FHA TAKES ADDITIONAL STEPS TO BOLSTER CAPITAL RESERVES
February 28, 2012 by HUD Category: News || Housing & Development, Marketing & Statistics
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New premium structure will help protect FHA’s MMI fund
WASHINGTON, DC – February 28, 2012 – (RealEstateRama) — As part of ongoing efforts to encourage the return of private capital in the residential mortgage market and strengthen the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund, Acting FHA Commissioner Carol Galante today announced a new premium structure for FHA-insured single family mortgage loans. FHA will increase its annual mortgage insurance premium (MIP) by 0.10 percent for loans under $625,500 and by 0.35 percent for loans above that amount. Upfront premiums (UFMIP) will also increase by 0.75 percent.
These premium changes will impact new loans insured by FHA beginning in April and June of 2012. Details will soon be published in a Mortgagee Letter to FHA-approved lenders.
“After careful analysis of the market and the health of the MMI fund, we have determined that it is appropriate to increase mortgage insurance premiums in order to help protect our capital reserves and to continue encouraging the return of private capital to the housing market,” said Galante. “These modest increases are one of several measures we are taking towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain a valuable option for low- to moderate-income borrowers.”
The Temporary Payroll Tax Cut Continuation Act of 2011 requires FHA to increase the annual MIP it collects by 0.10 percent. This change is effective for case numbers assigned on or after April 1, 2012. FHA is also exercising its statutory authority to add an additional 0.25 percent to mortgages exceeding $625,500. This change is effective for case numbers assigned on or after June 1, 2012.
The UFMIP will be increased from 1 percent to 1.75 percent of the base loan amount. This increase applies regardless of the amortization term or LTV ratio. FHA will continue to permit financing of this charge into the mortgage. This change is effective for case numbers assigned on or after April 1, 2012.
FHA estimates that the increase to the upfront premium will cost new borrowers an average of approximately $5 more per month. These marginal increases are affordable for nearly all homebuyers who would qualify for a new mortgage loan. Borrowers already in an FHA-insured mortgage, Home Equity Conversion Mortgage (HECM), and special loan programs outlined in FHA’s forthcoming Mortgagee Letter will not be impacted by the pricing changes announced today.
Taken together, these premium changes will enable FHA to increase revenues at a time that is critical to the ongoing stability of its Mutual Mortgage Insurance (MMI) Fund, contributing more than $1 billion to the Fund, based on current volume projections through Fiscal Year 2013.

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What is an FHA Hybrid ARM??

Adjustable Rate Loans are loans in which the interest rate will possibly change at some future date.

The FHA hybrid adjustable rate mortgage loan is one of the best adjustable rate mortgages currently available.  It is available 1-4 unit owner-occupied principal residences (i.e. townhouse, and PUDs.) and for loans to be insured under sections 203(b) (single-family mortgage insurance), 203(h)(disaster victims), and 234(c)(mortgage insurance on condominium units).

Highlights of the New Program

In addition to 1-year ARMs, under this rule change, FHA may insure ARMs on single-family properties that have interest rates that are fixed for the first three years, five years, seven years or ten years of the mortgage term and adjusted annually thereafter.  The 1-, 3-year and 5-year ARMs allow a one percentage point annual interest rate adjustment up or down after the initial fixed interest rate period and a five percentage point interest rate cap over the life of the loan.  The 7-year and 10-year ARMs allow a two percentage point annual interest rate adjustment after the initial fixed interest rate period and six percentage point interest rate cap over the life of the loan.

Be careful as FHA hybrid ARMs also exist with lender options to increase the margin to 2.75% and to also apply annual caps of 2/6 or 2 percent increase or decrease per year and six percent over the start rate over the full term.  These options for worse case caps are available in conjunction with a slightly lower start rate on the hybrid ARMs.  This could be good or bad depending on how long you will keep the loan.

Borrowers choosing the 1-year ARM must qualify for payments based on the contract or initial rate plus one percentage point (1%).  This only applies to the 1-year ARMs where the loan to value (LTV) is 95.00 percent or greater.  Borrowers choosing the 3-, 5-, 7- or 10-year ARMs are to be qualified at the entry level (note) rate (i.e., there is no requirement to underwrite at once percentage point above the note rate as there is for 1-year ARMs).

FHA's adjustable rate mortgage is based on the economic indicator index called the 1-Yr. T-Bill.  You can find the current T-Bill rate on many websites like HSH Associates or in the Wall Street Journal. 

