Conforming Loan Limits increased


above photo Mel Watt, director of the Federal Housing Finance Agency (FHFA), from left, Jerome Powell, chairman of the U.S. Federal Reserve, Steven Mnuchin, U.S. Treasury secretary, and Jay Clayton, chairman of the Securities and Exchange Commission (SEC), listen during a Financial Stability Oversight Council (FSOC) meeting at the U.S. Treasury in Washington, D.C., U.S., on Tuesday, Oct. 16, 2018. Powell said at the meeting he is worried about a spillover from hard Brexit, but stocks and Treasuries showed little reaction. Photographer: Andrew Harrer/Bloomberg via Getty Images

 

Today, the Federal Housing Finance Agency (FHFA) announced conforming loan limits would increase from $453,100 to $484,350.  For higher cost areas (see map below) the new limit will be $726,525.  FHFA was created as the umbrella agency for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Fannie Mae Headquarters, Washington, DC (Photo by Alex Wong/Getty Images)
Freddie Mac Headquarters, McLean, VA (Photo credit should read PAUL J. RICHARDS/AFP/Getty Images)

They purchase home loans from a network of lenders across the nation.  The lenders originate the loans from consumers who are seeking to finance their home purchase or to refinance their existing mortgage.  The lenders also work with mortgage brokers, credit unions and other organizations who have direct contact with consumers.

Once the loans are funded, they are packaged and sent to respective investors (i.e., Fannie Mae and Freddie Mac) and sold as securities, which are backed or collateralized from the property.

 

The Impact

Nationally the average loan amount is $229,000.  The new guidelines take effect for mortgages that originate starting January 1, 2019.  The increase will help those who see home prices continue to rise.

Conforming loans are those where the loan amount is $484,350 OR LESS.  Any loan amount in excess of that loan is defined as a “Non-Conforming” loan.  For borrowers the impact is typically ½ point or 50 basis points on the interest rate.

 

As an example based on current limits

Loan Amount Rate Payment Mo. Difference
$453,100.00 4.81% $1,816.00 -$188.00
$453,101.00 5.31% $2,004.00

The bottom line difference could be approximately $190 each month.  So, while the monthly payment is crucial, the move also provides those with higher loan amounts an additional $31,250 to deal higher prices, while being able to obtain more affordable interest rates.

 

The one bank indicted from the mortgage crisis of 2008


The mortgage or housing crisis erupted across the nation in 2008 and crippled the U.S. economy.  Institutions, companies, cities, communities and individuals were not spared its devastation.  Even though recovery was a painful process and total restoration is a fleeting hope for many, it was felt those responsible, especially the well-known companies and their corporate leadership would eventually be held responsible for their involvement.

 

Shockingly, of all those who may have been involved in the nuances of mortgage lending and whose decisions resulted in historic loses, only one bank was indicted by the federal government.  Abacus Federal Savings and Loan headquartered in New York was dealt the wrath of selling fraudulent loans to the Federal National Mortgage Association (FANNIE MAE).

 

Too Big to Fail

You remember the panic, the desperation and the commentary from our political leadership? Most had never heard the phrase, “too big to fail!”  They would quickly learn it was akin to one of the great Chick Hearn phrases in announcing a basketball game, “no harm, no foul.” That basically meant that even though a foul may have been committed by the opposing player, it was not deemed worthy of declaring a foul or infraction.

2008 photo Ben Bernake, President George Bush & Hank Paulson

Instead, countless banks and mortgage originators were fined billions by various regulators, however there was no criminal prosecution as was the case with Abacus.  Even today there are many raw nerves, emotions and opinions when the topic of the mortgage crisis is discussed.  The how and why of Abacus being targeted raises more questions than it answers.  In 2016 a film about the plight of Abacus and impending trial was released.  Frontline, which specializes in showing documentaries on the public broadcasting network platform released the television version on September 12, 2017.

This spread the danger of risky mortgage loans, systematizing the housing market’s risks throughout the global financial system.23 These developments occurred in an environment characterized by minimal government oversight and regulation and depended on a perpetually low-interest rate environment where housing prices continued to rise and refinancing remained a viable option to continue borrowing.  When the housing market stalled and interest rates began to rise in the mid-2000s, the wheels came off, leading to the 2008 financial crisis.

Low hanging fruit

Abacus was eventually vindicated as the government was not able to prove their case.   Whatever your thoughts are about the crisis or your familiarity of the case, you ponder and ask what was so unique about Abacus that the government thought them to be “the poster of criminal intent and deemed a responsible party?”  There were so many well-known companies that were involved in the crisis.  As a matter of fact, each day lenders were imploding right before our eyes.  No doubt, they represented low hanging fruit that even a rookie prosecutor could attempt to give the public some sense of relief through indictments..  Yet, absent those who managed to survive and keep the doors open, their core penalty as mentioned was having regulatory fines levied against them.    From their perspective, dealing with a fine was much better than going out of business or worse, having to spend time in jail or prison.

