FHA Changes to Mortgage Insurance Premiums

U.S. Department of Housing and Urban Development (HUD) announced today that they are changing the amount they collect for mortgage insurance premiums.

Mortgage insurance premiums are collected and pooled in a fund and these moneys are used to offset losses on FHA loans that go into foreclosure. The idea is for the fund to have enough money to cover losses on any loans that default. Recently, with the high levels of foreclosures, losses have exceeded mortgage insurance premiums in the fund and this leaves HUD and FHA in a bad financial position and/or could lead to insolvency and an end to the program.

The changes begin with FHA loans started on or after October 4, 2010 and the new policy will reduce upfront mortgage insurance premiums (UFMIP) and increase monthly mortgage insurance premiums (MMIP). Right now FHA collects UFMIP of 2.25% and MMIP of .55% annually The new requirements are:

Upfront Mortgage Insurance Premiums
Mortgage Type / Upfront Premium Requirement
Purchase Money --1%
Refinance --1%

Monthly Mortgage Insurance Premiums for 30 Year Loans
Loan to Value / Annual Premium Requirement
95% or lower --.85% annually
95% or higher --.90% annually

What does this mean to a homebuyer putting 3.5% down and borrowing $100,000? Under the old rules they would pay UFMIP of $2,250 and monthly mortgage insurance of $45.83. Under the new rules UFMIP is reduced to $1,000 but MMIP is increased to $75.00 per month. That’s a $30 increase in the monthly payment.

It’s a mixed bag really and should not have a meaningful impact on getting borrowers approved for FHA financing. It will, however, improve and strengthen the FHA program and help to ensure we will have FHA loans available in the future!

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Great Opportunity to Replace old Heating and Cooling Systems in Michigan!

My house is a little over 20 years old and my cooling system just hasn’t been up to snuff this year so I called a heating and cooling contractor to get it checked out. They told me my equipment would probably last a couple more years but was not nearly as efficient as the new stuff they’re making today. Given the state of the economy, and my own personal finances my first thought was to just let it go until I could afford it. Then the HVAC contractor mentioned some great incentives that are available this year:

1) The manufacturer (Carrier - http://www.residential.carrier.com/index.shtml ) was offering a $1,000 rebate on certain high efficiency furnaces and air conditioning systems
2) The IRS has a tax credit of up to $1,500 (http://www.energystar.gov/index.cfm?c=tax_credits.tx_index ) for the purchase of certain high efficiency furnaces and air conditioning systems

3) The State of Michigan has a rebate incentive of up to $650 )(www.michrebate.com)for the purchase of a new high efficiency furnace with a variable speed blower system

All told, I could save $3,150 by installing a new system this year. Wow!

We decided to go ahead and have the whole new system installed and all of the credits and rebates paid for nearly ½ of the total cost – incredible! The contractor we used – Sutton and Sons (248) 673-2224 – did a great job. They showed up on schedule, got the job done on time, cleaned up the mess, took the old equipment with them and showed us how the new system works. My house actually gets cold on a 90 degree day now and the system is so quiet you don’t even know its running. Because we installed a 95% efficient unit with a variable speed blower we should also see a difference in our utility bills. I couldn’t be any happier.

If you, or anyone you know has an older HVAC system in the home they own, or if they just bought a new house that needs a new system, there has never been a better time to upgrade. Most of these credits expire at the end of the year so get busy!

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The Appraisal Complaint Process

Appraisals have become the biggest problem affecting an otherwise recovering real estate market. I’m not talking about a well documented appraisal that uses good, recent comparable sales data, even when the value is lower than I’d like. No. If the sales price of a home simply can’t be supported by actual relevant sales data, then so be it. What I’m referring to is the appraisal that was thrown together and has inaccurate data, uses comparable sales that are not comparable or refuses to use good comps and uses only poor ones. You know, compares a tri-level to a colonial or maybe a 1,500 sq ft home to a 1,900 sq ft home and so on. When there are more relevant sales to use they should be on the report. This is a follow up to last weeks post How Appraisers and Management Companies are Stifling the Real Estate Rebound.

