The Housing Wire reports that the Standard & Poor’s Ratings Services lowered Fannie and Freddie’s preferred stock rating to ‘BBB-’ from ‘A-,’ while cutting a host of other ratings as well, and warning that further cuts may be coming in the future. The ratings agency said it cut the ratings over “increasing uncertainty about whether government support will extend to these securities in the context of further deterioration” in each GSE’s assets. It further reports that it’s becoming clear that holding preferred interests in either GSE is going to be hazardous to Q3 earnings.
Shares of the two mortgage financing giants each hit a new 52-week-low. They’ve lost more than a fifth of their value on Wednesday as fears mounted that the companies will soon need government support. Regional banks and insurers hold the majority of Fannie and Freddie’s $36 billion in preferred stock, and any bailout would hang these stockholders out to dry. Many financing experts wonder why Fannie and Freddie have not moved to a insured home loan platform like FHA. The government has backed FHA home loans and FHASecure for fixed rate refinancing and foreclosure prevention
Dow components Bank of America (BAC, Fortune 500) fell nearly 4% while Citigroup (C, Fortune 500) was down 2.5%. Wachovia’s (WB, Fortune 500) stock fell 7%. And shares of the investment bank Lehman Brothers (LEH, Fortune 500), which is facing its own concerns about the need for more capital, plunged 9%. “There’s a big negative feedback loop and there’s no way out of it,” Friedman, Billings, Ramsey & Co. analyst Paul Miller said in an interview. “As the stock falls more and more, it’s more likely the government steps in and more likely equity holders get wiped out.”
It’s looking more and more like the government bailout of Fannie Mae and Freddie Mac will become the taxpayers’ burden. JP Morgan Chase & Co.’s CEO, Jamie Dimon said in a Q2 earnings call that prime mortgages looked “terrible.” This is an indicator that it’s not just sub-prime mortgages with bad credit that are going sour. Even with all of the loan modifications, the home foreclosures are not stopping.
Fannie Mae has reported a loss for the past two quarters while Freddie Mac has posted three consecutive quarterly losses. Both companies are expected to report a loss in the second quarter as well. Fannie Mae’s chief executive sought to reassure investors that no bailout is imminent. They haven’t offered anything and we haven’t asked for anything,” Fannie Mae CEO Daniel Mudd said in a public radio interview Wednesday morning. “I don’t anticipate that they will do that.”
Armando Falcon, who served for six years as Fannie and Freddie’s chief government regulator, expects a full-fledged government takeover before year-end. The companies’ financial picture is far worse than they have acknowledged, he said, particularly for riskier mortgage loans they purchased as investments.
Following Freddie Mac’s August 12th announcement that it won’t purchase subprime loans fitting New York State’s new definition for that credit class, Fannie Mae recently announced that it too will not purchase New York Subprime loans. Fannie Mae will not purchase or securitize any mortgage loan that meets the definition of a subprime home loan under New York law, regardless of whether any provision of the law is preempted for a particular mortgage or for a particular originator,” senior vice president Michael Quinn wrote in a seller bulletin dated Aug. 19.
Quinn suggested that New York’s new definition of subprime falls under what the government-sponsored entity (GSE) sees as “high-cost” or “high-risk” home loans, and said that Fannie has had a long-standing policy of not purchasing such mortgage loans for securitization or for its retained portfolio.
Housing Wire reported that the percentage of subprime borrowers 60 or more days in arrears at the end of last month surged for both the 2006 and 2007 vintages, up nearly 7 and 11 percent compared to June, respectively. Sources indicate one of the reasons for this is because a large volume of repayment plans put into place earlier this year for troubled subprime borrowers are now failing. According to mortgage lender Jeff Moran, “FHA mortgage rates have increased slightly with the fears of Fannie and Freddie being taken over by the Fed.” A recent report from Moody’s Investors Service found that more than 50 percent of subprime adjustable-rate mortgages modified during the first half of 2007 had become 60 or more days delinquent by the end of March 2008.
Who will lend to New York subprime mortgage holders now?
