Monday Mortgage Update 1-26-09
Posted on | January 26, 2009 | No Comments
There are some very important changes taking place with mortgages soon that, as your trusted mortgage adviser, I wanted to be sure you knew about. This update may take you more than two minutes to read, but it’s NEWS YOU NEED TO KNOW!
Mortgage rates have seen a couple of big dips recently, to rates not seen in over five decades. The dips were short lived, however, as demand and inflation fears caused rates to retrace to higher levels. Chances are pretty good that we will see more of these dips, but even if we do, not everybody will be able to take advantage of them. This is because of recent changes announced by Fannie Mae and Freddie Mac. They will be imposing additional “risk-based pricing adjustments” to borrowers with credit scores and loan to values which in the past would have been considered very low risk. Also, based on rates being offered by these mortgage giants and other large buyers of mortgages, there has been a decrease in “premium pricing”, which has been used in the past to fund origination fees and closing costs in return for a slightly higher interest rates. This means that many buyers will no longer qualify for a “no point(s) mortgage”.
The recently announced changes come in the form of Loan Level Price Adjustments (LLPA), Condo Loan Pricing Adjustments, Cash Out Refinance Pricing Adjustments and Investment Property Adjustments.
Here is a grid that shows how these LLPA changes might affect certain borrower’s interest rates:
Assumption: 30 year base fixed rate of 5.375% (JUST AN EXAMPLE!)
20% Down 10%Down 5% Down
FICO >740 5.375– 0 points 5.375 – 0 5.375 – 0
FICO 720-739 5.375 – ¼ point 5.375– 0 5.375 – 0
FICO 700-719 5.375 – ¾ point 5.375 – ½ 5.375 – ½
FICO 680-699 5.375 – 1-1/2 points or 5.375 – ¾ 5.375 – ¾
6.25 – 0 points 6.125- 0
FICO 660-679 5.375 – 2-1/2 points 5.375 – 1-3/4 5.375 – 1-3/4
FICO 640-659 5.375 – 3 points 5.375 – 2-1/4 5.375 – 2-1/4
FICO 620-639 5.375 – 3 points 5.375 – 2-3/4 5.375 – 2-3/4
In the past, a lender might have been able to increase the rate to cover the cost of the loan level price adjustments. The idea being that at a higher than market interest rate, the loan was more valuable to the end investor, so they were willing to pay the originating lender more, which covered the cost of the LLPA. However, for various reasons, the end investors are not as willing to do this. One reason might be that the end investors are experiencing so much volume now that reducing this premium pricing is helping them to manage this increased volume with their reduced staffs. Another reason for the reduced premium pricing may be a fear on the part of the end investors that lower mortgage rates are ahead of us, and they don’t want to pay large premiums on loans that might payoff quickly as borrowers refinance into those lower rates. When an end investor pays a YSP (yield spread premium), SRP (service release premium) or other premium pricing to originating lenders, it is with the belief that the mortgage is going to be around long enough for them to make up these costs. If a loan pays off quicker than expected, the end lender (and sometimes the originating lender) loses out.
You may notice that the additional points in the above chart actually decrease with less than 20% down. This isn’t a mistake! Because of the private mortgage insurance that is required on loans with less than 20% down, there is less risk to the investor. Therefore, there is less of a risk-based pricing adjustment.
Condominium Loan Pricing Adjustments:
Fannie Mae, Freddie Mac and other mortgage lenders have experienced a lot of losses on loans secured by condominiums. As a result, they have instituted a price adjustment, or fee of 3/4 of a point on any loans secured by a condominium where the borrower has less than 25% equity. So, using the above chart, if a borrower with a 680 credit score and 20% down was purchasing a condominium, their rate would be 5.375% with 2-1/4 points (the 1-1/2 LLPA plus the 3/4 condo fee).
Cash-Out Refinancing Adjustments:
Borrowers trying to take advantage of lower interest rates by refinancing and pulling equity out of their current home (cash out refinance) will find pricing adjustments ranging from 1/4 to 2-1/2 points, in addition to the additional adjustments listed above, depending on LTV and credit score. Borrowers looking to refinance just their current balances will not pay the additional cash out refinance adjustments.
Investment Property Adjustments:
Finally, borrowers that are purchasing (or refinancing) investment properties will also see additional adjustments, based on the following:
Loan to Value up to 75% – add 1-3/4 points (a small increase from previous levels)
Loan to Value between 75.01 to 80% LTV – add 3 points (a large increase over previous levels)
The news isn’t all bad!!! FHA loans are still readily available for borrowers with as little as 3-1/2% down! The pricing adjustments don’t start until the borrowers credit score drops below 620, making FHA financing a fabulous alternative for many borrowers, especially those with smaller down payments and/or lower credit scores.
APPRAISAL CHANGES COMING, EFFECTIVE MAY 1, 2009:
The Federal Housing Finance Agency (FHFA), which controls Fannie Mae and Freddie Mac announced that Fannie and Freddie will implement a revised Home Valuation Code of Conduct (the Code), that will govern the relationship that any lender that sells mortgages to Fannie and Freddie have with their appraisers. The full Code is too lengthy to be included in this update, but it can be viewed at:
http://www.freddiemac.com/singlefamily/pdf/122308_valuationcodeofconduct.pdf
Highlights include:
1) Lenders must ensure that borrowers receive a copy of the appraisal at least 3 days prior to closing.
2) Lender’s production staff is forbidden from selecting, retaining or recommending the selection of particular appraisers.
3) Lenders cannot accept appraisal reports from appraisers selected by mortgage brokers, real estate agents, or other third parties.
These changes may have the biggest impact on the way that mortgage BROKERS.In
the past, a mortgage broker has put a loan package together, maybe with a funding lender in mind, but not committed to that end lender. With these changes, the end lender will need to be chosen at the beginning of the process, so that lender can order the appraisal, or there could be some delays in obtaining appraisals if the broker delays choosing the end lender, for whatever reason.
Although all of the changes that I have listed may seem extreme, we have had changes in the past, and the real estate market has always found a way to accommodate the changes. We may go through a period where mortgage underwriting standards move back to where they were 10 to 20 years ago, as the mortgage credit pendulum continues its swing from one extreme to the other. It will eventually settle somewhere in the middle! I’m confident of that. In the mean time, households are continuing to grow. The Echo boomers – children of the baby boomers – are getting ready to buy homes, ready to make up a big demographic of buyers, which will need to a larger number of households that will need a place to live! With mortgage rates at their current low levels, and home prices as low as they are, many experts say that home affordability is at its best level since the 1970’s. Now, if that fact could only make the headlines!
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