Index + Margin = Fully Indexed Rate
(current 1Yr. T-Bill Rate) + (percentage, usually 2.25%) = Interest Rate (apply 1% cap (+) or (-).)
NOTE: as of 9/14/11 the CMT 1Yr. T-Bill Rate = 0.19%
So, 0.19% + 2.25% = 2.44% (Interest Rate)

Other ARMs are being offered through Fannie Mae, Freddie Mac and the extremely unpopular Sub-Prime programs.  Fannie and Freddie ARMs typically offer 3-, 5-, 7-, 10-year initial fixed rate periods.  These products also have a much higher margin of 2.75 to 3.00 percent margin values in combination with 2/6 caps (i.e. two percentage point adjustments each year and a term cap of six percentage points over the term of the loan) which are much more aggressive than the FHA loan terms.

Sub-Prime ARM programs typically only offered a 2- and 3-year fixed rate period.  During the 2- and 3-year initial period you could also include the option to ONLY pay interest.  These products also had adjustment caps of 5/5/9 with a margin of 5.75-6.00 percent.  This basically means that after the initial fixed rate period the rate could increase up to five percentage points each year and nine percentage points above the start rate over the life of the loan.  Considering the fact that many choose to pay interest only, after the initial fixed rate period of 2- or 3-years the loan also at the same time as it's adjustment would also become full principal and interest.  THIS is why so many homeowners lost their homes due to outrageous upwards adjustments which nobody expected or could afford.

The FHA hybrid ARMs are a much more stable product and can be used for short term financial relief especially when utilized in combination with a purchase or Streamline refinance.  At some point after the first 6 months of making your first payment on an FHA hybrid ARM, you have an option to Streamline refinance to change the terms to fixed at very little costs and qualifying is simple.  Currently, you must have at least a 620 fico, have made the previous 12 months payments within 30 days of the due date and you must be able to reduce your principal + interest + mortgage insurance payment total by at least 5%.  Given that FHA has an available refi option, it really is a great product for the average homeowner to, for a period of time, reduce their payments with a lot of upside risks.

For more information or to Apply for your FHA Hybrid ARM today!

Why shorten my term on my mortgage NOW?

Did you know that choosing a 15yr loan over a 30yr loan can save you $100,000 in interest even if the rate were exactly the same on either loan?

Example:
250K Loan @ 5% for 30yrs = 1342.05 PI (1342.05x360payments) = $483,138
250K Loan @ 5% for 15yrs = 1976.98 PI (1976.98x180payments) = $355,856
In this case, the 15 year shorter term mortgage saves that borrower $127,281

I'll explain later why it can be done NOW at much less of an increase....

Very few people understand how compound interest works.  You are paying interest each month on the remaining balance of the loan.  So, the amount that is paid towards the principal each month lessens the total interest paid each preceding month.  Since the payment stays the same, you have a higher ratio of principal to interest the further the balance is reduced over time.

Most homeowners are solely concerned with keeping a "cheaper" monthly payment and are fixated on the interest rate itself.  My sales manager used to say "you can't take your interest rate to the grocery store to buy bread, can you?"

That quote is everything wrong with mortgage financing.  Everyone makes decisions for the wrong reasons.  Homeowners prefer to keep the cheaper payments so they can allocate the money for other expenses.  Their investment advisor tells them to keep longer terms so that they can fatten up the ole portfolio balance.  Mortgage brokers don't want to bring it up because they know homeowners are programed to take the payment in the opposite direction.

The conversation almost always goes:  Well yea, I'd love to go to a shorter term as long as the payment is about the same (This never works out BTW).

Mortgage interest should be like the plague for those who have the budget to shorten their term.  Nobody, who can afford it, should finance for 30 years given the difference you pay just to save a couple hundred every month.

Right now, there is good reason to go 15yrs.  It's been reported by Freddie Mac that there is a greater margin between 30yr and 15yr rates.  Instead of the average .5% reduction, lender are putting short term rates on CLEARANCE and we are seeing record discounts of up to .80% in the rate.

A 4.25% 30yr rate is now 3.5% 15yr rate.  Which reduces the amount that you must increase your monthly payment in order to shorten the term.

On the above scenario 250K Loan @ 3.5% 15yr the payment = $1787.20 PI
So the savings on the above mentioned scenario would result in Life of the Loan interest savings of $161,478 on a loan of ONLY 250,000.

