Bozick's Blog

The Home Affordable Refinance Program (HARP) was rolled out by FNMA and FHLMC in 2009 to give homeowners the ability to refinance even if the decline in their home’s value would limit refinance options or prevent a refinance altogether. In October 2011, FNMA and FHLMC announced changes to the HARP program in an effort to attract more eligible borrowers to refinance. HARP only applies to FNMA or FHLMC loans. Click these links to find out if FNMA or FHLMC owns your loan. In addition, a qualifying loan must have been purchased by one of the agencies prior to 6/1/2009, which means the loan should have closed in early 2009 because of the delay from when the loan closes to when the agencies actually take possession of the loan from the originating lender.

The primary benefit of HARP is the ability to refinance high loan-to-value loans without mortgage insurance if there was no insurance in place when the original loan was obtained. For example, if your rate is 5.0%, your loan was purchased by FNMA prior to June 2009, and your original loan to value was 80% or less, you could use HARP to refinance without mortgage insurance even if your equity position has disappeared. With 30 year mortgage rates around 4%, you could experience a significant savings by dropping your rate 1%. Without HARP, a refinance may still be possible, but the cost of the mortgage insurance will offset some of the rate savings. All other aspects of a HARP loan are the same as any other loan: you need to have income and be able to qualify for the mortgage, your credit needs to be OK (minimum credit score 620), and the home must be in a “lendable” condition.

Before getting into the changes to HARP, I’d like to offer some relatively unknown details about how the agencies price loans that will provide context for appreciating some of the changes. When the markets collapsed and the housing agencies started hemorrhaging cash, they instituted Loan Level Pricing Adjustments (LLPA) and Adverse Market Delivery Charges (AMDC) as a means to fix their balance sheets on the backs of homeowners that were still able to obtain loans. Sorry, I couldn’t resist adding a personal commentary regarding the intent of the charges. The fees were intended to price loans based on the risk inherent in each loan, something the agencies failed to do in the run-up to the collapse. LLPA is the more significant of the two fees. It adds fees to a loan based on loan type (purchase, rate/term refinance or cash out), loan to value, and credit score. To illustrate the impact of the LLPA, a borrower with a 620 credit score will pay a rate nearly 1% higher than a borrower with a 740 credit score on an 80% loan to value, no cash back refinance. This is an extreme comparison, but it does show the impact of these added fees. For HARP loans, the agencies have put caps on the sum of the LLPA and the AMDC. In the above illustration, the borrower with the lower score would pay only .625% more if they qualified for a HARP loan due to the cap on the adjustments.

Finally, here are some highlights of the changes:

- Reduced fees charged by the agencies on loans with a loan to value in excess of 80% (effective 1/3/2012). On loans with amortizations of 20 years or less, the LLPA and AMDC are eliminated. On 25 and 30 year loans, the cap is reduced, which means the borrower with the lower score in the example above saves another .25% in rate.

- Removal of loan to value cap on fixed rate mortgages (effective March 2012) – no equity, no problem. In fact, negative equity refinances will be allowed.

- HARP program extended to 12/31/2013.

Eliminating the fees on 15 and 20 year loans is significant. Rates on those loans are already well under 4%, so this should open up refinance opportunities for borrowers that are interested in the rapid principal reduction that comes with shorter amortization mortgages. The reduced caps on the other loans will help substantially too. One caution about the changes to the loan to value cap; sometimes lenders do not adopt changes announced by the agencies word for word. Some overlay their own underwriting guidelines and they are always more conservative. While FNMA and FHLMC may state they don’t have a loan to value limit for fixed rate HARP loans, many lenders will have a cap.

The agencies continue to tweak their programs with the goal of improving the performance of the loans in their portfolio. If you haven’t refinanced yet, maybe this change is the one that will benefit you.

Now that everyone is obsessed with their credit score, the scoring agencies are upping the ante. Version 1.0 of the credit scoring models captured data about consumer debt, mortgages, public records, and collections. The new scores, which have not been rolled out yet, will include information about payday loans, evictions, and child support obligations. Payment histories for cell phones, rent, and utilities will most likely be added in the near future.

Credit scoring has been around since the 1960’s but has only been used in mortgage lending since the 1990’s. In lending, a credit score predicts the likelihood that a borrower will default on a loan. For example, if your credit score is below 550, there is a 70% chance you will default on a loan. If your score is over 800, the chance drops to 1%. Credit scores are primarily used for lending, but they are starting to be used for other purposes. Looking for a new job? A prospective employer may pull your credit report. Shopping for insurance? Insurance companies look at your credit history as a way to identify risky behavior or life changes that may lead to an incidence of higher claims.

