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 slip to lowest point of the year


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Mortgage rates which have been sliding during the past several months reached their lowest point of 2017.  As reported by the weekly Freddie Mac Primary Market Rate Survey, the benchmark 30-year mortgage dropped another four basis points in week over week reporting and came in at 3.780%

The dip was attributed to the 10-year treasury yield which also fell to new lows at 2.061%.  Of all financial indicators which influence mortgage movement, it is the 10-year treasury yield which is the most predominant.  At the beginning of the year there was much optimism that the Trump Administration could jumpstart economic growth and inflation by cutting taxes and regulations.  However, with the administration not being able to claim any legislative victories investors are wondering whether they have the will to move the economy at a faster pace.

The effect

Rates are cyclical and will not always drop, however the recent national disaster of hurricane Harvey will have an effect in consumers applying and qualifying for mortgage.  Low mortgage numbers are great but you still have to be able to qualify based on your credit and condition of the property being used as collateral.  One of the first economic data points of Harvey was the BLS report reflecting unemployment claims.   The report showed that claims jumped 62,000 from week over week reporting and came in at the highest level since 2015.  That is worth mentioning as there as several more hurricanes, with equal or greater strength which is slated to hit the United States within the next several days.

 

READ THE REPORT HERE

Based on Harvey and other pending hurricane’s which primarily affect regional economics, consumers can expect a broader impact resulting in rates remaining at their current level.  The big question is with all that is going on, can consumers switch gears and be concerned about mortgage money?

Current rates

September 7, 2017 (based on Freddie Mac weekly rate survey)

30-Yr FRM 15-Yr FRM 5/1-Yr ARM
Average Rates 3.78% 3.08% 3.15%
Fees & Points 0.5 0.5 0.4
Margin N/A N/A 2.74

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

 

Mortgage Rates Dip 2 points


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The bench rate 30-year mortgage fell two basis points from week over week reporting as noted by the Freddie Mac Rate survey.   Despite treasury bonds rising the dip was attributed to the survey being completed prior the sell.  Consequently, next week and forward consumers can expect rates to rise as treasury yields are expected to climb as well.

Rates are cyclical and even though 10-year treasury bonds are the predominant indices which creates movement, there are other economic events to consider when attempting to peg the right time to purchase a new home or refinance an existing mortgage.

The purchase market has been hot and even though rates remain affordable the challenge for most consumers is being able to afford or justify the higher prices.  For those seeking to refinance the challenge is presenting acceptable credit and as well as a property with enough lendable equity.

Here is a snapshot of this week’s rate survey based on year over year data:

Product Current One Year Ago
30 YR FRM 3.88% 3.48%
15 YR FRM 3.17% 2.78%
5/1 ARM 3.17% 2.70%