Mortgage News

A bill that helps home buyers afford energy improvements and encourages banks to offer a discount on loans to pay for reducing energy usage passed the U.S. House in June and could pass the Senate in the fall. The American Clean Energy and Security Act of 2009 requires Fannie Mae and Freddie Mac to offer discounts on home loans that include monetary incentives for making a home more energy efficient. These discounts, which are already in effect at some lenders like J.P. Morgan Chase & Co. and Bank of America, include savings on closing costs for homes that have Energy Star appliances. The Federal Housing Administration is offering a plan through its approved lenders that allows borrowers to add the cost of making efficiency improvements into the loan, but the extra money doesn’t count toward determining how much loan a borrower can qualify for. For instance, a borrower who adds $5,000 to a $100,000 loan to afford new Energy Star appliances would only have to qualify for $100,000 – not $105,000. Source: The Wall Street Journal

Recent data illustrating steady home prices and rising sales for weeks have led economists and analysts alike to indicate a perceived bottom, or stabilization, in the US housing market. New market analysis out of Credit Suisse suggests the US residential housing sector may be past the point of stabilization and is now recovering vital signs. Demand is returning on higher affordability and the federal first-time homebuyer tax credit, according to Martin Bernhard, of Credit Suisse’s private banking, investment services and products divisions. “On a national level, we think that the turning point could have been reached,” he said. But several factors including unemployment rates and foreclosure levels may pressure these positive developments, Bernhard said in market commentary last week. New house supply is low as housing construction slips. The existing house side of the market, which is about 10 times as large as the market for new homes, according to Credit Suisse, remains pressured by levels of foreclosure inventory. The risks posed by the foreclosure pipeline may pressure prices in the short term, but the pricing correction achieved poses long-term investment benefits. “Given the sharp correction in house prices over the last three years, we think that there now exist interesting investment opportunities in the US housing sector,” Bernhard said. Source: HousingWire

There are many warning signals with regard to rough waters ahead. Last week we spoke about the danger of a double-dip or at the least a very uneven recovery. But even a robust recovery does not come without dangers. The stronger the recovery, the stronger the risk of inflation. There is no doubt that the amount of money the government is borrowing to both stimulate the economy and make up lost revenue due to the slumping economy brings long-term economic risks. A strong recovery will actually serve to lower the deficit but we still will be paying the bills for years to come. The lower dollar and higher price of gold represents recognition of this fact. With gold crossing the all-important psychological $1,000 barrier this week, the markets seem to be recognizing the dangers of inflation ahead.

In a scenario of a strong recovery, inflation could reign and that should translate into much higher rates. The good news? Well, believe it or not, the good news is actually the bad news from our discussion last week. The recovery is not expected to be strong. We may be able to tolerate the deficits in the short-run because we will not have strong private demand for borrowing. Even the scenario of a stronger recovery and higher rates could serve to slow borrowing and thus the recovery. Therefore, a weak and slow recovery could be the best news we could have. As long as it does not revert to a dip back into recession.

Conforming Loan Limit for U.S. to Remain $417,000 in 2009:
Different Limits in Some Areas
Federal Housing Finance Agency - November 7, 2009

The Federal Housing Finance Agency (FHFA) today announced the conforming loan limit will remain $417,000 for 2009 for most areas in the U.S. but specified higher limits in certain cities and counties. The conforming loan limit is the maximum size of loans that Fannie Mae and Freddie Mac can purchase in 2009.

According to provisions of the Housing and Economic Recovery Act of 2008 (HERA), the national loan limit is set based on changes in average home prices over the previous year, but cannot decline from year to year. Loan limits for two-, three-, and four-unit properties in 2009 will remain at 2008 levels as well: $533,850, $645,300, and $801,950 respectively, for homes in the continental U.S.

The national limit was left unchanged at $417,000 based on declines in FHFA’s monthly and quarterly house price indexes over the past year. The monthly purchase-only index declined 5.9 percent over the 12 months ending August 2008, and the quarterly all-transactions index dropped 1.7 percent from second quarter 2007 to second quarter 2008. Virtually every other measure of house prices has also fallen, with many showing even larger declines. FHFA has not yet determined whether it will continue to use a currently existing FHFA price index to gauge price movements in future years. For this year, however, all reliable metrics point to lower prices, and a price decline of any size is sufficient to determine that the national limit will not change.

Following the provisions of HERA, FHFA has set loan limits for “high-cost” areas in 2009. These limits are set equal to 115 percent of local median house prices and cannot exceed 150 percent of the standard limit, which is $625,500 for one-unit homes in the continental U.S. The new limits affect loans purchased by an Enterprise in 2009, unless the loans were made permanently eligible for purchase under the Economic Stimulus Act enacted earlier in 2008 and has generally higher limits.

Under rules set forth in the Stimulus Act, loans originated in 2008 and the second half of 2007 are subject to limits of 125 percent of local price medians up to a maximum of $729,750. As a result of the difference in the formula for determining high-cost area limits, many of the high-cost area loan limits are different for 2009 than they were for 2008. They are generally lower because of the lower median price multiplier in HERA (i.e., loan limits are 115 percent rather than 125 percent of median prices) and the lower ceiling ($625,500 rather than $729,750). For loans originated during the period covered by the Stimulus Act, the higher of those limits and the 2009 limits will apply.

