Oct. 27, 2012: A little history of the FHA to put things in perspective & compare ratio thoughts; political quotes continue
Rob Chrisman
I
confess that I own three type writers: the first helped my Mom
at Stanford in the 1940's, the second I used to teach myself
how to type while in high school, and the third I used in
college in San Diego. I have them stored in the basement next
to my floppy disks with
Lotus files that I can no longer access. In the finance
world, the typewriter was once a mainstay of the office, as
was liquid paper. They were invented in the early 1700's, mass
produced right after the Civil War, and the peak of production
was in the 1950's. The last company to exclusively produce the
typewriter, Godrej and Boyce, has recently shut down
production. Will 30-yr mortgages go the way of the
typewriter? Some say yes, and that mortgage duration and
rate should be much more closely tied with the duration and
rate of what banks are paying their depositors. Aside from
using swaps and derivatives, what bank wants to own a
30-yr security paying 2.5% and be paying its depositors 3%?
Few
think that the FHA will go away, although there are thoughts
of somehow melding it in with Fannie & Freddie. But many
look at today’s Federal Housing Administration (FHA) and
think it hasn’t changed since it was created in 1934 – it
has. The FHA initially insured fully amortizing 20-year
loans combined with a 20% down payment. As a result,
homebuyers accumulated nearly 30 percent in earned equity
after four years, yet over its first 20 years, the FHA paid
claims on only 5,712 properties, for a cumulative claims rate
of 0.2 percent.
Industry
analyst Ed Pinto continues with the history lesson. “Lulled by
this success, Congress periodically reduced the minimum down
payment and extended the maximum loan term. By 1956, the FHA’s
maximum loan-to-value (LTV) ratio stood at 95% and maximum
loan term was 30 years. For a borrower leveraged at the
maximum LTV and term, earned equity after four years totaled
9%, about enough to cover the cost of selling the home. A
borrower and the FHA’s success depended highly on unearned
equity accruing from house price appreciation. Higher leverage
is a double-edged sword. It creates a windfall of unearned
equity for home buyers and reduces losses for the FHA when
home prices are increasing rapidly, but it exposes home buyers
to foreclosure when prices were rising more slowly or decline.
At the same time, the shift to higher leverage caused the
FHA’s foreclosure rate to increase dramatically and
inexorably over the decades.” Recent figures show that
over 17% of all FHA loans were delinquent, and that total
delinquencies increased by 77,000 over August, the largest
one-month increase since FHA Watch began tracking monthly
delinquencies in September 2011.
An
industry vet from Nevada writes, “The FHA program was a
wonderful program. Now, like everything else, the government
has wrecked it. The MI is so high, the only reason you go FHA
is because you don't have the credit scores for FNMA/FHLMC 5%
down. Is that subprime or what? The FHA winds up with the
less qualified borrower, and then those idiots wonder
why the loss factor is higher.”
And
experts have wondered about the FHA’s net worth – it
isn’t good, and below the minimum capital requirements set by
Congress. (Does Congress care, or know?) The September
estimate of the FHA’s generally accepted accounting principles
(GAAP) net worth is -$28.3 billion, down from -$16.3 billion
in September 2011. The capital shortfall stands at $48 billion
(using a 2 percent capital ratio) and $67 billion (using a 4
percent capital ratio).
(The
folks at GNMA, however, are having a banner year. They are
different, remember: the FHA insures loans whereas Ginnie
packages them up into securities. With roughly only 100
employees, Ginnie made about $1.2 trillion in the last
fiscal year, or about $13 billion per employee! More on
Ginnie Monday.)
Returning
to the FHA, the industry carefully watches these delinquency
numbers. Robert Pieklo with American Financial Resources
points out that, "Companies should watch Neighborhood Watch
Compare ratios. Streamlines were taken out of the
equation this month (quarter end). The national default rate
is 1.25. If a borrower has 2 life events occur out of 100, you
are in bad shape. But companies are in a weird spot,
especially those that have a slightly higher CR. It seems
that FHA’s market share is dropping like a brick - certainly
for us the 700+ FICO score loan no longer best ex’s into a FHA
loan. A conventional loan with MI is much better so it’s hard
to get enough of the better borrower’s in to one's numbers."
Let’s
move on to some relatively recent investor changes
that will give us a flavor for some recent trends. Full
details can be found in the investor bulletins.
PHH Mortgage implemented credit score adjustments for
FHA, VA, and USDA loans locked on or after October 12th. A
+0.500 adjustment replaces the previous +0.250 adjustment for
borrowers with credit scores of 720 and over, while borrowers
with non-traditional credit will be subject to a -1.250
adjustment, which replaces the previous adjustment of -0.500.
SOAR and the PHH rate sheet have been updated accordingly.
As of October 12th, all new Attached Planned Unit Developments
(PUDATs) registrations for conventional conforming and
non-conforming loans are subject to review under PHH’s updated
guidelines. These guidelines state that the project cannot
consist of single-width manufactured housing units and that it
must be eligible, entirely completed, adequately covered by
its insurance policy, and reviewed within three months prior
to the Note date; see the PHH guide for specifics of these
requirements. For Tier 3 and 6 registrations, the revised
review protocol is similar to the current condo project review
process, and Tier 7 correspondents will responsible for
reviewing PUDATs based on the updated requirements. The
changes apply to all conventional conforming and
non-conforming loans with the exception of HARP and HomePath
transactions.
The product description for Tier 3, 6, and 7 VA loans has been
updated to clarify PHH’s current policy of rounding the final
loan amount down to the nearest dollar for purchase and
cash-out transactions. PHH reminds clients that, for VA
IRRRLs, the loan amount should be rounded down to the nearest
$50.