It appears now that the only lender willing to handle subprime loans in New York is the federal government through the Federal Housing Administration (FHA) loans. As a result of new legislation passed to address the foreclosure epidemic, the FHA has two new programs: FHASecure loans which are due to expire on December 31, 2008 and HOPE for Homeowners, due to start on October 1, 2008. These programs are foreclosure prevention programs, and only those facing foreclosure due to recently resetting or soon to reset subprime loans.
Alt-A Loans –Another Serious Cause for Concern
Another type of loan that is problematic that isn’t being addressed by either of the GSEs, Fannie Mae and Freddie Mac, or the FHA: Alt-A loans. Alt-A loan default rates are also rising at alarming levels. HousingWire.com reports that Alt-A delinquencies continue to worsen in July. It continues by reporting that the 2005 vintage — which should be seasoned by now — saw delinquencies jump an eye-opening 29 percent to 9.72 percent of remaining loans in the vintage; the increase is somewhat telling as well, given that prepayment rates actually fell by more than 5 percent in the same timeframe. Beyond the 2005 vintage, 2006 vintage Alt-A loans saw 60+ day delinquencies rise from 22.74 percent in June to nearly 25 percent in July; for the 2007 vintage, delinquencies rose from 20 percent to 21.35 percent. Weighted average loss severity also increased for Alt-A loan liquidations during July, according to the Clayton data: hitting 39.7 percent, compared to 38.6 percent one month earlier.
What is an Alt-A Loan?
An Alt-A loan is also known as an alternative documentation loan. The Mortgage Reference Library provides an example: a self employed borrower who makes $250,000 a year, but for tax purposes, writes a lot of that income off. These FHA home loans are held by borrowers with good credit that don’t qualify for conventional loans due to various circumstances like being self employed or having an income that is comprised mainly of commissions or bonuses. Another example is someone whose credit scores are slightly lower than what is required for an A paper loan, or someone who doesn’t have quite enough asset documentation. In short, Alt-A loan holders are not as high-risk as subprime loans but are deficient in some way to qualify for an A paper loan. Alt-A loans typically carry a slightly higher interest rate than conventional loans.
So, what’s going to happen with Alt-A loans and people who’ve lost their jobs?
With all the attention that the fed is giving to subprime loans, what about the Alt-A loans? There is no bailout for these types of loans. Will Fannie Mae and Freddie Mac decide not to purchase these loans like they’ve decided not to purchase New York subprime loans? What about people facing foreclosure due to job loss, medical bills or other financial distress? Like holders of Alt-A loans, people who are simply in financial distress due to job loss, medical bills or other reasons are not being addressed by the federal government or GSEs. Unless a solution that addresses all the reasons foreclosures continue to rise is reached, the foreclosure epidemic doesn’t look like it’s going to end any time soon. It will be interesting to see how the new president will handle this being that our country will be well in the midst of a housing and foreclosure crisis when the new president takes office.
Government-insured mortgage applications tripled in the past year according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Of all mortgage applications accepted during the month of July 2008, 29.1 percent were for government-insured loans (consisting of mostly FHA loans) compared to 8.4 percent in July 2007. FHA home loan volumes continue to rise as conventional lending continues to tighten.
Data from the U.S. Department of Housing and Urban Development (HUD) show that the level of conventional to FHA refinance applications has increased 317 percent on a year over year basis in July, the bulk of which is likely from subprime ARM products. Similarly, the level of conventional to FHA refinance endorsements has increased 260.8 percent on a year over year basis. Based on the MBA survey, application volume for government-insured loans was up 133.9 percent in July from a year ago.
In March of this year, the Economic Stimulus Act of 2008 temporarily raised the FHA and conforming loan limits for most areas in the country, which broadened FHA financing options for more borrowers. The Housing and Economic Recovery Act of 2008, passed in July 2008, permanently raised the lending limit, not quite as high as the Economic Stimulus Act, but high enough to still broaden the reach of FHA mortgage loans.
FHASecure, under the Economic Stimulus Act of 2008, provides holders of subprime adjustable rate mortgages (ARMs) the opportunity to refinance their loans to more affordable fixed-rate loans. This program is due to expire on December 31, 2008. The other foreclosure bailout program will begin before the expiration of FHASecure. HOPE for Homeowners will be initiated on October 1, 2008. Like FHASecure, it allows holders of subprime ARMs to refinance into more affordable fixed-rate mortgage loans.