In calculating loan limits, FHFA used median house price estimates calculated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). Those values have been estimated in a manner consistent with requirements of the National Housing Act, which requires that median prices for all counties in metropolitan statistical areas (MSAs) be set equal to the median price for the highest-cost county. FHA has estimated median house prices for the purpose of setting its own loan limits and has used data from a number of sources, including aggregated county recorder data (supplied by Radar Logic), the American Community Survey, and the National Association of Realtors.

HUD will allow a 30-day appeals period for those wishing to contest its median price estimates. Appeals are to be based upon data suggesting a potentially higher price median for a given area. Details concerning the appeals process will be released today in an FHA mortgagee letter. To the extent that appeals are deemed valid and HUD’s median price estimates change in response to the one-time appeals process, the FHFA loan limits will be changed to reflect the updated data.

While FHFA has used median house prices estimated by FHA for 2009 loan limits, it may choose alternative methods in future years. FHFA will be seeking public comment on a forthcoming proposal concerning the best approach to measuring price medians for this application.

As in previous years, the 2009 maximum conforming limits are higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands than in the contiguous U.S. In those areas, as delineated in the attached list, loan limits vary from $625,500 to $721,050 for one-unit properties.

In addition to a table containing a list of all conforming loan limits for all U.S. counties and statistically equivalent areas, also attached is a list showing only those areas where 2009 loan limits are set by the high-cost area provisions in HERA. These areas have loan limits above $417,000 for one-unit properties in the continental U.S. and above $625,500 for properties in Alaska, Hawaii, Guam and the U.S. Virgin Islands.

Current Indices For Adjustable Rate Mortgages
Updated October 17, 2008

It is very interesting that on Friday night Obama and McCain were debating while Congress debated the Administration’s $700 billion mortgage bailout proposal. All week, the President, The Chairman of the Federal Reserve and Congressional leaders tried to assure the public and the markets that the deal would get done and they worked through the weekend to make sure that happened. Of course, the devil is in the details. Proposals being debated included limiting executive compensation for companies that benefit from the plan, increased foreclosure assistance and the ability for bankruptcy judges to modify mortgage notes.

While most are absolutely blown away by the size of the proposal, most understand that the package is not only justified but essential to restore the ability of lenders to loosen their credit strings. One major point should be made. The government is not necessarily spending $700 billion. They will be obtaining an asset that could increase in value, especially if the proposal contributes to a recovery in the housing and financial markets. As a matter of fact, the government could wind up in a profit situation. That would be very good with the annual deficit soaring. The more important question is–will it work? This is a crisis of confidence. If loans of any kind could be sold more easily, then financial institutions are theoretically more apt to increase their lending capacity. There is no doubt that tightening by lenders is a major factor in the crisis and that they will not loosen up until they can be assured that there are takers for the loans they have on the books that are not performing.

One negative response to the proposal has been an increase in oil prices and interest rates. Why would that happen? Well if the markets feel the proposal will work and that the economy will recover, then a stronger economy would produce higher oil prices and rates. Of course, if there is no increase in economic activity, there is also no reason why rates and oil prices will not just adjust back to where they were. Speculation may be interesting–but there is no way to understand what will happen even in the near future in this case.

Just when you think the world can’t get any crazier, it happens. What a wild ride. In the past few weeks the government has taken over Fannie Mae and Freddie Mac and also now has rescued a major insurer, AIG, to the tune of $85 billion. In the meantime the government also let Lehman Brothers fall by the wayside without a rescue. Now the stock market has rallied upon the news that the Feds will start purchasing distressed mortgages from financial institutions. In a few hours the news mostly reversed a drop of almost 1,000 points over one week for the Dow Jones Industrial Average.

It is the housing crisis causing the financial crisis. Institutions are weighed down by mortgage debt that is defaulting. The more severe the crisis, the lower rates have fallen. And it is lower rates that can hasten the end of the housing crisis which will also end the financial crisis. As rates go lower and housing demand picks up (reports have indicated that this is already starting to happen), confidence will be restored in the mortgage markets. And this confidence will help banks lessen their present round of tightening of guidelines that is shutting many prospective homeowners out of purchasing their dream home. It may take some time but we say–let the next cycle begin!

Congressional leaders and the Bush administration are working with Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke to prepare a massive intervention to revive the U.S. financial system. The proposed plan reportedly includes using hundreds of billions of dollars in government funding to buy bad loans, leaving banks with more money and fewer problems and allowing them to again lend money. Paulson and Bernanke urged lawmakers to approve the plan rapidly, presenting what some described as a “chilling” picture of the state of the financial system.  Congressional leaders were told that the consequences would be grave if the legislation doesn’t pass by the end of next week. Taking over Fannie Mae and Freddie Mac, creating a new source of funding for investment banks, and assuming control of insurance giant American International Group obviously hasn’t been enough to end the crisis. It hasn’t stopped $79 billion in withdrawals from money-market funds, which are a critical source of funding for the U.S. financial system. "The costs of doing nothing are enormous," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. Source: The Washington Post

Activity is slowing in the commercial real estate market in response to tightening credit and weak economic growth, according to the National Association of Realtors. In its latest Commercial Real Estate Outlook, the NAR reports that financing problems stemming from the crisis on Wall Street, not a lack of demand, are curbing real estate transactions. "Although capital remains available for residential loans, the credit crunch is pronounced in commercial lending," said NAR chief economist Lawrence Yun. "Combined with a slowing economy, the lack of credit is curtailing activity in the commercial real estate sectors. As a result, there’s been a slowdown in the net absorption of space, which is leading to higher vacancies and more modest rent growth." Source: National Mortgage News

Current Indices For Adjustable Rate Mortgages
Updated September 19, 2008