Just in the past 7 days I have been fighting with an appraiser (actually fighting with the management company because we dangerous loan officers are not allowed to actually communicate with an appraiser) on a home purchase deal I am working on. I’m not even disputing the value which was actually higher than the purchase price. The problem is that the comparables used are all 3 to 4 miles away and two of them are 6 to 9 month old sales. Considering this house is in Rochester Hills, MI, a suburban community, guidelines call for comps to be within 2 miles and to have sold in the past 6 months. So, what happened when the loan was submitted for approval? Denied! Why? Due to poor collateral. I ask the appraiser to provide 2 comps that are within guidelines. The response – nothing available. Naturally I get with the Listing and Selling Agents and we come up with 2 sales and a pending which meet guidelines and I send them in to the AMC (appraisal management company) to forward to the appraiser. The appraiser sends back comments on why none of these can be used. One was “significantly larger” – the subject is 2,800 sq ft and the comp was 3,150. The second was too new – the subject is an all brick home built in 1994 with updated kitchen and baths and the comp was a couple of years old, otherwise they are the same size, style and have similar appeal. What are more relevant, similar homes that are within 1 mile and sold in the past 90 days or sales that are 9 months old and 4 miles away? Arghhhhh.

There is literally nothing I can do at this point because the management company says they cannot tell the appraiser what to use in the report. My only action is to shake up this appraiser by making a complaint with the State in the hopes that she, and other appraisers, will realize that they still have to do quality work or there will be consequences. The State will investigate every complaint and notify the appraiser of the investigation. That should do the job.
Appraisers are licensed and regulated in the State of Michigan by the Department of Energy, Labor and Economic Growth (DELG) and the web address is http://www.michigan.gov/dleg/0,1607,7-154-35299_35395_35396---,00.html. You can look up appraiser’s to see if disciplinary action has been taken in the past, print up a complaint form and get procedures for filing a complaint. When making a complaint be as specific as possible as to exactly what the faults are and offer better data.

It is really up to us, as real estate professionals, and as homeowners, to stand up and fight because nothing is hurting our business, or our property values, more than poorly done appraisals. Every time an appraisal derails the sale of a home or reduces the sales price, that damages a real estate market that is on the mend and an improved real estate market is the best thing for our economy right now. Standup, be counted. The next time a bad appraisal affects you make a complaint!

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How Appraisers and Management Companies are Stifling a Real Estate Rebound

Southeastern Michigan real estate sales have been brisk over the past 6 months with sales up and inventories down. The law of supply and demand dictates that when supply is down and demand is up then prices can rise. We’ve all been hoping for a rebound in real estate values to help put the economy back on a sure footing but appraisers and management companies are thwarting the natural order of things by capping, and even lowering values.

Market Value is defined as the price a buyer is willing to pay for an item and the price a seller is willing to sell the item for. Both parties agree to the price and that is the market value. As a mortgage lender in Bloomfield Hills, Michigan, the most frustrating thing I’ve been experiencing this year is low appraised values and simply poor appraisal work.

If a homebuyer has looked at dozens of homes in the marketplace he has a very sound idea of what the correct value of a home is at the present time and crafts an offer that fits into the current market. If the seller accepts the offer then that is the market value of the home. However, along comes the appraiser and he values the house at less than the sales price. What happens now? Of course the buyer wants the price reduced but the seller is angry because he got a price he could live with and agreed to it and now an outside factor is having a negative impact on that agreed price.

Effectively, the appraiser has capped the value of the house and hurt future sales of homes around the subject property. So, appraisers are currently one of the biggest factors keeping real estate values from improving and are even pushing values down! I don’t take issue with an appraisal that accurately portrays the current value of a home when it is less than the sales price. The problem is when the appraiser uses bad data to come up with a wrong value, or chooses poor comps that are either too far away, too old or are simply not comparable. Last month I had an appraiser use a ranch and tri-level as comps for a colonial! The appraised value was equal to the sales price but the loan was denied due to the poor value support in the appraisal analysis. When we asked for additional comps the appraiser said there weren’t any. Then we provided sales data to the appraiser and they said it couldn’t be used. They said one of the comps we sent could not be used because it was substantially larger than the subject property. Well, the subject property was 1,900 square feet and the comp was 2,060. That’s less than a 10% difference in size. Are you telling me that a buyer looking at a 1,900 sq ft home is not going to look at a 2,060 sq ft house with the same number of bedrooms and baths??