The news isn’t so great for conventional mortgage applications, the MBA reports that those fell to the lowest level in 6 years. Application volume for conventional loans was down 50.2 percent. Refinancing activity led the downward charge last week, according to MBA data, dropping 3.7 percent to 34.8 percent of total applications down from 35.2 percent the previous week. Purchase applications fell 0.4 percent, despite mortgage rates that appear to have eased somewhat during the week. The MBA’s preliminary rate survey found that the average contract interest rate for 30-year fixed-rate mortgages decreased to 6.47 percent from 6.57 percent; formal rate surveys are due out Thursday.
“With two more weeks left until the unofficial end of summer and mortgage rates threatening six-year highs, little on the horizon suggests any reversal of the current seasonal trend through the end of 2008,” said Mortgage Maxx publisher Paul Descloux.
The recent influx of activity for FHA home loans underscores the need for modernization of FHA’s lending guidelines. The new FHA Modernization Act of 2008 proposes to make the much-needed modernizations, which will be tested as more and more applications for government-backed loans keep coming in. The massive shift from conventional to government loans is due mainly to the fact that conventional lenders have tightened down lending standards to the point where only those with high credit scores and very low debt-to-income ratios can qualify. FHA’s standards are more reasonable, and allow those who have some credit challenges the opportunity to be a homeowner and to refinance troubled loans.
Even if a borrower doesn’t have a troubled loan, they are afforded the opportunity to refinance their existing loans into competitively priced FHA home loans. If you’re interested in getting a FHA loan or refinancing into one, fill out the free loan quote on this page, or call us.
Freddie Mac announced Tuesday morning that it will not purchase mortgage loans in the state of New York that fall under the state’s new definition of “subprime”. “The state of New York has enacted legislation that creates a ’subprime home loan’ category of mortgages,” wrote vice president of customer outreach Patricia McClung in a memo to sellers and servicers. “Freddie Mac will not purchase New York subprime mortgages with note dates on or after September 1, 2008 that fall within the law’s definition of ’subprime home loans.’”
What does this mean to home borrowers?
“Mortgage lenders will just decide to stop lending in certain areas,” said one source, a banking executive that asked not to be named. “We could end up with an entire class of borrowers that I call ‘the unlendables.’”
This exemplifies the position that conventional home lenders are taking. They are tightening their belts on lending practices to the point where it’s getting to be nearly impossible to qualify for a home loan. Fortunately, however, the FHA has stepped up to the plate. Under the Housing and Economic Recovery Act of 2008, just recently signed by President Bush, the FHA is being modernized to help with new home purchases and bring hope to those facing foreclosure.
The FHA Modernization Act of 2008 raises the FHA home loan limit. The current loan limit is $362,790. Under the new legislation it will be raised to $417,000 in certain parts of the country. In less expensive markets, the limit would be raised from 48 percent to 65 percent of the conforming loan limit, or an increase in the ceiling from $200,160 to $271,050 under the bill. It also does away with seller-funded down payment assistance programs like AmeriDream. But, since many lenders have already done away with these programs, it’s inconsequential. And, you can still get down payment assistance from family, friends, employers, churches and city-,county- and state-funded down payment assistance programs.
HOPE for Homeowners Act of 2008 was put in place to bring hope to those facing foreclosure due to skyrocketing mortgage payments as a result of subprime adjustable mortgage rates resetting to record high levels. This program allows these people to refinance into a fixed-rate FHA home loan.
FHASecure is not part of the new legislation. It was put in place earlier this year to address the rising foreclosure rate. It allows people facing foreclosure to refinance their mortgage loans into FHA fixed rate mortgages. This program is due to expire on December 31, 2008. The new HOPE for homeowners act will pick up where FHASecure leaves off.
Even if you’re not facing foreclosure, you can still refinance your home through FHA–just not through the HOPE for Homeowners or FHASecure programs. Fill out the free loan quote on this page or call us at 800-606-5143 to find out if you qualify for a FHA refinance loan.
