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Posts Tagged ‘fannie mae and freddie mac’

Obama signs bill raising FHA mortgage limits

FRIDAY, NOVEMBER 18, 2011

BY KATHLEEN LYNN
STAFF WRITER
THE RECORD

* Move designed to help more buyers get FHA-backed mortgages

President Obama on Friday signed a bill that allows the Federal Housing Administration to back mortgages of up to $729,500, six weeks after the limit dropped to $625,500. The move makes it easier for more buyers to get low-interest FHA loans.

But loans backed by the government entities Fannie Mae and Freddie Mac will continue to have a $625,500 limit, making them less useful in high-priced housing markets like North Jersey.

Loans that exceed the Fannie, Freddie and FHA limits are considered “jumbo” mortgages, which typically carry higher interest rates and require 20 percent (or higher) down payments.

The FHA allows lower down payments and is more forgiving of imperfect credit. But FHA loans also carry higher fees, so more-affluent buyers tend to prefer Fannie and Freddie loans, when they qualify for them.

Keith Gumbinger, a vice president with HSH.com, a Pompton Plains company that tracks the mortgage market, said high-end buyers who can’t qualify for a Freddie or Fannie loan will have to figure out which is the better deal: a jumbo loan or an FHA loan.

Jumbo loans were recently going for about 4.7 percent, while FHA loans were around 4 percent, Gumbinger said. But the FHA loans require a 1 percent upfront fee, plus about 1 percent a year in insurance fees.

Posted at NorthJersey.com

5 big refinancing blunders

Who wouldn’t want some of the rates available now? You, maybe. Before you get carried away with bragging rights, check to see if a refi is really in your best interest.

 

When interest rates are low, plenty of homeowners rush to refinance without evaluating the consequences of their actions. A mortgage refinance can benefit some homeowners, particularly if they intend to stay in their home for the long term or if they can significantly reduce their interest rate. Sometimes, though, a mortgage refinance can be the wrong move.

“People often make poor decisions because of what I call ‘interest-rate envy’ around the coffee table,” says A.W. Pickel III, the CEO of LeaderOne Financial in Overland Park, Kan. “They jump at refinancing just so they can say to their neighbors that they got a lower rate.” (Should you refinance? Run the numbers with MSN Money’s refi calculator.)

 

Here are five of the worst mistakes homeowners make when refinancing:

Not comparing the real rate

“Borrowers should shop around for a mortgage by comparing the APR of each loan rather than the quoted interest rate,” says Gregg Busch, vice president of First Savings Mortgage in McLean, Va. “You need to look at the true cost of the loan and compare it to your current APR to make sure you will really be saving one-half point or more on the new loan.”

Busch points out that a lot of homeowners today find out that their homes are worth less than they assumed at appraisal.

Fannie Mae and Freddie Mac have added fees on loans with a high loan-to-value, so borrowers need to re-evaluate the rate and fees before they decide to refinance,” Busch says.

 

Borrowers who have little or no equity may qualify for a refinance under the government’s Home Affordable Refinance Program, or HARP, available to those with a current mortgage owned or guaranteed by Fannie Mae or Freddie Mac.

“The beauty of the HARP program is that it does not require an appraisal, so if you suspect you are ‘underwater’ on your loan, this could be a good option,” says Busch. “Just make sure you compare the rate and fees to see if the new loan is worth the cost.”

Choosing the wrong loan

Pickel says the first step when deciding to refinance is to establish a clear objective.

“If you think you may lose your job but you have one now, your focus should be to lower your overall payment regardless of the length of the loan,” says Pickel. “If you want to be debt-free by a certain year, then you need to find a loan that meets that objective.”

Pickel says that sometimes, even with a lower interest rate, you could end up with higher monthly payments because wrapping in the closing costs has increased the size of your mortgage.

Every borrower should look at the cost of refinancing along with the financial benefits before choosing a loan, Busch says. Some borrowers forget that refinancing into a new 30-year mortgage can add years of payments.

“A 10/1 ARM (adjustable-rate mortgage) or a 10-year fixed-rate loan can sometimes be a better choice depending on the individual borrower’s circumstances,” Busch says.

Not shopping around

While many borrowers compare loan offers from more than one lender, they can also shop for title services and save hundreds or sometimes thousands of dollars on their loan.

