion of the American job base as well as a large drop-off in quality service is sure to occur should this be imposed.

And if employees are providing mortgage advice along with selling other types of unrelated products with little or no training or background, how is the consumer going to be helped by that?  Remember that many of the bad loans were originated via call centers and that type of business model in the first place.  If you were going to have a medical procedure performed, would you want a professional?  Or a call center employee talking you through things?

It is important for you as a consumer to have the SAFE ACT given an opportunity to work.  You don't pull a casserole out of the oven 5 minutes into baking time and decide that you need to change the recipe.  But, it appears that what the Federal Reserve is proposing is exactly the same thing. 

A New RESPA

Despite many comments from many different angles opposing the change, HUD has gone ahead and issued rules for a new Good Faith Estimate and HUD Settlement Statement.  Even with contradictions to the Truth In Lending Act [Reg Z], HUD has gone forward.  This new Good Faith Estimate [GFE} will lump settlement costs into categories and some will have certain tolerance levels for changes and some will not.  There is no place for signatures, no outline of escrow payments and how it would affect the monthly payment, and no place to disclose just how much money a consumer will actually need to close a transaction.

There are a number of restrictions placed on a lender, too, including one that will likely preclude the provision of a Good Faith Estimate to a consumer looking to do a pre-approval.  Since a lender will be held to certain figures EVEN if the loan amount and purchase price [another notable absence from the form] changes, no lender will be willing to provide a written GFE in advance of a property being identified.  So much for consumers having a tool in advance to compare offerings.

Mortgage Brokers could feel the squeeze, too, as lenders may not want to be held responsible for documents not originated by the lenders themselves.  Since this begins on January 1st, and HUD has not even published new settlement cost booklets for consumers, expect this to be another delay factor in buying and financing a home.

FHA Chief Proposes Changes

Changes loom for FHA in 2010.  We have seen plenty of changes over the past 12-24 months with mortgage programs and FHA is not immune.  And although most of the projected default issues lie with mortgage loans that are pre-dating those changes, the perceived risk to the insurance fund is prompting more adjustments going forward.

FHA traditionally has not used credit scores for qualifying, although many lenders impose their own guidelines.  Consideration is being given to imposing credit score or FICO guidelines.  The pricing of Mortgage Insurance based on this type of risk factor may be a byproduct of this line of thought.  The statutory ceiling for monthly [annual] MI has been reached.  The Up Front MIP can be as high as 3% under statute.  Right now it is 1.75%.  It appears that a change in the statute may be requested.  And it would seem that the monthly amount may be the target.  The UFMIP is usually financed, so funding the insurance through actual payments from the borrowers seems to be a better way to manage the insurance fund.

The down payment was adjusted to 3.5%, but some feel a greater amount is needed.  Some say 5% and some say 10%.  The 10% down payment would probably slow the program to a trickle and would not help the housing recovery at all. {Note:  I am weary of certain phrases at work in the English language, so I will refrain from using the much overused phrase regarding buyer funds invested.}  In addition, the generous 6% seller contribution may be halved.  Gifts from family are still allowed, but this will mean an increased investment on the part of home buyers.  For a home of $100,000, the down payment could be $5000 or even $10,000 versus $3500 today.  And the seller contribution would be reduced from $6000 to $3000.  This probably translates into buyers accepting higher rates to lower closing costs.

None of these proposals have been enacted at this point.  But if you are saving toward a home purchase, it may become more expensive an investment in the new year.

What If The Tax Credit Went Away?

Would it be the end of the world?  Would it mean that the hopes and dreams of buying a home would be forever dashed?  Would anyone ever qualify to buy a home again? The way that many are talking would lead us to believe that the answer to all 3 questions would be 'yes'.  But that is not necessarily the case.  The broader outlook is that the economy has to improve and that does not mean Ben Bernanke telling us it has improved.  It means that consumers have to have confidence that their jobs remain stable.  And if a home purchase is to be made, that it will not be a bad decision.  The 'cash for clunkers' auto purchase program was a red herring.  Some people bought cars who might not have without the program.  But, now they have higher payments, insurance costs, etc. And now car sales are hurting once again.

Buying a home is serious business.  And having a housing budget is the most important consideration in buying a home.  The presence of a tax credit that is going away in 7 weeks should not be a factor.  If your rent is $700 a month and you are saving $500 a month, that does not mean you should plan to spend $1200 for housing.  And certainly not more than that.  Home repairs and unforeseen expenses that the landlord presently covers will now be your responsibility.  I always ask prospective home buyers what is the comfort level in writing that monthly check to cover housing [principal, interest, taxes, insurance, mortgage insurance] expenses.  What the maximum qualifying number might be could be higher than the comfort level.

Buying the wrong home just so you get the tax credit is not a good reason to put down a deposit to purchase.  Buying before you are ready is also a big mistake.  It is much better to find the right home at the right time than the wrong home right now.  Not every mortgage professional or real estate professional will give you that advice.  So it is important to be in a position to make a decision based on well thought out logic than to succumb to pure emotion.  Buying smart will always be the best way to go.

FHA Streamlines: Now Would Be A Good Time

The FHA streamline refinance has been around for a long time.  It is about to get a major facelift.  And when I say 'major', I really mean it.  Presently for a non-cash out streamline without an appraisal, you may have some minor credit hurdles regarding the payment history on the present FHA loan.  Most people jump those hurdles with ease.  The rationale behind this loan is that if the borrowers find it easier to make the payments, there is less likelihood of a default.  So, no additional qualifying was needed.  The new loan could be written for the original loan amount plus the new Up Front Mortgage Insurance Premium.  That was often enough to cover the closing costs and many borrowers brought next to nothing to the closing table.  Or they might bring their escrow balance to closing knowing a check would head their way in a couple of weeks from the old lender.