If you can afford higher payments, PLEASE consider saving some interest by shortening your mortgage term.  Paying the house off will also prepare you for retirement by increasing your monthly cash-flow.  And if you haven't set aside enough money by age 62 to retire or the Federal Government increases the age of retirement, you can take out a reverse mortgage that pays YOU money every month for the rest of your life.

Life is great without a car payment.  Imagine what it would be like without a house payment!  Or even an extra 161,000 more CASH over 30 years in saved interest.  Just my .02 for those who can afford to do it but choose not to.

Why Fewer take 30-Year Mortgage

Fewer Opt For 30-Year Fixed Rate Mortgage

According to Freddie Mac, as mortgage rates have dropped this year, so have loan terms.
Between April-June 2011, of all the Freddie Mac-to-Freddie Mac refinances, 37% of homeowners who started with a 30-year fixed transitioned into 15-year or 20-year fixed rate loans. It's the 30-year fixed fastest abandonment rate since 2003.
There's no surprise about why it's happening, either.
Last quarter, the gap between 30-year fixed rate mortgage rate and the rest of the loan market got wide. The spread between the 30-year fixed and 15-year fixed, for example, averaged 80 basis points.That's the widest gap in recorded history.
15-year mortgages are "on sale" and homeowners are taking advantage of it.

For a quote on a 15 year fixed-rate mortgage call 443-320-9793.

Understanding FHA Mortgage Insurance Premiums (MIP) and (UFMIP) for Streamline Refinances

The Federal Housing Administration (FHA) operates based on a balance sheet just like any other business or government agency.  On October 4, 2010 FHA made substantial changes to it's insurance premiums which have a significant effect on their Streamline Refinance program.

On loans with case#s issued prior to October 4, 2010 borrowers will pay an Up-Front Mortgage Insurance Premium (UFMIP) of 2.25% plus a Monthly Insurance Premium (MIP) of 0.5%.

EXAMPLE of Streamline before 10/4/10

Payoff = $200,000

UFMIP = $4500.00 (2.25%)

MIP = $85.20 (0.5%)

New Loan Amount = $204,500@4.5% fixed

PI + MIP = $1121.37

EXAMPLE of Streamline after 10/4/10

Payoff = $200,000

UFMIP = $2000 (1.00%)

MIP = $185.16 (1.10%)

New Loan Amount = $202,000@4.5% fixed

PI + MIP = $1208.66

From the above example, you can see that the monthly payment is now $87.29 higher.  That extra money is being collected to compensate for the UFMIP reduction of $2500. 

These changes discourage people from using the FHA streamline product to help them save money monthly.  Based on today's rates the 30yr fixed rate is at 4.25%.  The problem is that most people who have 5-5.5% can hardly save money due to the monthly increases.

It's a shame that FHA made these changes, but at the same time we are fortunate that fixed rates are at such a low point.  On a positive note, the MIP does drop off from the total monthly payments once the existing loan balance reaches 78% of the appraisal value on record (last FHA appraisal done).  So at least FHA borrowers who do want to take advantage of lower rates offered now, they can expect a healthy reduction later on when the MIP drops off.



Breaking News - Virginia Earthquake Felt Accross the Eastern Shore - Reported 5.8 - 6.0

Apparently this hit Virginia somewhere, but my office on the 3rd floor of the building here in Towson, MD. 21286 was shaking back and forth.  A friend on Facebook confirmed that family in NC had felt it.  The entire Towson area was out on the streets trying to call loved ones.   Co-Workers said that window shades were flapping against the windows and shaking back and forth.  I was just pulling into the lot when everyone coming barrelling out of the building.  I didn't feel a thing because I was in my van coming back from lunch.

My original thought was could this have been a bomb?  What the heck just happened.  We're close to Washington, D.C. and I was checking out the sky to see if there was any smoke.  Facebook was the first source of information I received and was the first way I could communicate as well.  I heard rumblings once of FB being a source for a National Emergency Plan....I would have to concur!!!

My wife said the floor in our house in Harford, MD was shaking and pictures were slapping against the wall.  The kids went running out of the house.  After seeing Japan I know my young boys who are 8 and 6 were extremely worried that they would see similar things happening.

CNN reported that the NY stock exchange was reporting the quake and that trader's were yelling "keep trading, keep trading!".  Unreal.  If I were in NY I'd be worried about those skyscrapers tumbling down.  It's reported that 11 million people felt this quake and that there is a 35% chance that this quake will cost over 10 million dollars in damages.

