Fannie Mae and Freddie Mac’s Proposed Appraisal Changes

Due to a lawsuit brought about in New York, a settlement was reached between the state of New York and the GSE’s (aka Fannie Mae and Freddie Mac) whereby the GSE’s would implement the Home Valuation Code of Conduct (HVCC) and in turn, the state of New York would drop their case against them.

What Will Change?
Appraisals have generally been handled at the point of sale - either by the mortgage originator or the realtor in any purchase or refinance transaction.  This proposal seeks to completely remove both the loan originator and the real estate agent from the transaction.  In fact, they are explicitly forbidden from having any contact with the appraiser who delivers the report.

It is my opinion that the proposed solution is well-intentioned and very easy to implement, but it is not well thought out.  There are other, far superior solutions which exist, but the GSE’s appear to be taking the easy road.  There are many alternative ideas out there - including appraiser peer review, lender reviews of appraisers, and regulatory audits and reviews.  Those solutions, while more cumbersome to implement, will provide a superior solution to the problem at hand and avoid driving many small businesses out of the real estate industry.

 How Will This Impact Consumers?

• Consumers will no longer be able to easily shop their loan through a mortgage broker.  Since the ultimate lender that they will use must order the appraisal from an appraisal management company of their choosing, that appraisal will no longer be usable at any other lender.  Therefore consumers will be locked in very early in the process to a particular lender and will not be allowed to shop their loan unless they are willing to come up with another $300 to $500 for a new appraisal when they change lenders.
• Service levels will likely decline for a number of reasons.  Many of the best appraisers out there have built their business on service and under the new system, service will simply be less important in the overall picture.  The appraisers who remain will be held to a lower standard simply because the people who are directly impacted by their work (home buyer, mortgage originator, and realtor) are completely removed from the process.
• Mortgage rates will likely increase because of reduced competition.  If passed, this ruling will likely force many or all mortgage brokers out of business.  Brokers have been a significant competitor to the large banks for the past 20 years and without that competition in place, rates will almost certainly increase in the long term.

 How will this impact real estate agents?

• Agents are banned from any form of communication with the appraiser.  No more discussing additional comps that may have been overlooked.
• Agents’ role as primary coordinator of the transaction is severely diminished
• Power is shifted away from agents and toward the large lenders who will be the sole point of contact for the buyer on many key pieces of the transaction

What can be done?
There is a brief window where you can register your opinion with the GSE’s:

Comments may be sent to Fannie Mae by clicking here, and Freddie Mac by clicking here.

Huge Changes Coming For Investment Property Financing

On April 22, 2008, Freddie Mac announced that the maximum number of financed property limit will be changed from 10 to 4. The rule goes into effect on August 1st, 2008 and has a number of implications to investors. First, if an investor was planning to take advantage of some of the excellent deals on foreclosures that exist here in the Atlanta, Georgia market, they need to act now. Second, if an investor was planning to refinance an existing investment property with an agency loan and they own more than 4 properties, this new ruling will prohibit them from refinancing as of August 1st. Again, the time to act is now.

While this news would have been a non-issue a few short months ago, there are currently very few options for real estate investors today outside of the two main agencies - Freddie Mac and Fannie Mae. Fannie Mae is expected to follow suit and reduce their max property rule to match Freddie Mac’s.

You can read the entire bulletin here:

100% Financing, Mortgage Insurance, and Investment Property Update

There has been a tremendous amount of confusion over the past several months with Fannie Mae, Freddie Mac, and the mortgage insurance companies making sweeping changes regarding 100% financing.  Since we have sort of stabilized for the time being, I wanted to give a quick overview of what is and is not still available.

A conventional loan with 100% financing on one mortgage is gone.  The mortgage insurance companies will no longer insure any loans over a loan to value of 97%.  We are one of the few lenders who can still do 100% financing on a conventional loan in the form of an 80/20 piggyback, however, this is limited to borrowers who have a credit score of 720 or higher.  Additionally, the number of lenders who will do the first mortgage dwindles every day, and I expect that this program will also be down to a 97% maximum CLTV in the very near future.

The one bright spot in terms of 100% financing is on government loans.  VA loans continue to be eligible for 100% financing, of course only those few borrowers with a VA Certificate of Eligibility are able to qualify for this loan.  On FHA loans, the guidelines technically require a 3% down payment, but through downpayment assistance, we are able to get around this and do 100% financing in most cases - assuming the appraised value comes in high enough to support it.
Finally, on investment properties the majority of the mortgage insurance companies have given us a stay of execution on the proposed rule of no mortgage insurance on investment properties.  Therefore, we can continue to do investment properties in Atlanta with an LTV of up to 90% for borrowers who have a minimum credit score of 680.  However, we have inside information that indicates that on or around May 1st, many of the MI providers will eliminate mortgage insurance on investment properties nationwide.  This could change, but I would not bet against this happening.