 

Abacus goes down in history by being the only bank or mortgage lender to suffer the fate of being indicated and having to go through a full trial.

 

 

You can access the full film by clicking HERE

Mortgage rates climb back towards 4 percent


rates 762017

 

As predicted, mortgage rates climbed eight basis points in week over week reported and now sit at 3.960%.  The move was expected and based on the shortened trading factoring the July 4th holiday.  Therefore, the two-point gain from last week was wiped out.

Positioning

Overall rates are very attractive for home buyers as well as those seeking to refinance their existing mortgage.  The key for most consumers to take advantage of rates is positioning or being able to make a formal application and having the ability close within a reasonable period of time.  Refinancing can be trickier as many lenders lock in the rate for 60 days at time of preliminary approval.  Consumers completing a purchase transaction are guided by the close of escrow, so locking before that time might be unavailable.

Supply and Demand

While the 10-year treasury bond is the key instrument in gauging mortgage movement, there are other factors to consider such as the overall economy and even world events.  Supply is demand triggers movement up or down.

credit – Freddie Mac

Mortgage applications have been stable, however should there be a surge the result may be higher rates.  Just this month, lenders are preparing for more applications as underwriting guidelines have changed which may motivate more borrowers to consider a transaction.

Rate Recap here

The Freddie Mac Primary Mortgage Market Survey® (PMMS®) has evolved since its inception in April 1971 into the foremost reliable, representative source of regional and national mortgage rate trends and is relied upon by the mortgage industry and the public in gauging market conditions and evaluating mortgage loan options.

Mortgage applicant’s catch a break


Embed from Getty Images

 

If you are trying to purchase a home or refinance your existing mortgage, starting this month the break you may have been hoping for is here.  At least for those on the margins who may have lower credit scores or excessive debt to income.

Tax liens and civil penalties may be dropped from your credit report, thus allowing your score to increase.  Additionally, Fannie Mae and Freddie Mac who are the two largest institutional mortgage providers who purchase mortgages from their large cadre of lenders will allow borrowers debt to income ratio to move from 45 percent to 50 percent.

The impact

Tax liens and civil penalties can be a thorn for borrowers who sometimes don’t find out about them until late in a transaction.  The issue is sometimes they are not 100% complete or may contain erroneous information.  If that is your circumstance and you can document your position, the three credit reporting bureaus cannot report them as being authentically delinquently, thus your credit score will not reflect them as negative.

Again, this is critical if you are at the margins of being defined as having great credit versus good credit, or good credit versus poor credit.  As an example, most lenders use risk based pricing to determine which interest rates borrowers will be afforded.


Using a first-time buyer for the sake of illustration on a $200,000 mortgage, using today’s benchmark 30-year mortgage at zero discount points, equals 3.875%.

Great credit, FICO above 720. payment is $940 per month.

Good credit, FICO below 720 but higher than 680, rate is 4.125% or to obtain 3.875% discount points of 1.250% must be applied.  Payment is $969 per month or to achieve $940 payment, discount points of $2,500 must be paid.

$29 difference does not seem like a lot of money but over time you are paying more than necessary.

This is just a crude example but as you can see your credit score will determine which rate you are offered and before the announcement, lenders were required to put the information on your credit report as it was assumed to be accurate.

The other component where borrowers may get some breathing room is the increase of the debt to income ratio.

Again, using the $200,000 mortgage as an example and a purchase price of $250,000, assume taxes and insurance are $300, so the total mortgage payment would $1,240.  Assuming you have $1,000 in debt, so your total housing debt based using basic underwriting guidelines would be $2,240, thus you would need a gross household income of $5,600 per month to gain mortgage approval.  With the new guidelines, you now would need just $4,480 per month.  The difference is a whopping $1,120 per month and that could represent the opportunity to qualify for a larger mortgage which is crucial as home prices continue to rise or you simply could easier qualify for the mortgage of your liking.


Of course, there are critics to these two changes as some reflect back to the housing crisis of 2008 as well as the core reasons which led to the downfall.

At the same time, many lenders feel their portfolios are healthier and the benefits outweigh the risk, particularly as application production has been tepid, if not flat.

If you are in these two categories the best advice is:

  1. Present your documentation or your dispute to the three major credit reporting agencies Equifax, TransUnion and Experian.
  2. Check with your lender or mortgage originator to make sure the mortgage is based on Fannie Mae or Freddie Mac underwriting guidelines, and to determine if the new debt to income levels are in place.

references

Fannie Mae

Freddie Mac

Equifax

Experian

TransUnion