Dennis' Mortgage Blog

Question of the week:  Last week you wrote about the new refinancing program for Fannie Mae and Freddie Mac, you didn’t seem very enthusiastic about it. What changes would you propose to enable more home owners to refinance and take advantage of lower rates?

Answer:  This question was emailed to me by long-time client Susan in Long Beach and it is a popular topic of discussion for many in our industry.

There major issue that underlies this topic is what to do, if anything, to assist home owners who have been making their mortgage payments in a timely fashion and have insufficient equity to refinance their mortgage using conventional or FHA financing to lower their monthly mortgage payments and interest rate.  Why this should occur, assisting equity strapped or negative equity home owners, is the topic of a larger debate, but my opinion briefly is that reducing paying home owners payments reduces the risk on the outstanding debt.  With Fannie and Freddie into the U.S. Treasury for $142 billion, and Freddie asking for another $4 billion this week, reducing the risk on outstanding loans seems to be in the best interest of the tax payers backing existing mortgages.

Back to the initial question, what changes would I propose to enable equity challenged home owners to reduce their mortgage payments and therefore the risk to holders and insurers of mortgages?

Let’s address FHA mortgages first.  The HARP program created by the Obama Administration in 2009, and with revisions proposed last week, does not affect FHA mortgages but those owned by Fannie Mae and Freddie Mac.  But this does not mean that home owners with FHA mortgages are not in need of some assistance as well.

FHA has had an excellent refinance program for its mortgagees for many years; it is called the Streamline Refinance.  The Streamline Refinance program has two options, with an appraisal or without an appraisal—neither option requires that income be verified but rather that there is a source of income.   The option without an appraisal does not allow any closing costs to be included in the new loan; the option with the appraisal will allow closing costs to be included provided that the new loan amount with the closing costs does not exceed the FHA maximum loan to value of 96.5%.

The FHA Streamline is an excellent program and until recently has been able to benefit a tremendous amount of FHA home owners over the years.  I say “until recently” because of the increases in the monthly mortgage insurance premiums earlier this year to 1.15% have precluded many from taking advantage of the Streamline programs.  One of the requirements for the Streamline program is that the payment for the principal, interest and mortgage insurance premium declines by 5% or more.  Because of the higher mortgage insurance many home owners cannot meet the 5% threshold which with their current mortgage insurance premium they would be able to make.

As an example, I am currently working with a client who can lower their interest rate from 5.25% to 4.00% using the FHA Streamline and will save $200 per month even with the new mortgage insurance premium; had they been able to retain their current insurance they would be saving over $450 per month.  Another client has a 5.5% rate but due to the size of their loan amount and the increase in the mortgage insurance premium saves only 4% on their payment despite a drop in the interest to 4%.

If I had HUD Secretary Shaun Donovan’s position I would alter the FHA Streamline Refinance guidelines so that applicants would retain their existing mortgage insurance premium unless the premium for new borrowers is lower. This would enable current FHA mortgagees who have exhibited the ability to pay their mortgages in a timely fashion the ability to lower their monthly mortgage payments and take advantage of lower rates without incurring the penalty of reduced savings due to higher insurance premiums. 

As for conventional mortgages, there are few modifications I would make to the HARP program. 

First, I would emulate the FHA Streamline program and not require income documentation but rather require documenting that there is a source of income. This would enable those home owners who have experienced a decline in income, but who have maintained their mortgage with timely payments, the ability to reduce their monthly payments and reduce the risk to Fannie and Freddie of future default.  As well I would not require an appraisal, part of the new revisions proposed for HARP. 

Second, on HARP refinances I would release the traditional representations and warranties that lenders are required to give to Fannie and Freddie on mortgages.  These warranties are what allow Fannie and Freddie to require “buy-backs” from lenders on mortgages sold to them that may have some missing documentation or other errors.  The aggressive use of buy-backs by Fannie and Freddie have severely hampered the mortgage markets, are the single biggest reason for tighter credit in the markets and have limited the effectiveness of the HARP program to assist more home owners than it has to date.  By drastically cutting the representations and warranties that lenders must make to Fannie and Freddie on HARP refinances more lenders will be willing to participate and to assist millions of home owners reduce their monthly  mortgage payments, thereby reducing default risk to Fannie and Freddie.

Finally, for both conventional and FHA mortgage refinance programs I would suspend the originator compensation rules imposed by the Federal Reserve in April 2010.  This rule has raised the cost, and thereby the rates, for mortgage applicants and reducing the amount of savings they could be getting from the current market on no cost mortgages.  In another instance of government regulations meant to protect the public but having the unintended consequence of providing additional costs to the public, this rule has limited the refinance options and savings for homeowners.