Not after January 1st.  The only way to NOT have to pay closing costs on a streamline will be to have an appraisal done on the property.  In some states, this may mean bringing $2500 to closing.  In others, that amount could be much higher.  An appraisal may not help in some areas of the country.  If values have declined since the purchase, the borrower is stuck.  So, saving 1% or more on the note rate may not be within the reach of many consumers.  And that is just another straw on the camel's back.  Helping the consumer does not appear to be in the cards for many of the sweeping changes that are taking place.

SO, if YOU have an FHA mortgage that is at 6% or above, and you have wondered about refinancing, please do not procrastinate any longer.  There will be a huge rush to get these closed by the year's end.  Around the 25th of the month is the optimal closing date.  And you all know what falls around that date in November.  And ON that date in December.  Another 'feature' kicking in on January 1st is the 6 month rule--if your loan is not 6 months old, you cannot streamline.  You can read about more of the details in HUD's Mortgagee Letter.  There are abundant rumors about even more changes with the program so stay tuned.

The Site Condo and FHA

When FHA announced sweeping changes in its condominium policies back in June, there were some negative changes such as the elimination of the Spot Condo approval, which allowed for a single unit approval based on a one page questionnaire even though the complex was not as approved as a whole.  Approval of condo complexes is now a streamlined affair as proclaimed by HUD.  But, the new news has to do with the cross-breed known as the Site Condominium as defined below:

Site Condominiums are single family detached dwellings encumbered by a declaration of condominium covenants or condominium form of ownership. Condominium Project approval is not required for Site Condominiums; however, the Condominium Rider must be included in the FHA case binder submitted for insurance endorsement.

The guidlelines of ownership is the key element.  These are homes on their own lots in a development that have condo ownership in some common elements and may have some common care covenants.  Here in Pinellas Park, FL, one such area had lost its FHA condo approval status for several of the 'units' which consisted of dozens of single family ranch style homes.  But, since they are considered 'Site Condos', they can be financed using FHA just like a single family home. So, the Mortgagee Letter in this case, gave the nod for more possibilities, not less.  Condo master policies are still needed and there is the HOA dues amount to factor into qualifying, but things sure got a lot easier for folks buying and selling in The Mainlands.

FHA Makes Changes

In a flurry of Mortgagee Letters issued in the past couple of weeks, HUD has changed the landscape of FHA loans--both forward and reverse.  How those changes will be interpreted is anybody's guess.  Some have already been implemented.  Some have a start date of January.  The elimination of brokers needing to get FHA approved by HUD is juxtaposed against lenders being responsible for all in the origination channel.  Will lenders who wholesale to brokers eliminate that channel altogether?  Will those who wholesale exclusively change their business model?  [Wholesalers generally have no contact with the consumer.]  Will this mean the end of brokers being able to do FHA loans?  Will this mean fewer consumer choices?

Well, certainly if wholesalers are concerned about the lack of control over brokers, they may turn to retail and they may sign up brokers as employees to do what they have always done--work directly with the consumer.  But, the broker, or former broker, will now only have one lender to choose from.  The Account Executives or AEs as they are commonly referred as will need to adapt to become loan officers if there are no brokers to interact with in the future. [Bear in mind that this is merely speculation on my part, but my nearly 30 years in the business have given me a lot of insight.]  Brokers without the FHA product will be severely hampered.

The FHA streamline now has more defined terms with respect to payment histories, benefits to the borrower, etc.  Many consumers were streamlined even if there was little benefit to doing so.  It is not all about the rate.  If it takes 5 or 6 years to re-capture closing costs in terms of payment savings, the consumer may very well have been better off not refinancing.  Mortgagee Letter 09-32 outlines many of these and other changes in the program.  Slowing the default rate is the impetus behind these changes.

If you have a pre-approval that is more than a few weeks old, things may have changed for you, too.  Especially if your credit scores hovered around 620.  Many lenders are moving those minimums to 640 or higher.  And that can mean your approval is no longer an approval.  So, it is important to continue to do things to improve your scores.  Making payments on time, reducing revolving balances to aggregate of less than 50%, and even watching to make sure credit card companies have not increased your minimum payments.  Be diligent and pro-active and be in constant contact with your mortgage professional.

Using Social Networking Sites

Referrals only come if you ask for them.  Referrals from people you know are the best kind of referrals.  Giving referrals goes hand in hand with asking for them.  If past clients have a business or provide a service that is outside of your line of business or even if it is loosely related, it makes sense to send a referral and to have the client mention your name when doing so. 

You have not asked directly for a referral, but you have helped someone you know in increasing business by sending someone.  Maybe it is a car repair shop.  Maybe it is a hair stylist.  Maybe it is an appliance dealer.  Maybe it is a lawn care service.  Maybe it is to a factory worker's brother's business.  You just never know who may ask you for advice.  And you may never know who will ask someone else for advice which could mean a referral for you.

Facebook is a networking site where you have contacts with friends.  And those friends can benefit by you referring business to them.  The reverse is also true.  One quote I use quite often is from Jeffrey Gitomer.  "All things being equal, people want to do business with their friends.  All things being not so equal, people STILL want to do business with their friends."  That is true on so many levels.  Gitomer goes on to offer the following: "You don't need more techniques and strategies.  You need more friends." 

Of course, there are a number of other sites where you can develop relationship such as Linkedin and Plaxo.  But the point is that you need to look at giving, or adding value, not just asking or taking.  There really is no secret to using social networking sites.