The Federal Housing Administration (FHA) has been around since June 27, 1934. It was folded under the Department of Housing and Urban Development (HUD) umbrella in 1965. FHA mortgage loans began to lose steam in the late 1990s, when home values started increasing because home prices were exceeding the FHA loan limits. Sellers also didn’t like working with buyers using FHA home loans because of the FHA’s stringent appraisal guidelines. With the recent housing turmoil and home prices tumbling in excess of 30% in some areas, FHA has made a comeback. See more at FHA Home Loan Services website.
A housing stimulus was passed earlier this year that temporarily set the FHA and conforming Fannie Mae/Freddie Mac (FNMA/FHLMC) loan limits to the lesser of $729,750 or 125% of an area’s median home sales price. If 125% of an area’s median home sales price is below the current conforming loan limit of $417,000 the current limit still applies. The higher loan limits allow first time home buyers with limited down payment resources, and possibly not so perfect credit, get a FHA loan in higher-priced areas like California and Arizona. Remember, the credit requirements for FHA loans are not as stringent as those for conventional loans. These higher loan limits expire on December 31, 2008, so now is the time to take action. The loan limits lower to a maximum of $625,500 (115% of an area’s median home sales price) on January 1, 2009, when the new housing law loan limits take effect.
With the passage of the Housing and Economic Recovery Act of 2008 (the new housing law) on July 30, 2008, the first time homebuyer benefits even more through a tax credit worth as much a $7,500. The credit isn’t a grant, but rather an interest-free loan that must be paid back to the government over the course of 15 years. If the property is sold for more than the original purchase, and the tax credit hasn’t been fully repaid, the borrower must pay back the balance out of the proceeds of the sale. To get the tax credit, you must buy before July 1, 2009.
James Glassman, a senior economist at JPMorgan Chase, says the tax credit is unlikely to increase demand from first-time home buyers all by itself. But when coupled with other factors–such as falling home prices–”it’s just one more thing that helps,” Glassman says. Add the benefit of using low rate FHA home financing and it could get first time buyers who are sitting on the fence trying to decide if the time is right to purchase a home to take action and become a homeowner.
Are you a first-time homebuyer? We can help you take advantage of the provisions under the new housing law and newly modernized FHA with its higher loan limits. Just fill out the free loan quote form on the right side of this page, and a lender will get with you promptly.
If there is one good program our government started its the FHA mortgage loan. This loan program was created in 1934 to help ensure equality for home financing. The Housing of Urban Development belived that everyone deserved the right to own a home and the FHA loan program that spun out of HUD has done exactly that.
When mortgage financing collapsed the end of 2006 and early 2007, FHA was their to pick up the pieces for homeowners. Today thousands of people are loosing their homes in foreclosure, but FHA has been the shining star that has actually helped people save their homes. The FHA Secure has helped thousands of homeowners refinance into a fixed rate mortgage and save their homes at the same time. Let;s all make a toast to HUD and FHA…Thank You!
In a recent article, Carol Marshall reviews the latest FHA home loan programs created to help homeowners stay in their houses with prevention measures against home loan defaults. HUD secretary Steve Preston has been on the job as the Secretary for HUD for a month. Preston made his announcement in Detroit, which he called “the epicenter of the foreclosure crisis,” for his 1st significant address as HUD secretary to announce an aggressive foreclosure prevention assistance program. Under the program, HUD would enter a joint venture partnership to buy bad loans from lenders, Preston said at a July 9 Detroit Economic Club meeting. The new FHA loan program will begin in Detroit, one of the country’s hardest-hit foreclosure markets. “Traditionally, when all FHA loan modification and loss mitigation measures have been exhausted, mortgage lenders foreclose and then submit a claim to FHA,” Preston said. “Under this program, we will create a means for lenders to sell their non-performing mortgages before foreclosure to HUD and a joint venture partner.” FHA is trying to prevent foreclosure losses and may assist the troubled housing market stabilize, he said, at a time when the market remains on the brink of future disaster.