Managing your credit is pretty easy. The first step is to get a credit report. Go to www.annualcreditreport.com for a free report. This is the only site that will give you a free report, no questions asked. You can get a free report from each of the three credit bureaus once per year. I recommend pulling one from each bureau every four months so you can keep track of your credit history on a regular basis. Once you see what you’re dealing with, here are some quick tips to improve your score:

- Pay your bills on time and bring delinquent accounts current.

- Pay collections and judgments; ask to have the item removed by the collection agency. It probably won’t happen, but it’s worth asking.

- Do not close old accounts. Old accounts give depth to your credit profile.

- Keep your revolving accounts (credit cards and lines of credit) at less than 30% of your credit limit. Over-utilizing credit will really hurt your score, and the magic number is 30% of the limit.

- Limit credit inquiries. Only apply for credit when it’s needed.

The proposed scoring “enhancements” are meant to give lenders more information about borrowers that may not use traditional credit. Reading between the lines, I think the scoring companies are looking for ways to enhance the predictability of the scores for all borrowers by capturing as much information as they can. Regardless, the formula just got more complicated, so proceed accordingly.

The business news over the last few weeks has focused on a sputtering economy and a double dip in real estate prices, but one story has been largely untold. It’s a story that parallels the bad news that we have been hearing about the financial markets and the economy. This story generally develops when there is flat GDP growth, a bad housing market, and mediocre job creation. All these elements point to poor prospects for economic growth and lower inflation. The story gets better when there is economic uncertainty worldwide due to looming debt and budget crises in a number of countries. This leads to a move by investors to safer investments such as US treasuries and mortgage backed securities. Here are the themes at play in this story:

- low growth = low inflation = low interest rates

- world economic uncertainty = flight to quality US debt = low interest rates

In the event you haven’t figured it out, the untold story is the drop in interest rates. When both themes occur simultaneously, rates drop a lot, which is exactly what has happened over the last sixty days. Rates are approaching the all time lows hit last fall. We’ve got about .375% to go before we touch the low of lows, but I don’t think our storyline will change anytime soon so the prospects for a “double dip” in interest rates are looking pretty good. As for those of you that are questioning the part of the formula above that references “quality US debt”, that discussion is for another day.

So where are rates now? Without getting into specifics which would trigger a long list of disclosures and disclaimers, 30 year fixed rates are in the low to mid 4’s, 15 year fixed rates are in the mid to high 3’s, and 5 year ARM’s are right around 3. The rate you will be offered by a lender is a function of loan type (FHA, VA, Conventional), loan size (conforming vs jumbo), loan to value ratio, and credit score. Yes, it is complicated, so don’t call up a lender and ask “What’s your rate today?” Be specific about your request. The quote you receive will only be as good as the information you provide to the lender. Get a couple of different quotes; written quotes are best. Rates and fees will vary between lenders. Rates can change daily, sometimes multiple times per day, so keep that in mind as you compare quotes. Ask your realtor, financial planner, or tax person for a referral to a loan originator. They often network with lenders so they may be able to direct you to a qualified professional that they trust. The mortgage business has become much more complicated over the last couple of years. Underwriters now check for more than just a pulse. Sound advice and competent loan processing is more important than ever. Mortgage loan originators must also be licensed or registered by the National Mortgage Licensing System. Click here to see if yours is.

The problem with this story is you never know when the end is near. At least with a book, you can take a peek and see how many pages are left. The story of low rates will end at some point. Whether it’s due to inflation fears, a renewed interest in international bonds or equity investing, or some combination of the two, rates will once again trend upward. There are other factors to consider as well. If the government pulls out of the mortgage lending business as is being discussed in Congress, rates will certainly increase and that has nothing to do with the factors mentioned above. Buying a home? Considering a refinance? Now is the time to add the low interest rate chapter to your own story.

Light at the End of the Tunnel?

The recently released S&P/Case-Shiller home price index has Seattle as one of only two metropolitan areas that had an increase in home prices in March; the other being Washington DC. An increase of .1% isn’t much to get excited about, but compared to the 1.9% drop in February, maybe there is hope for our real estate market. Nationally, the news keeps getting worse. The national index hit a new low in the first quarter, and prices are back to mid-2002 levels. The modest increase in prices, activity, and optimism that we saw last spring as a result of the first time homebuyer tax credit has completely reversed course and we are in the middle of a double-dip in real estate. Need a second home? Now is the time to buy in Arizona or Nevada. Before I get into the specifics about what’s going on in our area, let’s start with a little mortgage news.

Rates Down Again!

