Thursday, February 12, 2015

Getting a mortgage for less

Julian Castro, the current Sec for the US Dept of HUD, testified before the Committee on Financial Services on Wednesday, February 11, 2015 regarding the reduction of the Mortgage Insurance Premium

Before your eyes glaze -this is important.  A reduction in the premium has huge benefit to everyday people buying a home and financing it with an FHA loan.  About 5-years ago, HUD raised that premium and that cost borrowers a significantly higher amount to close their loans - money out of their pocket to HUD.  And, each month, their monthly payment included hefty monthly premiums that went to HUD.

Castro is seeking to reduce this amount for two reason.  1. The high premium is forcing borrowers to look at big banks offering 3% down payment mortgages with lower insurance.  2.  By reducing the premium and by offering a truce with banks who refuse to do FHA loans (by not forcing them to buy back FHA loans for immaterial defects), Castro is hoping that more people will apply for and get an FHA loan. 

This is important to HUD and frankly to the US.  First, HUD has seen a large drop in FHA loans for the reasons cited above.  Consumers don't want to pay and banks don't trust FHA to punt loans back to them for small defects that don't affect the material soundness and quality of underwriting a borrower.

But, FHA loans provide borrowers who can't get a 3% down loan at a bank with the ability to get a mortgage.  Those much talked about low down payment loans at major banks and bankers come with tougher credit, employment and asset requirements than an FHA loan

Since the 1930's FHA has played an important role in housing - providing loans to people who otherwise would not get one.   So, HUD is an important player in the US economy.

The US Congress cares about this reduction because not so long ago FHA and HUD ran out of money as the foreclosures went through the roof.   Castro stated that in response to this HUD increased the insurance amount from borrowers and toughened underwriting which brought in a 21 billion improvement to the insurance fund.

HUD remains under the limit required to have in reserve - a violation that a regulatory like HUD would not tolerate in a lender.  Congresspersons grilled HUD about this very fact in light of the reduction of the insurance premium, which goes to increase their reserves. 

Monday, February 9, 2015

Subprime lending back

Subprime mortgages are back

Subprime mortgages - what most consider the epicenter of the financial meldown - are coming back.

Sub prime mortgages were meant for borrowers with less than prime credit.  It started out that a subprime loan came with a higher interest rate and a larger down payment.  It slid into not requiring any income verification of the loans, then no asset verifications (with yet higher rates and higher down payments) to offering literally lowering the down payment and increasing the rate higher and higher.  In fact, lenders were so hungry for the returns that they offered adjustable loans with teaser interest rates and moved into "interest only" mortgages  - requiring the borrower to only pay the interest and never pay the debt off.  If not bad enough, there were negative amort loans - which allowed the borrower to pay less than was required to pay the mortgage, which meant that their mortgage debt increased, not decreased.  And, let's not forget that lenders got into giving out home equity loans with the subprime loans - so you got two mortgages.  One for 80% of the value and one for 10%, 15% of the value - which meant you only put down 5%.   It actually got worse when lenders came out with the "125's".  Those were 125% loan to value loans - which meant if you bought a 100,000 dollar house, the bank would happily lend you 125,000.00 to buy the house..... The appetite for those loans by investors was voracious.  Big banks bought sub prime lenders and got in the game.  It got huge.  In fact, in 2006 and 2007, more people were doing subs than doing your normal Fannie Mae or Freddie Mac loans.  And, forget FHA - they required too much verification and too much insurance premiums - and Realtors steered borrowers away from an FHA for fear of the appraisal - which was more stringently done on an FHA financed property.

Subs are back.  Now they are being hawked to borrowers who have fallen outside the tight lending criteria that came into place after the crisis.  When lenders would lend without regard to income, now they lend with regard to ability to pay and most won't lend to someone with less than a 640 credit score - and that credit score will cost you in points and fees.  Over 700 and maybe you won't have points.  So, young people starting out are locked out of the housing market.  And, we wonder why the housing market has stumbled and stumbled since 2010.

The new subprime loans come with higher interest rates than being offered to borrowers with 640 abd higher credit scores.  The loans can not have rates that increase if a borrower defaults nor any pre payment penalty should the borrower pay off their mortgage sooner (inheritance, sale, re-finance).   And, the borrowers do need to complete homeownership housing counsling.

But, while not as wild as before, they are back.  Some do not call them sub prime, they call them alternative mortgage products.  They argue it opens to doors to people who in other days easily qualified.

What ever happened to the days when common sense underwriting was done on each loan?  No two borrowers and no two mortgage applications are the same.  With automated underwriting and investment firms seeking every higher returns - all that went out the window.  For every borrower who lied and fabricated supporting documentation for their loans - lending became a nightmare.  In the good days, those who say got hit with a medical emergency were approved because an underwriter underwrote the loan and got the documentation proving they were on time with their payments prior to the emergency, have stable income and all that portends stability and ability to pay.  But, that is all gone now and those and new home buyers are the ones aone's who today are paying the price.