Fed Senior Loan Officer Survey Q1 2011Another quarter, another sign that mortgage lending may be easing nationwide.

The Federal Reserve’s quarterly survey of senior loan officers revealed that an overwhelming majority of U.S. banks have stopped tightening mortgage requirements for “prime borrowers”.

A prime borrower is one with a well-documented credit history, high credit scores, and a low debt-to-income ratio.

Of the 53 responding “big banks”, 49 reported that mortgage guidelines were “basically unchanged” last quarter. Of the remaining four banks, two said mortgage guidelines had “eased somewhat”, and the remaining banks said guidelines “tightened somewhat”.

It’s the second straight quarter in which fewer than 5 percent of banks tightened guidelines, and the first quarter in nearly 5 years in which the number of banks that loosened guidelines equaled the number of banks tightening them.

The easing in mortgage lending is a positive development for the housing market; and for buyers in Midlothian and nationwide. Looser lending standards means that more buyers will be approved for home loans, and that should spur home sales forward across the region.

However, don’t confuse “looser standards” with “irresponsible standards”. It’s much more difficult to get financing today as compared to 2006. Delinquencies and defaults have altered how a bank reviews a loan application.

Today, underwriters are more conservative with respect to household income, total assets and overall credit scores. Even as compared to just 6 months ago:

  • Minimum credit score requirements are higher
  • Downpayment/equity requirements are larger
  • Maximum allowable debt-to-income ratios are lower

If you can get approved, though, your reward is that mortgage rates are especially low. Since early-April, both conforming and FHA mortgage rates have been on a downward trajectory, and pricing is near a 6-month low.

Home affordability is at an all-time high, too.

Looser guidelines and lower rates should help fuel home demand through the summer months. If you’re in the market to buy, your timing appears to be excellent.

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Pending ARM Adjustment Spring/Summer 2011

When a mortgage applicants chooses an adjustable-rate mortgage over a fixed-rate one, he accepts a risk that — at some point in the future — the mortgage’s interest rate will rise. Lately, though, that hasn’t been the outcome.

Since mid-2010, conforming mortgages have adjusted below their initial “teaser” rate consistently, giving homeowners in Virginia and nationwide reason to ride their respective adjustable-rate mortgages out.

For example, this month, conforming 7-year and 5-year ARMs are adjusting near 3.011 percent based on the most common loan terms of 2004-2006. It’s because of how adjustable-rate mortgages are structured.

Adjustable-rate mortgages follow a defined life-cycle. First, the ARM’s mortgage rate is pegged; held fixed for a set number of years. This period ranges from one year to 10 years; periods of five and seven years are most common.

When the initial fixed-rate period ends, the mortgage rate then adjusts based on a pre-set formula. The formula is established by contract in the mortgage closing paperwork, and is commonly defined as:

(Adjusted Mortgage Rate) = (2.250 percent) + (Current 1-Year LIBOR)

Next, every 12 months, based on the same formula as above, the ARM adjusts again until 30 years have passed and the loan is paid is full.

It’s important to recognize that in the above equation, LIBOR is a variable so as LIBOR goes, so goes your adjusted mortgage rate. And because LIBOR is ultra-low right now, adjusted mortgage rates are ultra-low, too. LIBOR is expected to stay this way until the global economy has recovered more fully. Analysts predict a higher LIBOR by mid-2012.

So, if you have an adjustable-rate mortgage that’s due to reset this season, consider refinancing but know that for at least one more year,  you will benefit from low rates and low payments.  As for the next adjustment, though, that’s anyone’s guess.

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FHA Mortgage Insurance Changes

After this week ends, the FHA is raising mortgage insurance premiums on its new Midlothian borrowers. It’s the FHA’s third such increase in the last 12 months.

Beginning with FHA Case Numbers assigned April 18, 2011, mortgage insurance premiums will be higher by 25 basis points per year, or 0.25%.

Against a $200,000 loan size, the MIP increase adds $500 to an FHA-insured borrower’s annual cost of homeownership. All new FHA loans are subject to the increase — purchases and refinances.

Existing FHA-insured homeowners across Virginia are unaffected. Premiums do not rise for loans already made.

The FHA is increasing its mortgage insurance rates because, as a group, the FHA is insuring a much larger percentage of the U.S. housing market. 

In 2006, the FHA held a 4 percent market share. By 2010, that share ballooned to 19 percent and, today, it’s estimated to be even higher.

In its official statement, the FHA says that the quarter-point MIP bump will “significantly strengthen” its reserves which are depleted because of delinquencies and defaults. By law, the FHA’s capital reserves must meet certain levels. 

Therefore, to meet these requirements, the FHA is rolling out its new mortgage insurance premium schedule:

  • 15-year loan term, loan-to-value > 90% : 0.50% MIP per year
  • 15-year loan term, loan-to-value <= 90% : 0.25% MIP per year
  • 30-year loan term, loan-to-value > 95% : 1.15% MIP per year
  • 30-year loan term, loan-to-value <= 95% : 1.10% MIP per year

In order to calculate what your FHA monthly mortgage insurance premium would be, multiply your beginning loan size by your insurance premium in the chart above, then divide by 12. 

The FHA also charges a 1 percent, up-front mortgage insurance premium at closing. That figure remains unchanged.