A guest on CNBC claimed bond investors are smarter than stock investors, so if you want to know where the economy and interest rates are going, watch the trend in bond prices. The increase in bond prices and the corresponding drop in interest rates have paralleled a lot of bad news about the financial markets and the economy; flat GDP growth, a bad housing market, and mediocre job creation all point to poor prospects for economic growth, and more importantly, lower inflation. Here’s the formula: low growth + low inflation = low rates. Rates are down approximately .5% since mid February and, interestingly enough, the Dow and S&P 500 are down over 4% in the last month. Here’s a sample of rates that are available today:

30 year fixed 4.25% 4.452% APR

15 year fixed 3.625% 3.896% APR

5/1 ARM 2.625% 3.011% APR

These rates are based on a $300,000 loan amount, a maximum 60% loan to value for a purchase or no cash back refinance, and a minimum credit score of 740. The APR includes all origination and escrow charges. Rates are approximately .125% higher for loan amounts between $417,001 and $567,500. Above $567,500, expect tougher underwriting guidelines and rates about .75% higher. FHA and VA note rates will be similar to those listed above.

Local Real Estate Rebound?

A rebound usually involves a bounce of some kind, so I think “thud” is a better term to use. Thud is the sound something makes when it hits bottom, and I think our regional real estate market, in many areas, has finally hit bottom. The median house price has increased for the last two months in King County. Looking deeper into the county stats, Seattle, the Eastside, and SW King have all had month over month increases in the median home price. SE King is still dropping, which is not surprising due to the amount of housing stock that entered the market in those areas at unsustainable prices. As for the other counties in the Puget Sound region, all appear to be bouncing along the bottom with Kitsap, Pierce, and Thurston leveling off, while Snohomish is still in decline.

I did allude to the fact that the thud will not be accompanied by any kind of a bounce. Prices will not rapidly reverse course and all that lost equity will miraculously reappear. There are still a lot of structural problems in our market. Short sales still have to sell and we’re about half way through the foreclosure problem. Until these distressed properties are gone, short sales and foreclosures will exert downward pressure on prices. The good news is that investors are coming into the market to absorb the problem properties. Housing affordability, which compares prices relative to incomes, is at the highest (most affordable) level since tracking began in 1970. While the real estate tunnel we have been in has been a long and dark one – four years and counting - I fear we won’t emerge at the other end until Seattle has finished its own tunnel.

The Federal Housing Administration (FHA) loan program was rolled out in 1934 in response to a housing industry that was devastated by the great depression. FHA provided default insurance to lenders that were only willing to make short term home loans as long as you had a 50% down payment. The insurance protection allowed lenders to offer loans with lower down payments. Since that time, the FHA program has played an important role in helping America achieve one of the highest homeownership rates in the world.

The FHA program has not been immune to the problems that have plagued the housing finance industry over the last four years. The mortgage insurance that is collected from borrowers is placed in a fund to cover FHA’s operating expenses and losses that lenders incur on FHA loans. The fund has taken a substantial hit during the housing crisis. To replenish the fund, FHA has increased the cost of the mortgage insurance three times in the last 14 months. Comparing the mortgage insurance cost over a five year period, a FHA borrower today will pay 50% more for mortgage insurance than someone who obtained an FHA loan in March 2010.

What are the options to FHA financing? The USDA program offers zero down financing, but you must be in a USDA rural area to qualify. VA also offers 100% financing, as long as you are a veteran. Conventional loans, those purchased by FNMA and FHLMC, are the only other option. The 97% loan-to-value conventional loan has reappeared. The main reason for that is Private Mortgage Insurance (PMI) companies are now willing to insure these loans for lenders. When you compare the FHA and conventional loans over a five year period, the cost of the PMI on the conventional loan is about 15% cheaper than the mortgage insurance cost on an FHA loan. Here are some of the guidelines for 3% down conventional loans:

- Minimum credit score of 720-740 (depends on the PMI company)

- Maximum allowed debt-to-income ratio of 41-45% (again, depends on the PMI company)

- 3% seller contribution allowed (should cover most closing costs)

- Condominiums and Refinances (maybe, depends on the PMI company)

- Gifts are not allowed for the down payment

While the FHA loan has a higher required down payment (3.5%), FHA loans will always be easier to obtain due to the policy regarding gift funds, lower credit score requirements, and higher allowed debt-to-income ratios, but in many market areas a conventional loan may be the only option due to lower FHA loan limits; conventional loans up to $417,000 can be obtained in all market areas. Furthermore, some properties may not pass FHA’s appraisal guidelines.

As a lending professional, it’s great to see the PMI companies reenter the high loan-to-value market. It’s a sign that our real estate market is on the road to recovery and a shot over FHA’s bow that they are not the only game in town.