In the last 90 days I have seen numerous cases where appraised value is less than purchase price. Recently, I had a sale where the purchase price of the home was $265,000 and the appraisal came in at 260,000. The comparable sales used could have easily supported a value of the $265,000 but the appraiser’s opinion of value was $260,000. This individual obviously thinks very highly of themselves as they are able to pinpoint the value of a house! So, the sales price went down and we all suffer. Why?

Appraisal Management Companies (AMC) contribute to and exacerbate the problem because they remove the appraiser’s responsibility to the lender and neither the AMC nor the appraiser cares if the lender is happy with the appraisers work. As the lender I cannot even talk to the appraiser about issues I have with the report. When I call the management company they say they can’t tell the appraiser how to do the job. Nobody does anything to correct the appraisal and loans are denied and real estate that could have sold goes back on the market. Everyone walks away mad except the AMC and the appraiser who get paid regardless. That’s another problem – the AMC is taking a chunk of the appraiser’s fee and that must make the appraiser angry which leads to lousy work. What value is added by the management company anyway? The whole idea of an Appraisal Management Company is a farce and has lead to nothing positive for home buyers, sellers or lenders. Eliminating AMC’s would be a very positive step for a troubled real estate market that could be healing right now.

As a homeowner, I am asking myself how can real estate values ever increase under these conditions? Even when buyers are willing to pay more for a property, appraisers will not allow the sale to be consummated because they are either being so conservative in their valuations, they are ignorant of specific local market characteristics, or they are simply doing poor quality work and coming in with low values. This puts a cap on real estate values and stifles any possible rebound in home prices! The Home Valuation Code of Conduct (HVCC), which created AMC’s is basically derailing current market strength that could restore confidence and stabilize values in real estate across the nation.

We homeowners, sellers, buyers, lenders, real estate agents, and yes, even appraisers need to stand up and tell congress that the HVCC does not work and to eliminate it!

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FHA Loan 101

In a general sense FHA loans are easier to qualify for than a conventional loan with a similar down payment. Credit requirements are less stringent and underwriting guidelines are more flexible.


Here are the basic FHA Rules and Requirements for Borrowers:

 Credit should be reasonably good. This means the applicant should have at least a 620 credit score and the credit report should show a minimum of 3 trade lines with at least a 12 month history
 Bankruptcy’s should be at least 2 years since discharge and the applicant needs to have re-established credit since the BK and paid their bills on time
 Foreclosure’s should be at least 3 years in the past with clean payment histories since
 Employment must be stable. Typically this means a 2 year employment history in same line of work
 Income must be stable as well. Bonus, overtime or part-time employment income can only be used if it has a 2 year history
 Down payment and funds for closing costs can be a gift from a relative
 Total mortgage payment, including taxes and insurance, should be no more than 33% of buyer’s gross monthly income. This is called the Debt to Income ratio

These are the Requirements for the Transaction:

 Minimum down payment is 3.5% of the purchase price
 Seller can pay up to 6% of sales price towards buyers closing costs and prepaid items, but the seller cannot make the buyers down payment
 There is no separate FHA inspection of the property. Just a standard appraisal inspection and all utilities and water must be on and functioning at the time of the appraisal
 Sellers must be in title for a minimum of 90 days prior to sales contract date! If the seller has owned the house between 90 to 180 days a second appraisal may be required
 Borrower pays FHA Upfront Mortgage Insurance Premium (UFMIP) of 2.25% of loan amount
 Borrower pays Monthly Mortgage Insurance (MMI) of .55% of loan amount (this is annual amount)