“Check at least three lenders and at least three title companies before choosing one,” Busch says. “There can be an advantage to going to the same servicer that handles your loan now, because they may require less documentation, but I also recommend consulting with at least one other direct lender to compare rates and fees.”

Ask the title company for a reissue rate on your owner’s title insurance — Busch says this can save as much as 35% on the premiums.

 

Refinancing when you shouldn’t

Charles A. Myers, president and CEO of the Home Lending Group in Flowood, Miss., says refinancing can be a mistake if you don’t plan to stay in your home for several years.

“One customer wanted to refinance in order to improve his property and rent it, but he would have ended up with a larger mortgage and then needed a different loan because the property would no longer be his principal residence,” says Myers. “The key is to make sure the refinance has a net tangible benefit to the homeowner.”

Before choosing to refinance, borrowers need to decide how long they intend to stay in the property and determine the break-even point when the savings outweigh the costs, Myers says.

Not keeping up with borrower responsibilities

Homeowners must rely on a lender to refinance, but they have obligations of their own that, if not met, could derail the mortgage refinance. Borrowers must have good credit to refinance, with most lenders requiring a credit score of at least 640 even for a loan insured by the Federal Housing Administration, says Myers.

Lenders can check the borrowers’ credit again just before the closing, so you need to maintain good credit and avoid taking on new debt even after the refi has been approved.

“Check the lock-in date for the interest rate on your new loan to make sure you can close before the rate expires,” says Busch. “Be sure to turn in all your documentation as soon as it is requested, because a delay could mean that your closing date must be pushed back.”

This article was reported by Michele Lerner for Bankrate.com.

 

 

 

 

QRM Restricts Credit and Adds Borrowing Costs, Senators Say

Over one-third of the current members of the U.S. Senate have written a letter to federal regulators urging they adopt a less restrictive definition of a qualified residential mortgage than has been formally proposed.  The bi-partisan group is led by Mary Landrieu (D-LA), Johnny Isakson (R-GA), and Kay R. Hagan (D-NC). The letter, addressed to the heads of the Federal Deposit Insurance Corporation, Office of Comptroller of the Currency, Federal Reserve Bank, Federal Housing Finance Agency, Department of Housing and Urban Development, and the Securities and Exchange Commission, is signed by 23 Democrats, 13 Republicans, and both independent senators. It urges the regulators to avoid restricting credit to middle class families who are saving to buy a home.

The Dodd-Frank financial reform act requires the originator of a residential mortgage to retain at least a 5 percent interest in that mortgage when selling it into the secondary market, a provision commonly referred to as "skin in the game."  Loans backed by FHA, VA, USDA, Fannie Mae and Freddie Mac will however be exempt from risk retention regs. For non-agency loans to meet the QRM definition and avoid being subject to risk retention regs, they must have down payments of 20% or more and a DTI of 28%/36% or less.

When Dodd-Frank was enacted, Landrieu, Isakson, and Hagan inserted an amendment which exempts suitably qualified mortgages (QRM), the definition of which was left up to regulators, from that 5 percent requirement.  The senators state that when they included the QRM exemption amendment in the Dodd-Frank Wall Street Reform and Consumer Protection Act that they were aiming to create a broad exemption from risk retention for historically safe mortgage products. The senators contend that they intended the exemption statute to require that the QRM definition be based on "underwriting and product features that historical loan performance data indicate result in a lower risk of default" and that they provided clear guidance on the types of factors that can be used including the documentation of income and assets, debt to income ratios and residual income standards, restrictions on negative amortization, balloon payments, prepayment penalties and the inclusion of mortgage insurance and features that mitigate payment shock.  The three senators who proposed the amendment said they intentionally did not include a rigid down payment requirement in the provision to ensure that creditworthy, qualified buyers could access mortgages with reasonable down payments.

The letter states that the proposed regulations go beyond what was intended in the statute by imposing down payment standards which it termed unnecessarily tight.  "These restrictions unduly narrow the QRM definition and would necessarily increase consumer costs and reduce access to affordable credit."  The senators said that well underwritten loans did not cause the mortgage crises and that the additional requirements proposed for QRM swing the pendulum too far and reduce the availability of affordable mortgage capital for otherwise qualified buyers.  Many will have to pay higher rates and fees and others may not be able to obtain a mortgage at all, the letter says.  The senators also criticized "overly narrow debt to income guidelines."