Regarding the new guidelines for the HARP refinances for borrowers with existing Fannie Mae and Freddie Mac loans we will have them and our lenders specific guidelines in a few weeks.  When they are available I will address them in my Weekly Update.

In the meantime if you want to know if you may be eligible for a HARP refinance contact me so we can look up your mortgage on the appropriate websites.

Have a question?  Ask me!

Greece. Have you stopped reading?  Yes, still Greece.  Rates took a strong dip earlier this week after Greek Prime Minister George Papandreou thumbed his nose at other members of the European Union, particularly Germany and France, by saying that he would not accept the bailout required to save Greece’s economy but would have a referendum for the citizens to accept or reject the bailout and its terms.  Even though the referendum idea was withdrawn later in the week the specter of Greece not accepting the bailout and creating a ripple of failing banks through Europe and across the globe caused money to flee to American bonds, including mortgages.

On the domestic economic front, not that investors seem to care, the Federal Reserve released the minutes of it Open Market Committee on Wednesday and Fed Chairman Ben Bernanke had a press conference to discuss the economy.  From the minutes and Bernanke’s comments it is evident the Fed and its Governors are not very optimistic about the economy suddenly gaining steam and growing.  The Fed expects unemployment to remain high, dropping to 8.6% by the end of 2012, to 8% in 2012 and 6.8% to 7.7% in 2014.  Because of their projection for poor employment rates to continue for at least three more years the Fed anticipates keeping short term rates at current low levels at least through the middle of 2013; which is good news for those with adjustable rate mortgages and home equity lines of credit.

More on jobs today as the Labor Department issued the payroll and unemployment numbers for October.  Non-farm payrolls grew by 80,000 jobs in the month, with the private sector adding 104,000 jobs and the public sector losing 20,000 jobs.  While 100,000 new private sector jobs is good news it is below the number needed to sustain the growth in population and new entries to the job market.  The unemployment rate fell from 9.1% to 9.0%, primarily due to decrease in the number of part-time workers seeking full time work (from 444,000 to 374,000 workers).  If the economy continues to add less than 125-150,000 jobs each month we can expect the unemployment rate to rise in the future.

Rates could experience major drop on a potential international event more severe than what is happening in Greece.  Israel and Iran are moving more rapidly to conflict over Iran’s nuclear program.  Eighty percent of Israelis feel there will be a war with Iran, and Iran’s leadership has stated it is ready to enter hostilities with Israel and “the Great Satan and defender of Israel,” which is the U.S., will also be damages in such a conflict.  Britain has vowed to support any U.S. maneuvers with warships in the Arabian Sea.  Poorly reported in the U.S. media thus far this conflict has been brewing for many years as the international community has refused to aggressively deal with Iran’s development of nuclear capabilities and Israel has taken steps to defend itself and if necessary unilaterally destroy Iran’s nuclear program.  Should war break out rates will drop as investors worldwide move funds to the safe investments of U.S. bonds.  Let’s hope a peaceful resolution is obtained satisfying Israel’s natural desire to feel safe from nuclear attack from Iran.

Rates for Friday November 4, 2011: As mentioned above, rates took a dip on the Greek mess and conforming rate is back to lows of late September.  No reason on the horizon for rates to move up and any movement up will be result of investors pushing more money into the stock market.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.75%               Down 0.125%

30 year high-balance conforming           4.00%               Down 0.125%

30 year FHA*                                                   3.75%               Flat

30 year FHA high-balance*                   3.75%               Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

* Current rates include credit towards closing costs, call for quote on rate and credit.

Long Beach has lost another great citizen and valuable member of our community with the passing of Larry Allison editor of the editorial pages for the Press-Telegram.  As I wrote to the paper on his passing, Larry was perhaps the best editorial page editor in the nation as he allowed all points of view and opinions to be expressed on the issues.  Whether syndicated columnists or letters to the editor from the community every day some readers were ticked off at the views being expressed and every reader was ticked off some days such was the balance he displayed.  Allowing the wide spectrum of views to be expressed on the pages under his charge, Larry exhibited the critical importance of a free press combined with free speech to allow our democracy to work.  Our condolences to his family, friends and co-workers for many decades at the Press-Telegram.

Do not forget to set your clocks back tomorrow night when you go to bed.  I was corrected by Leslie for my statement last week about losing an hour’s sleep, in fact an hour is gained in the fall when clocks move back.

If you have any questions or inquiries I can assist you with over the weekend give me a call or drop an email as I will be working throughout.

Have a great week,

Dennis