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FHA Increases Cost of Upfront Mortgage Insurance Premium (UFMIP)

This is a very important reminder that for any FHA Case Numbers assigned on or after Monday, April 5, 2010 the cost of UFMIP is going to increase from 1.75% of the loan amount to 2.25%. This is important as it is going to be more expensive to obtain an FHA loan. The increase will add $1,000 to the cost of getting a $200,000 FHA loan. A Case Number can only be obtained for a borrower who has applied for a loan and has an accepted purchase contract. Also, it can take up to 3 days to get a Case Number from FHA so to ensure the case number is assigned prior to the cutoff date it would be wise to request the Case Number as early as possible prior to Friday. FHA has proposed a number of upcoming changes which you can read about in my previous post.

Upfront Mortgage Insurance Premiums (UFMIP) are collected by HUD to cover the losses on FHA loans that go into default. Due to higher default rates in recent years FHA has been forced to increase the UFMIP premium to ensure the health and viability of the FHA loan program.

It is important that home buyers who are considering using an FHA loan be made aware of this change so that it does not come as a surprise to them late in the home buying process!

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Michigan Mortgage Market Update – The Economy is a State of Mind

I can’t speak for anybody else, but business is booming in my office right now! It’s a major twist since we have been slow to moderately slow for the past 18 months. We are financing people buying houses like crazy right now and some of that can certainly be attributed to the current home buyer tax credit. I sure hope that thing gets renewed! The bottom line is that it seems like the housing market has really picked up and that is great news for everyone in Southeastern Michigan! I am seeing buyers lose houses that have gotten multiple offers and that has not been typical for the past couple of years. Also, most homes are selling within a narrow range around the asking price of about 5% within our typical market area of Oakland, Macomb and Wayne Counties.

Mortgage rates have continued to stay very low with rates this year averaging between 4.875 and 5.250% and that has added fuel to home buying activity. Over the past couple weeks most of the economic news has been pretty benign – meaning it has had little impact on interest rates. Industrial production reported on Monday, March 15, was up .1% and February Housing Starts were down 5.9% both pretty much in line with expectations. The Federal Reserve met last week and announced that they would leave the Federal Funds rate unchanged for the foreseeable future. Later in the week the Producer Price Index and the Consumer Price Index (both measures of inflation) were pretty much flat. This is good news as inflation causes interest rates to rise. Arguably the most important factor affecting interest rates right now is excessive government borrowing. In order to finance the HUGE government deficit the fed’s have been issuing records amounts of new debt in the form of treasury bonds and notes. Today the federal government is selling a record $42 billion of 5 year notes and demand for this new debt has been low as there is a limit to how much US debt the world is willing and able to hold. The federal government needs to get a handle on this deficit spending or we are going to be in for significantly higher interest rates in the near future! If you want to keep up with news items that impact mortgage rates on a daily basis please read our Daily Market Advisory.

Overall, it seems like economic activity is starting to improve in my little corner of the world. Consumer spending and housing activity are the two biggest components impacting the economy and both have been on the mend this year. The economy is really just a reflection of the state of mind of consumers, so, let’s all think positively and encourage those around us to do the same and we’ll see the economy getting better which will in turn improve business profits which will create new jobs and more spending and things will continue to get back to “normal.”

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FHA ANNOUNCES IMPORTANT POLICY CHANGES BEGINNING IN APRIL 5, 2010!

Recently Federal Housing Administration (FHA) Commissioner David Stevens announced a set of guideline changes to the FHA loan program for the purpose of strengthening loan quality and shoring up FHA’s capital reserves. These are significant changes that will impact both the cost of getting an FHA loan and the down payment requirements as well as providing more strict oversight of FHA lenders. There are four primary changes that we are concerned with here:

1) Mortgage Insurance Premiums will be increased – FHA charges what’s known as an Upfront Mortgage Insurance Premium (UFMIP) on all FHA loans. The UFMIP is paid by the borrower and the cost is allowed to be rolled into the loan amount so borrowers don’t have to pay for it out of pocket. UFMIP premiums are pooled and this pool of funds is FHA’s Capital Reserve which is used to pay for losses on loans that go into foreclosure. Currently, UFMIP is 1.75% of the loan amount, so, for a $100,000 loan the cost of UFMIP is $1,750. Beginning April 5, 2010, UFMIP is going to increase to 2.25%, so for that same $100,000 loan the cost is going up to $2,250. The purpose of this increase is to strengthen the capital reserve fund to cover current losses on bad loans.