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Non-Agency Lending Limited by QRM Rules

The proposed regulations governing the Qualified Residential Mortgage (QRM) exemption from risk retention rules constitute a "devastating, unnecessary and very expensive wrench (thrown) into the American dream" according to a white paper released Wednesday by a consortium of housing industry groups.

The paper was published in advance of a scheduled hearing of the House Subcommittee on Capital Markets and Government Sponsored Enterprises on "Understanding the Implications and Consequences of the Proposed Rule on Risk Retention".  Two of the groups in the consortium, the Mortgage Bankers Association and the Center for Responsible Lending addressed the committee along with other trade groups and a panel of representatives of the regulatory agencies which drafted the regulations. 

Under Dodd-Frank lenders must retain five percent of the credit risk on loans packaged and sold as mortgage securities.  However, certain qualifying mortgages will be exempt from risk retention, making loans with the QRM designation highly sought after assets by lenders.  Last month federal agencies including FDIC, the Federal Reserve, Securities and Exchange Commission and Federal Housing Finance Administration proposed QRM rules which will qualify FHA, Fannie Mae and Freddie Mac loans by definition and require non-agency loans to have down payments of 20% or more and Debt to Income (DTI) ratios of 28% / 36% or less.  QRM may not include products or terms that add complexity and risk to mortgage loans such as negative amortization or interest-only payments or present significant payment shock potential. While FHA and the GSEs currently dominate the lending landscape, they are expected to reduce their market share in the year's ahead.  The argument presented in this White Paper is QRM rules will limit the ability of Non-Agency lenders to compete with the GSEs and FHA in the future, therefore limiting the incentive for private investors to enter the sector; making it harder for the governemnt to reduce its footprint in the mortgage market in the process.

The White Paper takes particular exception to the 20 percent down payment requirement.   Based on 2009 home price and income data it says it would take 15 years for an average family to save the $43,000 down payment on a median priced home compared to only six years to save 5 percent to put down on the same house. This requirement, it says, would deny millions of responsible borrowers any access to the lowest rate loans with the safest loan features.  

The down payment requirement will also present a sizeable bar to homeowners hoping to refinance.  Based on data from CoreLogic, the paper estimates that nearly 25 million existing homeowners lack sufficient equity in their home to meet the 80 percent loan-to-value requirement.  Even at 90 percent LTV, 34 percent or over 16 million homeowners could not refinance into qualifying mortgages.

Analysis of CoreLogic data on loans originated between 2002 and 2008, a period which includes the loans that recently defaulted at record rates, shows that raising down payments in 5 percent increments had only a negligible impact on default rates but significantly reduced the pool of borrowers that would be eligible for QRM loans.   For example, where borrowers already met strong underwriting and product standards, moving from a 5 percent to a 10 percent down payment reduced the default rate by only 0.2 to 0.3 percent but reduced the pool of eligible borrowers by 7 to 15 percent.  Jumping the down payment from 5 to 20 percent changed the default rate by 8/10ths of a percent while knocking out 17 to 28 percent of borrowers depending on the year of the loan.    

Removing so many potential buyers from the pool of borrowers eligible for qualified mortgages "could frustrate efforts to stabilize the housing market," the report says, and to date the regulators have not put a price on the cost of risk retention to the consumer.  "This should be done before finalizing a rule that imposes 5 percent risk retention across such a broad segment of the market."  A JP Morgan Securities Inc. estimate put the cost of 5 percent risk retention at a three-percentage point rise in interest rates for loans funded through securitization.  While that estimate may be high, the report says, even a one percentage point increase in interest rates could be devastating to a fragile housing market.  The National Association of Home Builders (NAHB), another member of the consortium, estimates that every percentage point increase in interest rates means that 4 million households would no longer qualify for a median priced home.  Any QRM-related costs, the report points out, would be in addition to a general interest rate increase anticipated over the next 12 to 18 months.

Any of these effects will carry greater impact in those states that have already been hardest hit by the housing downturn.  For example, in the five states that have seen the most foreclosures and greatest price decreases (Nevada, Arizona, Georgia, Florida, Michigan) between 59 and 80 percent of homeowners do not have 20 percent equity in their homes.  Six out of ten homeowners would not be able to move and put 20 percent down on their next home.

These borrowers, the paper says, have already put significant "skin in the game" through down payments and years of timely mortgage payments, "but the proposed QRM definition tells them they are not 'gold standard' borrowers and they will have to pay more." 