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New FHA Streamline Guidelines Spring 2011FHA Streamline Refinance guidelines are changing. For the better.

In an effort to improve its loan portfolio, the FHA is loosening approval standards on its popular refinance program, rendering large groups of homeowners suddenly FHA Streamline-eligible.

Now, that may seem counter-intuitive — lowering qualification standards in order to reduce loan defaults — but in the FHA’s case, it makes complete sense. It’s because the FHA doesn’t make loans. It insures them. What’s good for FHA-insured homeowners is good for the FHA, therefore.

All things equal, lower housing payments for its insured homeowners should correlate to fewer FHA loan defaults in Virginia and   nationwide.

One interesting facet of the FHA’s new rulebook is the manner in which the government group is applying common sense to the approval process. So long as the homeowner is current on their mortgage and there’s a demonstrable benefit in the refinance, the FHA reasons, there’s good reason to insure the new loan.

The FHA defines “current on the mortgage” as being up-to-date on payments, and having zero 30-, 60-, or 90-day lates within the last 12 months. Demonstrating benefit is a little more tricky.

According the FHA, “benefit” is defined by refinance type.

When refinancing any fixed rate mortgage, or an existing ARM to a new ARM, the borrower’s new monthly (principal + interest) + (mortgage insurance premium) must be 5% or more below the current levels to meet the FHA’s minimum benefit requirements

The refinance of any ARM to a fixed rate mortgage is considered an acceptable benefit.

Beyond that, Streamline Refinance guidelines are simple:

  • Income is not verified, or required
  • Employment is not verified, or required
  • Assets are not verified, unless required to meet closing costs

Note that an appraisal is not required, either This allows “underwater” homeowners to refinance their FHA-insured home loan without penalty. The downside is that without an appraisal, the new loan size may not exceed the current principal balance plus the FHA’s 1% upfront mortgage premium. All other charges must be paid as cash at closing.

The FHA Streamline program is a refinance program special to FHA-insured homeowners. To confirm your own eligibility, check with your lender.

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LLPA rising April 1 2011Beginning April 1, 2011, Fannie Mae is increasing its loan-level pricing adjustments. Conforming mortgage applicants in Virginia should plan for higher loan costs in the months ahead.

If you’ve never heard of loan-level pricing adjustments, you’re not alone; they’re an obscure mortgage pricing metric and, thus, are rarely covered by the media. That doesn’t make them any less relevant, however.

LLPAs are mandatory closing costs assessed by Fannie Mae and Freddie Mac, designed to offset a given loan’s risk of default. LLPAs were first introduced in April 2009.

This April’s amendment is the 6th increase in 2 years. LLPAs can be costly.

In addition to an up-front, quarter-percent fee applied to all loans, there are 5 additional “risk categories” in the LLPA equation:

  1. Credit Score : Lower FICO scores trigger additional costs
  2. Property Type : Multi-unit homes trigger additional costs
  3. Occupancy : Investment properties trigger additional costs
  4. Structure : Loans with subordinate financing may trigger additional costs
  5. Equity : Loans with less than 25% equity trigger additional costs

Adjustments range from 0.25 points (for having a 735 FICO score) to 3.000 points (for buying an investment property with just 20% downpayment). And they’re cumulative. This means that a borrower that triggers 3 categories of risk must pay the costs associated with all 3 traits.

Loan-level pricing adjustments can be expensive — up to 5 percent or more of your loan size in closing costs. The fees can be paid a one-time cash payment at closing, or they can be paid in the form of a higher mortgage rate.

The loan-level pricing adjustment schedule is public. You can research your own loan scenario at the Fannie Mae website, but you may find the charts confusing.

Phone or email your loan officer if you’re unsure of what you’re reading.

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FHA Mortgage Insurance Increase April 18 2011For the third time in 12 months, the FHA is changing its mortgage insurance costs. 

Effective for all FHA case numbers assigned on, or after, April 18, 2011, annual mortgage insurance premiums (MIP) will increase 25 basis points.

The change will add $250 to an FHA-insured homeowner’s annual loan costs per $100,000 borrowed, and applies to all borrower’s equally. Current FHA borrowers are unaffected.

To understand the FHA is to understand why premiums are rising.

As an institution, the Federal Housing Administration plays a much larger role in the U.S. housing market today than it did just 5 years ago. According to its own records, the FHA’s percentage of purchase money business in Virginia and nationwide expanded from 4 percent in FY 2006 to 19 percent in FY 2010.

Rapid growth like this has strained the FHA’s capital and, indeed, in its official statement, the FHA alludes to this, stating that the MIP increase will “significantly strengthen” its reserves. By law, the FHA must maintain a certain minimum level of reserves.

FHA mortgage insurance varies by loan term, and by loan-to-value and, beginning April 18, 2011, the new insurance premiums are as follows:

  • 15-year loan term, loan-to-value > 90% : 0.50% per year
  • 15-year loan term, loan-to-value <= 90% : 0.25% per year
  • 30-year loan term, loan-to-value > 95% : 1.15% per year
  • 30-year loan term, loan-to-value <= 95% : 1.10% per year

To calculate your monthly mortgage insurance premium, multiply your starting loan size by your insurance premium, and divide by 12. 

There is no change planned to the 1 percent upfront mortgage insurance premium charged by the FHA.

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