2) Increase the Minimum Down Payment Requirement – Currently FHA requires a minimum down payment of 3.5% of the purchase price of a home. The proposed change would require borrowers with credit scores of 580 to put a minimum 10% down. This change is really inconsequential as 95% of lenders today will not make an FHA loan to a borrower with a credit score under 620 anyway. The reason for this is that borrowers with credit scores under 620 have historically not performed well and FHA can hold the lender who made the loan responsible in the event the home goes into foreclosure and FHA is more likely to find fault in the underwriting process of the lender when the borrower clearly has a weak credit history. This change is scheduled to take place in early summer of 2010. There are also rumors going around that FHA may increase the minimum down payment requirement for all borrowers to 5%, but, we’ll just have to wait and see.

3) Reduce Allowable Sellers Concession from 6% to 3% - The Sellers Concession, otherwise known as Seller Paid Closing Costs, is a very important component of the FHA loan. Most FHA borrowers have only a limited amount of funds available to buy a home and the closing costs and prepaid items (property taxes and insurance) can really add up. Here in Oakland County, Michigan, a buyer purchasing a $150,000 home can expect typical prepaid items plus closing costs to add up to approximately $6,500 which is about 4.5% of the purchase price of the home. IF FHA will only allow the seller to pay 3%, or $4,500, then the buyer will have to spend an additional $2,000 out of pocket to purchase the same home! This change has not yet been approved but if it is it will go into effect this summer as well.

4) Increased Enforcement of FHA Lenders – The idea here is to push out lenders who are creating an excessive number of non-performing loans. FHA plans to publicly report lender performance rankings and to make lenders more responsible for loans they approve that go bad. This is a good idea because in order for the FHA program to work, loans that are approved need to perform – meaning the borrower makes their payments on time. This will have some negative impact though in that this type of stricter oversight by FHA will also cause FHA loan underwriters to become stricter making it difficult for more marginal borrowers to be approved. This change has actually already been implemented and FHA has shutdown 2 of the nation’s largest FHA loan underwriters in the past 6 months!

So, it looks like it’s going to become more costly to obtain an FHA loan, buyers may have to make larger down payments, sellers can’t pay as much of the buyers closing costs and lenders making FHA loans will be more careful about approving only those loans that have a strong likelihood of performing.

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Mortgage Market Update February 23, 2010

As usual lately, there has been some interesting news affecting mortgage rates. Over the past two weeks rates have been on the rise. The causes of this increase have been numerous.

Mortgage rates are closely linked to the current rate of the Federal Governments 10 Year Treasury Bond. The 10 Year Treasury rate has increased from 3.55% to 3.80% over the past 2 weeks and mortgage rates increased from 5.0% to 5.25%. What caused this increase?

One of the main factors influencing rates right now is the Federal Government issuing massive amounts of new debt on a weekly basis to fund the budget deficit. Recently, these auctions have been met with lackluster demand as foreign buyers of US debt at some point decide that there is only so much US debt they are willing to hold. This lackluster demand for new US Gov’t bonds causes the rates paid on these bonds to rise so that investors will be encouraged to purchase them.
The other factor that influences interest rates in general is current economic news. Interest rates are generally lower in poor economic times and move higher when the economy is good. Rates have been very low over the past 18 months due, in part, to the weak economic times we have been experiencing. When the economy starts to heat up investors fear inflation and inflation erodes the value of fixed income investments, so, investors require higher rates of return to make up for those losses.