With major regional housing markets ineligible for lower cost QRMs many states and metro areas that have seen the biggest price declines will now face higher interest rates, reduced investor liquidity, and fewer originators able or willing to compete for their business.  "These areas face long-term consignment to the non-QRM segment of the market."

The paper concludes that the proposed rules will also negatively impact the private lending market.  The vast majority of loans will be non-QRMs subject to the higher costs of risk retention and without regulations that mandate sound underwriting standards.  The statutory exemption for FHA and VA loans will give them a significant market advantage over fully private loans.  This will delay or even halt the return of private capital into the market. 

While the inclusion of GSE loans mitigates the immediate adverse impact of the rule on the housing market, it is not a viable long-term solution and does little to establish the certainty the secondary market needs.  "Rather than rely solely on a short-term fix the regulators should follow Congressional intent and establish a broadly available QRM that will create incentives for responsible liquidity that will flow to a broad and deep market for creditworthy borrowers."

Risk-retention is not a viable option for smaller institutions and will reduce the ability of community-based lenders to compete in the mortgage market.  The top three-FDIC insured banks already control 55 percent of the single-family mortgage market and this consolidation will only intensify.  "In short, the proposal creates real systemic risk while doing little to relieve it."

Congress intended QRM to provide creditworthy borrowers access to well underwritten products, provide a framework for responsible private capital to support housing recovery and to shrink government presence in the market while restoring competition and mitigate the potential for further consolidation.  Instead the proposed rule is so narrow that it will force a majority of both homebuyers and homeowners to either forego purchasing/refinancing or pay higher rates, and will hamper competition and accelerate consolidation in the market.

In addition to MBA, NAHB, and the Center for Responsible Lending, the members of the consortium are Community Mortgage Banking Project, the Mortgage Insurance Companies of America, and the National Association of Realtors®.

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MBA Urges Regulators Not to Rush Critical Mortgage Reforms

The Mortgage Bankers Association (MBA) has what it calls "strong reservations" about the short timetable set out by the Departments of Treasury, Housing and Urban Development and the Federal Housing Finance Agency (FHFA) for revamping the fee structure for loan servicers.  The agencies are seeking to make a final decision on the matter by mid-summer, timing that MBA says could lead to a "rush to judgment on this critical and complex issue."

MBA, which represents a membership composed of mortgage bankers, brokers, commercial bankers, life insurance companies, and Wall Street conduits, sent a letter on Tuesday to Secretaries Timothy Geithner and Shaun Donovan of Treasury and HUD and Edward J. DeMarco the Acting Director of FHFA expressing concern about the timing of the decision and laying out four pages of questions about the alternatives proposed for restructuring the fee.

The letter, signed by John A Courson, President and Chief Executive Officer, says servicing is the predominate asset of most mortgage companies and thus it is critical that changes to the current fee structure be done with extreme caution, research, and input from stakeholders.   According to the letter, changes could affect more than just compensation; they also affect counterparty risk, servicing values, tax policy, representations and warranties, prepayment speeds, and rights to the asset.  They could also impact the TBA MBS market and ultimately the liquidity of the secondary market for mortgage loans.

Courson urged the agency heads to take deliberate steps to ensure the decision is not rushed, that the industry receives answers to its questions, and has sufficient time to respond and comment.

The Federal Housing Finance Agency (FHFA) on January 18, 2011 instructed Fannie Mae and Freddie Mac to study possible alternatives to the current servicing and compensation structure that they employ for their single-family mortgage loans. The initiative hopes to improve service for borrowers, reduce financial risk to servicers, and provide flexibility for guarantors to better manage non-performing loans.

Loan Servicers' handling of the foreclosure crisis has generated criticism from many quarters including the FDIC Chairman, Federal Reserve Board members, consumer groups, as well as academics. Typical of the criticism were remarks last fall by Federal Reserve Governor Sarah Bloom Raskin. Raskin told a meeting of the National Consumer Law Center that mortgage servicing is an outgrowth of securitization which changed the old model from one where the lender also services a loan to a system where loans owned by many investors are consolidated and serviced by a few companies, some of which are also lenders. This consolidation has led to significant economies of scale in routine matters.