As it has been for the past several months, the key to navigating this ever-changing market is to be sure that you are working with a mortgage professional who is staying on top of all of these changes and watching out for your interests.

FHA Approval

On March 4th, 2008, Primacy Mortgage received full approval to originate FHA loans from the Department of Housing and Urban development. We are proud to display the HUD logo as fewer than 10% of mortgage brokers in operation today have the honor of being HUD approved.

With this approval, we are now able to originate some of the most aggressive loan programs available today.  These include the FHA 97% purchase loan, the FHA 97% rate and term refinance, the FHA 95% cash out refinance, FHA streamline refinances, the FHA Secure refinance program, as well as the various FHA renovation options (203-k, 203 streamline-k).

The Fed Cuts Rates 0.75%. The impact on Mortgage Rates.

The Federal Reserve cut short term interest rates for the 6th consecutive time yesterday.  This follows unprecedented action from the Fed over the weekend where they bailed out Bear Stearns.  Rate cuts are often assumed to be good for mortgage rates, but this is often not the case.

 Why Did They Cut Rates?
The Fed is trying to stimulate the economy and improve consumer confidence in Wall Street.    Our economy is feeling the impacts of a slow housing market coupled with very tight credit markets.  By effectively increasing the money supply, the Fed is trying to improve things somewhat.

How Will This Impact Mortgage Rates?
Remember that mortgage rates are not directly impacted by the Fed.  In fact, Fed rate cuts are considered inflationary which is bad for the bonds which do directly impact mortgage rates.   The bottom line is that there are a huge number of issues which affect mortgage rates each day, and short term interest rates are just one of them.  The past couple of Fed moves have actually resulted in higher mortgage rates.

If you are looking to purchase a home or refinance, rates are still historically very low.

The Fed’s Unprecedented Move

Over the past 25 years, the Federal Reserve has used basically a single tool to impart their desired effect on the economy.  Short term interest rates.  When the economy slowed, they dropped rates effectively increasing the money supply.  When the economy got too hot, they raised rates.  For the most part, it worked.

Ben Bernanke has shown that he is not afraid to venture into uncharted territory when what was working, no longer works.  Yesterday, the Fed set up the Term Securities Lending Facility.  The simple explanation of this is that banks can now use mortgage backed securities as collateral - which should help open up credit markets somewhat.

How does this affect American home owners?
We all know about the subprime meltdown and the coinciding decline in housing prices.  A result of all of this has been that money for lending to both businesses and consumers has become very hard to come by.  Up until the past few weeks, this has been limited to so-called Jumbo, Alt-A, and sub-prime loans.  That is, non-conforming loans.  If we continue to see tightening in the credit markets, there will continue to be fewer and fewer borrowers qualified for a mortgage, and this will worsen what is an already ugly housing market.  Let’s hope Mr. Bernanke’s bold move pays off.

100% Financing Will Continue to Be Available

Last week it was announced by the various mortgage insurance companies that they were going to end the insuring of 100% financing across the board.  We are pleased to report that a few of the lenders that we work with have been in negotiations with the MI companies and have successfully stalled the elimination of the 100% products.  As a result, we will continue to offer Flex 100, MyCommunity 100, etc with credit scores as low as 620.  Additionally, we are still able to offer 80/20 and 75/25 piggyback loans to borrowers with credit scores of 720 or greater.

At this point, the implementation is going to be on a lender by lender basis.  Some will continue to offer these products, some will not.  As a broker, we will follow the money and ensure that we are able to offer 100% loans for as long as someone is still offering it.

While this is great news for the short-term, the long-term trend is obvious:  Credit is continuing to get tighter.  Any buyers who need 100% financing should be aware that these products could be pulled at a moment’s notice and they should work as quickly as possible to secure a signed purchase agreement.

Atlanta FHA Loan Limit Increased

On March 5th, 2008, HUD published their new loan limit guidelines based on the recently passed economic stimulus package.  These new limits will be in effect through the end of 2008, at which time legislators will decide whether to extend the new limits.  The metro Atlanta Area maximum FHA loan amount is now set at $346,250.  This excellent news comes at a great time - just as many of the sub-prime and high loan to value loan programs are being discontinued.

If you are putting down the FHA standard 3%, this means that the purchase price that you are looking for (including any seller’s contributions) is  $356,900.  Keep this in mind when you are making an offer.