Recently, the news reports have been a bit more positive than expected and this has caused concern that inflation might start to rise and that makes interest rates go up. The latest news has included:

1) Producer Price Index (PPI) went up 1.4% with the core rate up .3%, according the report issued February 17, 2010. Both readings higher than expected. PPI measures the prices that companies pay for the raw materials they need to produce goods. This report means it was more expensive to make products. When it’s more expensive to make an item producers will naturally want to increase the price of the product and an increase in the price of products is – inflation
2) January Industrial Production, also released February 17, 2010, increased by .9%. This is an indication that manufacturers are busier than expected. A sign the economy may be heating up
3) Finally, the Federal Reserve Bank increased the Discount Rate last week by .25%. The Discount Rate is the interest rate the Fed charges to member banks for short term loans. It is more of a symbolic move than anything else but it is an upward move of a key interest rate that the Fed controls and could mean the Fed will start increasing the Federal Funds rate at some point in the near future. This would have a much more direct impact on interest rates in general

So, mortgage rates have moved up a touch, but, are still very very low!

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Good Faith Estimate 2010: An Improvement?

The New Good Faith Estimate: Is it Easier to Understand?

Over the past year the Federal Government has made some sweeping changes to the way mortgage loans are originated, how appraisals are ordered and how and what is disclosed to the consumer. The change I want to address here is a change in what’s known as the Good Faith Estimate (GFE). The GFE has always given potential borrower four bits of crucial information when shopping for a loan:
1) The terms of the loan – Loan amount, interest rate and number of years to repay
2) The total costs of obtaining the loan broken down by mortgage costs and prepaid taxes, insurance and interest
3) The total cash needed to close including closing costs, prepaid items and down payment
4) The total monthly house payment including all taxes and insurance
Here is the old form Good Faith Estimate which covered all of the important information on one page – pretty efficient and I’d say, easy to understand.

← Here is Page 1 of the new GFE. The new form is 3 pages long. It does a good job of giving you the basic loan terms.
It loses ground on the monthly payment as it only shows the principal and interest payment on the loan and does not tell a borrower what the total monthly cost of the home is including taxes and insurance. This is a very important number!

At the bottom it gives you “Total Estimated Settlement Charges”, however, this figure includes things that, in Michigan, a home buyer generally does not pay for, and as a result, overstates the settlement costs (in my example the costs are overstated by $2,796 – quite a large amount!)

←This is the Page 2 of the new Good Faith Estimate. This page is right on the money except for two items:

1) HUD has stated that the cost of Owners Title Policy should be listed regardless of who pays for it. Why, I ask? If the buyer is not paying for it, it should not be included in the settlement charges to the buyer.
2) Transfer Tax also must be included in the buyer’s settlement charges. In Michigan, the seller pays the transfer tax (in 99 out of 100 cases).

So, when you get to the buyers total Settlement Charges they are overstated, as I mentioned above, by $2,796! Maybe it’s just me, but, shouldn’t we stick to telling the buyer specifically what they have to pay for? Why not include the seller’s real estate commission here too?

←Finally, Page 3 of the new form. This page summarizes the loan terms, loan payment and total estimated settlement charges. It also gives the buyer a table where they can write in offers from different lenders so they can make comparisons. This page could be pretty handy. I like it.

It also lets the borrower know that the Lender is required to honor their stated Origination Charges and that other specific settlement costs cannot change by more than 10% at closing. I actually love this because it keeps unscrupulous loan officers from quoting low costs and then increasing them at the last minute due to some contrived change in the borrower’s circumstances. Page 3 is a hit and the rules that go with it are great too.

In the final analysis, the New Good Faith Estimate should not include closing costs that the buyer does not pay. It should include the total payment including property taxes and insurance so a borrower can evaluate if they can afford the home. It also should tell a borrower what their total cash to close is including only their closing costs, all property taxes and insurance and the down payment so they are prepared for what they will be required to pay. My question – Why change a 1 page form, which has all of the necessary information on it, into a 3 page document which does NOT give complete and accurate figures to a borrower? Answer – Who knows? Your Federal Government in action. See you next time . .

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