The cell phones were shut down and no signal was available. I'm actually still a little shaken up because it just happened about 10 minutes ago. Approximately 2:01PM

I'm glad everyone is OK so far. Wondering if someone should check out the building I'm in for any structural damages. 


Crazy stuff.

Building a New House - A Lesson you CANNOT AFFORD to MISS!!

In this post I'm going to discuss a sore subject for thousands of homeowners who have purchased land and/or had a new home built on it. There should be legislature passed immediately to fix the issue I am about to dive into.

Thousands of people are victims of mortgage servicing stupidity every year! When a potential homeowner purchases a NEWLY built house, the title company or home builder estimates how much the property taxes will be once the total assessment is done. Since the home is not built yet, the only thing the local government has on record is the value of the land. They asses a certain tax amount yearly for just the land. Then, you talk with your builder and decide on how to "improve" the land and build plans for the structure. The builder or title company will estimate the final or total taxes based on the planned improvements.

The unsuspecting homeowner thinks that because the mortgage they applied for is escrowed for taxes and insurance that everything is included and taken care of when they pay their monthly payments. That holds true all the way up until the mortgage servicing company receives it's first tax bill. There is a major lapse of up to 2yrs before the assessor's office actually comes out to appraise the land + the house which means the land tax is the only amount the lender is required to pay from escrow. The land alone may be taxed at $400.00 per year, where the house adds another $5000.00 to that bill each year.

Originally at closing, the lender escrowed for the full estimated amount of $5400.00 or $450.00 each month because the full amount was estimated. This gave them a total house payment of $2700.00 When that same lender pays the land bill of $400.00 they have no fail safe in their system that raises a red flag. When you reach your 1st anniversary of the loan closing, that lender will do what's called an annual escrow analysis and basically re-adjust your escrow because they have an "OVERAGE" in the account of $5,000.00. This is going to cause them to automatically send you a refund of the overage and reduce your monthly payments by $416.66 per month making the new payment $2283.34.

Going back to my original comment, the homeowner assumes they are escrowed and this must be OK. The whole process is so complex and there is so much money changing hands that it's understandable that people don't realize why or how this money has found it's way back to them and the monthly payment has gone down considerably. But even if they were suspicious enough to contact their lender to discuss it, the lender would be of no help to the situation assuring the homeowner that the tax bill was only 400.00 and it has been paid.

Now that a year has passed, it's time now for the assessor's office to play catchup to the 1-2yr old transaction. They come out and appraise the house and come up with an adjusted net increase of $5000.00 per year just like the original estimate. The terrible thing is that they backdate the taxes due for the time lapsed. At this point, things start to go downhill very quickly when the lender receives the NEW bill for $5400.00.

At this point, there is still no fail safe in the system that tells them there is a problem in the escrow account. They will pay the $5000.00 that was past due and the escrow account goes negative.

This triggers an immediate red flag and the homeowner gets a nice ransom letter in the mail with two options.

Option#1 Pay $5000.00 now
Option#2 Pay $833.33 additional each month for the next year

Option#2 is the ONLY option because they don't have $5000.00. The new payment will not be $2700.00 but $3116.66 per month because you still have to account for monthly escrow for next years taxes $416.66 plus another $416.66 over the next 12 payments to pay back to refund they mailed to you.

As you might imagine, this is quite the surprise to the person who just spent the money on new furniture and who had a tight budget on the original monthly payment and cannot afford the extra $416.66 per month on top of the original payment of $2700.00.

What a dilemma....

The Lesson here:

If at any point during the servicing of your loan you receive a check for any amount being refunded to you from escrow - make sure you don't spend it and contact the TAX Dept. for the company servicing your loan to find out ALL of the details about the refund.

Unfortunately this is still a regular occurrence.  I get clients who call me once a week with this scenario and I hate giving them the dreadful news about what has taken place.  Sometimes this doesn't come up until almost the 3rd year of servicing on the loan.  These homeowners are asking me to help them refinance to solve the issue in many cases saying "I don't know what happened.  My payment went up 350.00 and I need to get away from this lender".

I believe Title Companies and Home Builders have a responsibility to inform their clients better so they are prepared for what will most likely take place.  That way, at the very least, they don't spend the money they received in the mail and won't be faced with a huge increase in payments.

That is my rant for today.  I hope that this blog helps save someone from having it happen to them.  If you are reading this and you are a lawmaker - Please pass some rule preventing lender's from refunding money blindly like this on new home builds.  Matter of fact, don't process any escrow refunds for the first 3 years on new homes, that would solve the issue IMO.