Experts estimate as many as 2.5 million foreclosure filings this year, Preston said, compared to 1.5 million in 2007. The average is 650,000. Housing prices are down between 4 % and 17 % nationwide. At the same time, FHA lenders have pulled back from originating loans, which are at their lowest levels since 2000-2001. In Oakland, Wayne, Macomb, Livingston and Washtenaw counties, there are some 40,000 houses on the market now, representing a 17-month supply, well above the national average of 9.6 months. A six-month supply is considered normal, Preston said. ‘This is tough on families, very tough,” Preston said. In some parts of the country, the market was impacted by the housing bubble. But in Michigan, fundamental economic challenges prevail.
“Sub-prime lending is not in and of itself a bad thing,” Preston said. “It has been the path to home ownership for very responsible people. But irresponsible behavior has led to a dangerous proliferation in the market.” There is $1.3 trillion in outstanding subprime loans – about 12% of the market, but more than half of the foreclosures. Non-prime avariable rate mortgage loans represent 6% of outstanding home loans, but more than 40% of foreclosures, with more than 1 in 4 of those home loans currently more than ninety days past due or in foreclosure.
Unfortunately, the worst may be yet to come. “We have another $150 billion in subprime ARMs resetting in the next 18 months,” Preston said. “We’re right in the middle of that reset period of time. We have to understand that we will continue to be flooded with a need to work out these loans.” That’s where the government has been at the center of the solution, Preston said. Government supported lending is essentially the only source for non-jumbo loans. FHA home loans, Fannie Mae, Freddie Mac and the Federal Home Loan Bank have absorbed the retreat of the private sector, he said. But HUD needs to protect itself as well, Preston said. So the department is pushing to institute risk-based pricing on FHA mortgage insurance. “FHA will price the insurance premiums for borrowers according to their credit risk,” he said. “Today the typical borrower pays 1.5 points …. Riskier borrowers will pay 2.25.” He disputed critics’ claims that risk-based pricing hurts low-income borrowers. “The facts show the opposite. Risk-based premium pricing will actually benefit lower-income borrowers. Contrary to conventional wisdom, FHA families with lower incomes actually have higher FICO (credit) scores. They are hard-working people who live within their means and pay their bills,” he said.
FHA has taken some measures already to try to stem the tide of the foreclosure crisis – temporarily eliminating the 90-day requirement for buyers to hold a property before selling; increasing FHA home loan limits to as high as $729,000 in some areas of the country. The recent alliance with HOPE NOW, an organization that offers aid and advice to distressed homeowners has proven to be a wise move. Hope connects these borrowers with mortgage lenders in an effort to revise their existing mortgages to allow homeowners to remain in their properties at an interest rate they can afford while establishing effective housing counseling programs.
In a recent article published by the Star Tribune, H.J. Cummins raises some interesting home loan points. Cummins assets that income alone “does not explain why minority borrowers got a disproportionate number of sub-prime home loans in the run-up to the current foreclosure crisis.”. That study also ranked cities by the home loan disparities between white borrowers and those from racial and ethnic minorities. Only Milwaukee gave a worse sindication than the Minneapolis metro area, based on data concluded in 2006. The 2007 and 2008 data in not available yet. This data was gathered and collected under the federal Home Mortgage Disclosure Act (HMDA).
John Taylor who is the head of the National Community Reinvestment Coalition said “The financing data reminds us that the current housing crisis was overwhelmingly the result of the explosion of bad loan products in financially vulnerable communities.” However it should be noted that the the study did not consider credit scores or loan payment delinquencies. FHA home loans are the most popular financing tool used today for buying or refinancing a home and they do not use credit scores into the underwriting score card.
In the Minneapolis area, middle- and upper-income blacks were three times more likely than comparably paid whites to get loans that carry more expensive terms designed for high-risk borrowers called sub-prime or “Alt-A” home mortgage loans. Middle and upper-income Hispanics were 2.4 times more likely; Asians, 1.6 times.
Dave Snyder, a community organizer at Jewish Community Action in St. Paul was not surprised by the financing data revealead. “It’s not a statistic that stands in isolation,” Snyder said. He continued by noting that Minnesota has one our country’s lowest homeownership rates for black people, and one of the highest for white people.
|
|