In addition to servicing fees, servicers earn money from other fees such as late fees and float interest while streamlining processes to keep costs down, but servicers have been ill-equipped to deal with their new role as loan modifiers. The structural incentives that influence servicers' actions, especially when they are servicing loans for a third party, now run counter to the interests of homeowners and investors, Raskin said. A foreclosure almost always costs the investor money but may bring the servicer additional fees while proactive measures to avoid foreclosure and minimize investor losses cost the servicer. Loan modification is costly and those costs may not be reimbursed; during forbearance the servicer must still advance payments to the investor. "Even in the case of a servicer who has every best intention of doing the right thing,"incentives are largely misaligned with everyone else involved in the transaction, and most certainly the homeowners themselves."

The bottom line: The MBA is asking mortgage and housing regulators to slow their decision making process to allow for the proper exploration of unintended consequences.

A copy of the questions accompanying the letter are printed here in their entirety.

 

READ MORE: Loan Servicing Debacle: Berliner Gets Blunt

 

 

 

 

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Republicans Dive Head First into GSE Reform with Eight New Bills

The House Republicans who will ultimately have the most influence on the decision have come out with a plan for reforming the two government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. 

Scott Garrett (R-NJ) Chairman of the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises released what was actually a summary of eight bills, each covering a different aspect of reform and each introduced by a different member of the parent Financial Services Committee.  They cover a broad range of issues involved in bringing the government's conservatorship of the GSEs to an end and establishing a philosophy as well as a new system of financing the housing industry. 

Garret said that this is the first in what will be multiple rounds of "very specific, very targeted bills to end the bailouts, protect the taxpayers and get private capital off the sidelines."  The end result, he said, will formally wind down the GSEs and return the housing finance system to the private marketplace.

"With the American taxpayers on the hook for $150 billion and counting, the bailout of Fannie and Freddie is already the most expensive component of the federal government's intervention into the financial system.  Americans are tired of the ongoing bailout of the failed government-backed mortgage giants, and they are tired of Democrats' refusals to address the driving force behind the financial collapse.  While Democrats chose to ignore the problem last Congress, House Republicans stand ready to end the bailout and protect American taxpayers from further losses."

Here is a summary of the bills:

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Skin in the Game: Risk Retention Proposal Published

The FDIC has released a proposal to define Qualified Residential Mortgages (QRM). QRMs are home loans that will be exempt from the requirement that mortgage lenders retain a 5 percent share of each loan they originate that is packaged for securitization - keeping "skin in the game." 

The Dodd-Frank financial reform bill already identified loans guaranteed or originated by FHA, VA, and USDA as qualified for exemption but left other products, including loans written by Fannie Mae and Freddie Mac, up to federal regulators to determine. Under the proposed definition released today,  Fannie Mae and Freddie Mac will indeed be exempt from risk retention regs at least while the GSEs are under government control. When/If Fannie and Freddie are released from conservatorship their exemption status will be revisited. For non-agency loans to meet the QRM definition and avoid being subject to risk retention regs, they must have down payments of 20% or more and DTI of 28% / 36% or less. Also, QRMs will not include products that add complexity and risk to mortgage loans, such as terms permitting negative amortization, interest-only payments, or programs with significant payment shock potential.

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Congressional Panel Questions FHFA Economist on Impact of TARP

The Congressional Oversight Panel assessing the impact of the Troubled Asset Relief Program (TARP) on financial stability is currently holding its last few hearings before issuing a final report.  The panel heard last week from Patrick Lawler, chief economist for the Federal Housing Finance Agency who was asked to address three specific issues from the perspective of FHFA.

The impact of TARP on financial stabilization and recovery in the U.S. economy and financial sector, Fannie Mae and Freddie Mac's responsibilities with respect to TARP, FHFA's interaction with Treasury with respect to the GSE and the federal government's initiatives to promote financial stability.

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Fannie Mae Rolls Out Servicer Evaluation Program

Fannie Mae has announced a new program to measure and evaluate the performance of its servicers' actions toward helping homeowners avoid foreclosure.  The Servicer Total Achievement and Rewards Program or "STAR" is designed to directly link servicer performance in assisting homeowners to the customer's experience with that assistance. 

In a speech to the Mortgage Bankers Association earlier this week, Edward J. Demarco, acting director of the Federal Housing Finance Administration (FHFA) signaled that such a program would be forthcoming.  He told the audience attending a national servicers' conference that FHFA had established working groups with Fannie Mae and Freddie Mac, for which it is conservator, to align servicing standards and establish rewards for servicers for early engagement with borrowers. STAR seems to be the first product from those working groups.

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