Warehousing lending managers are in good spirits these days:
across the board, their profits are way up thanks to high
commitment volumes. The trend is predicted to continue well
into 2013 (due in part to QE3), which has everyone
optimistic. Capacity hasn’t been a concern when it comes to
obtaining warehouse credit, either. To give an idea of the
numbers, Wells Fargo’s warehouse bank, in the number one slot,
recorded $7 billion in commitments last June, and other banks
have experienced increases in commitments ranging from 13% to
123%. The only institution that isn’t dancing a jig is Bank
of America, which recorded a mere $3 billion in commitments in
June, a 78% decrease from a year prior. (Courtesy of National
Mortgage News.)
Freddie Mac is making a number of revisions to its
Servicer Success Scorecard criteria, which will go into effect
in 2013. Changes will affect performance criteria for
investor reporting, including cash management, data integrity,
and operational management; and default management, including
loss mitigation, workout effectiveness, default timeline
management, and data integrity. Note that FHA, VA, and USDA
loans will be exempt from all default management criteria
apart from data integrity criteria. For the full details of
the changes, see the relevant bulletin on the Freddie website
(http://www.freddiemac.com/singlefamily/news/2012/1015_new.html).
In an effort to reduce the risk of payment shock, Freddie is
updating various requirements for ARM loans. ARMs with
initial periods of five years or less will be required to have
initial and periodic caps less than or equal to 2%, and
borrowers of such loans will need to be qualified at either
the note rate plus 2% or the fully indexed rate. Freddie will
announce the exact date on which the changes will go into
effect in the near future.
Both LP and the Affordable Income and Property Eligibility
tool will be updated on November 18th to reflect the FHFA’s
median income estimates for 2012, which will be applied to all
loans submitted thereafter. In addition to these updates,
Freddie is revising its definition of “underserved area,” as a
property with a Home Possible mortgages in such an area is not
subject to any income limit.
Fannie Mae has updated its “Broker Price Options and
the Valuation Process” job aid and the “Retrieving Fannie
Mae’s Response for HAFA Short Sale, HAFA Deed-in-Lieu and
Fannie Mae Short Sale BPOs” section of the User Guide. The
updated versions are both available via www.efanniemae.com.
Wells Fargo will be revising its non-conforming ARM
adjustment cap structure from 5/2/5 to 2/2/5 for Best Effort
locks and registrations dated November 12th and after. As a
result of this change, the first adjustment cap can change the
previous interest rate by no more than 2% in either direction,
which also applies to each subsequent adjustment. The
lifetime cap is 5% over the initial note rate, and there is no
downward cap apart from the margin.
Sellers are reminded that the “delivery” and “purchase by”
dates for DU Refi Plus refinances of non-Wells-serviced loans
are approaching—these loans should be received on or before
November 9th, as they must be purchased by November 30th at
the latest. Sellers must assign loans that are delivered in a
mandatory commitment to the commitment on or before November
13th. Note as well that, beginning November 10th, DU Refi
Plus transactions not coded as being Wells-serviced will be
recommended for non-purchase.
In light of the current regulatory climate, Wells reminds
sellers that all income and asset sources that are used to
qualify borrowers must adhere to local, state, and federal
laws and that it will not consider any loans whose income and
asset sources do not comply for qualification.
Fifth Third has applied a 50bps price improvement to
all of its purchase transactions, which will be effective for
all locks, re-locks, and float-downs until November 30th.
As a reminder, Fifth Third will permit financing concessions
on conforming and portfolio products so long as they are used
within the limits of the product description, LTV, and
occupancy type; originate from an interested party; and are
put towards reducing the loan’s interest rate, funding a
buydown plan, or otherwise permanently reducing mortgage
costs. Amounts that exceed these limits are considered to be
sales concessions, which also include “vacations, furniture,
automobiles, property allowances,” or other nice things
granted by an interested party. Fifth Third does not permit
undisclosed seller concessions.
Fifth Third reminds clients that investment properties in
Florida are still considered an ineligible occupancy type.
This applies to all loans regardless of collateral review
type, including VA IRRRLs, FHA Streamline refinances, HASP
Open Access, and DU Refi Plus.
With the USDA’s announcement about FY2013 funding
availability, Flagstar is once again offering a refinance
option to Rural Housing borrowers.
Here is part 2 of 3 of some political quotes, with neither
party targeted:
Politicians are the same all over. They promise to build a
bridge even where there is no river.
~Nikita Khrushchev
When I was a boy I was told that anybody could become
President; I'm beginning to believe it.
~Clarence Darrow
Why pay money to have your family tree traced; go into
politics and your opponents will do it for you.
~Author Unknown
If God wanted us to vote, he would have given us candidates.
~Jay Leno
Politicians are people who, when they see light at the end of
the tunnel, go out and buy some more tunnel.
~John Quinton
Politics is the gentle art of getting votes from the poor and
campaign funds from the rich, by promising to protect each
from the other.
~Oscar Ameringer
I offer my opponents a bargain: if they will stop telling lies
about us, I will stop telling the truth about them.
~Adlai Stevenson, campaign speech, 1952
If
you're interested, visit my twice-a-month blog at the STRATMOR
Group web site located at www.stratmorgroup.com.
The current blog discusses the looming fiscal cliff brought on
by Washington DC. If you have both the time and
inclination, make a comment on what I have written, or on
other comments so that folks can learn what's going on out
there from the other readers.