Major Atlanta Mortgage Guideline Changes

Things continue to change very rapidly on the home financing front. Over the past 9 months we have seen many areas such as Florida, California, and the northeastern US labeled as “declining markets” by Fannie Mae and Freddie Mac. Recently, mortgage insurance companies have set their own standards for declining market and the Atlanta Metro has been named as a declining market.

Major Changes to Mortgage Insurance

• 100% financing using mortgage insurance is gone as of March 10th. 95% is the new maximum. And that is not just Atlanta, this is nationwide.  The March 10th date means that we have to have a full loan package and appraisal sitting with an underwriter by 3/10.  The underwriter will pull an MI certificate at that time.  Once that certificate has been pulled there can be NO CHANGES to the loan.

• No Investment Properties with MI in the Atlanta Metro. Did I read that right? Yes, unfortunately it is true. Basically, unless you can bring a 20% down payment (and 25% is preferred), you will not be able to finance an investment property.

• No Cash Out Refinances with MI in the Atlanta Metro. Again, if you are doing cash out, then you will need a 2nd mortgage (which are hard to come by right now) or you will only be able to go to 80% Loan To Value.

• 90 to 95% Loans With MI in Atlanta now require a minimum 680 FICO.

Other Recent Changes That Affect Financing

Fannie Mae and Freddie Mac have gone to a highly risk based pricing model. What that means is that credit scores have become more important than ever before. These rules originally went into place in February 2008, and already the rules are completely changing effective June 1st. But, lenders will begin to implement the new rules in the next few weeks. Some of the highlights:

• FICO score of 680 to 720 and LTV > 60%? 0.5% hit. (Example: Borrower has a middle credit score of 805, co-borrower has a middle score of 719. They are putting down 20% to avoid MI. Loan amount is $300,000. The lender will take the lower of the two middle scores and this couple with what was once considered fantastic credit will pay a $1500 penalty at closing for having a sub-720 score. 0.5% of $300,000 is $1500.)

• FICO score of 660 to 680 and LTV > 70%? 1.25% hit. With the same $300,000 loan this would be a $3,750 penalty.

• FICO score of 640 to 660 and LTV > 70%? 1.75% hit or $5,250 on our $300,000 loan.

• FICO score of 620 to 640 and LTV > 70%? 2.50% hit or $7,500 on our $300,000 loan.

• FICO score of less than 620 and LTV > 70%? 2.75% hit or $8,250 on our $300,000 loan.

What Other Options Are Available?

One option is FHA. With FHA you can go to 97% or sometimes 100% using a down payment assistance program and currently there are no pricing hits based on credit scores. In Atlanta, the current FHA loan limit is $252,890. That limit is going to be raised somewhat in the next several weeks and the estimate is somewhere in the $320,000 range. But again, that is just an estimate. If you need more than that, FHA is out of the question.

For 100% financing we are one of the few lenders who can still do an 80/20 or 75/25 piggyback loan for primary residence purchases. It is unclear how long the investors will continue to offer that program when the new MI rule goes into effect early in March, but we are not counting on that program continuing for much longer.

The bottom line is that if you are planning to buy a home in Atlanta after early March 2008, you had better plan to bring at least 5% to the transaction unless you can qualify for FHA financing.

How Will This Impact Atlanta Housing Prices?

In our opinion, this is almost certainly going to have at least a short-term detrimental impact on an already reeling housing market in Atlanta. Essentially, we are significantly reducing the pool of qualified borrowers. Just two short years ago, nearly anyone with a 620 or higher FICO score would qualify for 100% financing without a problem. Now, even the top credit borrower cannot get 100% financing if mortgage insurance is required.

For properties that are in areas of town that were heavily purchased by investors, those values have already taken a serious beating and this will make the problem much worse. The problem is two-fold. First, most investors who have the capital do not want to tie up their capital on a 20 or 25% down payment of an investment property. Second, very few investors have that kind of money to put down. The good news on this front is that for the investors who have capital to work with and the guts to enter into this market, there are incredible deals to be had. We have little doubt that in 2018 when you look back at 2008, you will either say “That’s where I made some great money in real estate” or “If only I had the guts to buy real estate in 2008…..”.

Economic Stimulus Package and Mortgages

We have a lot of clients who are asking about the impact of the new stimulus package signed last week by President Bush on mortgages.  The press has been reporting this as if everyone will see an increase in the conforming loan limit from the $417,000 that we have been sitting at for the past few years.  This is simply not the case.

For the vast majority of the US, the limit will continue to be $417,000.  Only certain high cost areas (as determined by the HUD median sales price) will see an increase in the conforming limit.  HUD has not yet released the final numbers, but we should see the final numbers in the next couple of weeks.  For those of us in Georgia (including metro Atlanta), the conforming mortgage limit appears very unlikely to be increased in any part of the state.