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Just a quick look at last week’s mortgage bond market. Up and down (red is bad) in huge strokes all week long. I hope you see how important it is to work with a mortgage professional that not only has access to this data, but understands how to use it to your advantage. It could make a huge difference in how much interest you pay over the life of your loan!

Here’s to hoping this week starts off with a bang and we can keep these historically low rates for a little while longer (so far it’s already looking good)!

-Greg

I was once told that FHA IS MORTGAGE INSURANCE. FHA is the government’s program that allows more Americans to own homes. They have both purchase and refinance programs designed to allow those with less of a down payment (equity for refiance customers) and/or lower credit scores than the conventional mortgage market will allow. To keep the program safe and tax payers off the hook for FHA losses, HUD employs a mortgage insurance premium to keep the program viable. EVERY FHA LOAN HAS MORTGAGE INSURANCE (MI). This MI premium keeps the program solvent, allowing for the program to continue and more people to become homeowners.

Recently, with the decline of conventional financial availability, FHA’s market-share has grown. So much so that they needed to make a change to keep the program running well. These changes will make a negligible difference to homeowners payments but will keep the program up and running for the long term. Up until these changes took place the UFMIP premium for an FHA loan was 2.25% of the loan amount. Although this amount is not required to be paid by the homeowner at closing it is financed into the loan, making the loan amount thousands of dollars higher than it otherwise would be and increasing the monthly payment accordingly. The annual MIP was .55% (or .50% with at least 5% down payment) but that is not being raised to .90% (or .85% with at least 5% down payment). This, of course, is going to increase monthly payments.

What does this mean? Well, not much in the beginning. Those obtaining FHA financing will have smaller loans, a good thing, but their monthly payment will be increasing but about the cost of a trip for two to the movies (without popcorn, candy, and drinks!). Not a bad price to pay to keep these programs viable and starting out with a smaller loan. But that still seems like a negative on the surface. Higher monthly payments, no matter how small the increase may be, is a negative.

However that is not looking at things in the long term. One thing to remember is, FHA’s mortgage insurance is only required to be in place for 5 years, or when the mortgage balance reaches 78% of the original purchase price, whichever comes last. Anyone that keeps their home long enough to realize the deletion of the annual MIP will see huge savings over today’s situation. To keep it simple, their monthly mortgage payment without the MIP will be less from day one because they are only financing the Up Front MIP of 1% of the loan amount, not a whopping 2.25% as they are today, so their loan amount is smaller. That principal and interest payment is the same for the life of the loan and when that MIP premium they are paying for the first 5 years falls off, their payment will be reduced drastically.

In the short term this change will not mean much to people; loan amounts will be a little smaller, the overall payment will be a tad higher, and this valuable program will stay in effect for more Americans to utilize to become homeowners or refinance to today’s incredibly low rates. Those that keep their homes/loans for 5, 10, 15, 20+ years will realize huge savings in the later years. Seems like a win-win to me.

Your Local Expert,
Greg Cowart

1. I applied for the 2009 New Home Credit, but didn’t get it since the money ran out. Can I apply now since there is more money available?

 No. The 2010 New Home / First-Time Buyer Credits are only available for purchases which close escrow on or after May 1, 2010 

2. I just closed escrow on a new home on April 26, 2010. Can I apply for the New Home Credit? 

No. The 2010 New Home / First-Time Buyer Credits are only available for purchases which close escrow on or after May 1, 2010. 

3. What is the difference between requesting a reservation and applying for a credit? 

Reservations can only be requested for the New Home Credit and are optional. Since the credits are allocated on a first-come, first-served basis, a reservation will hold the buyer’s place in line until two weeks after escrow closes, the due date of the application. Applications are used for both the New Home Credit and the First-Time Buyer Credit and are required for either credit. 

4. Why can’t I request a reservation for the First-Time Buyer Credit? 

The reservation process is intended to allow buyers, who are purchasing a new home that may not be completed until after the $100 million cap is reached, to still have an opportunity to apply for the credit. This prevents some new home buyers from being disqualified just because the home they are purchasing is in an earlier stage of construction. 

5. How do I reserve a New Home Credit? 

Buyers who will qualify for the New Home Credit and enter into an enforceable contract on or after May 1, 2010 to purchase a new home may apply for a reservation using FTB 3549-RR, Reservation Request for New Home Credit. Both the buyer and seller must certify on the form that they have entered into an enforceable contract. Specific pages of the purchase agreement must be faxed to FTB along with the reservation request so FTB can verify the information. FTB will send the buyer a letter stating whether the reservation request is approved, revised, or denied. 

6. Does FTB’s approval of my reservation request guarantee my credit? 

No. FTB 3549-A, Application for New Home / First-Time Buyer Credit must still be completed and faxed, along with the buyer’s final settlement statement, to FTB within 2 weeks after escrow closes. If FTB does not receive the completed application and the settlement statement within 2 weeks after the close of escrow, the reservation will be cancelled and you will not be eligible for the credit. 

7. Can I just send my application for the New Home Credit with my reservation request? 

No. Any application (FTB 3549-A) received before escrow closes will automatically be denied. Applications are only valid after the home is actually purchased. The date of purchase is the date escrow closes. 

8. I entered into a contract to purchase a new home before May 1, 2010 but the house will not be completed for several months. Can I request a reservation? 

No. Reservations for the New Home Credit can only be completed if the contract is entered into on or after May 1, 2010. However, if the contract is cancelled and a new contract is entered into on or after May 1, 2010, you may request a reservation. 

9. How long will it take FTB to respond to my application or reservation request? 

It will probably take FTB 3-6 months to respond to your application or reservation request. We must build a new computer system before we can begin verifying the applications and reservation requests. Please wait at least 4 months before contacting FTB regarding your application or reservation request. Because of this delay, it will be important to keep a copy of the fax confirmation. 

10. I requested a reservation, but I have not received a letter from FTB telling me whether my reservation request was approved. Now escrow is closing. What should I do? 

Do not wait for FTB’s response. Complete an application (FTB 3549-A), and make sure it is faxed to FTB within 2 weeks after escrow closes. If FTB does not receive your application on time, your credit will be denied. 

11. I requested a reservation, but now I will not be purchasing the home. How do I notify FTB? 

Write “Cancel” across the face of Side I and Side II of the original reservation request (FTB 3549-RR) that was faxed to FTB and fax it to FTB at the number shown on the bottom of the form. Use this method regardless of whether or not FTB has responded to your original reservation request. 

12. I’m a First-Time Buyer, purchasing an existing home that has been lived in before so I can’t request a reservation. However, I think the $100 million will run out before escrow closes. Can my escrow person send my application early? 

No. If FTB receives your application (FTB 3549-A) before escrow closes, your application will be denied. 

13. I am purchasing a duplex and intend to live in one of the units. Do duplexes qualify as a “single family residence?” 

The unit that you will live in qualifies as a “single family residence.” However, the credit amount is determined by the portion of the purchase price allocated to the unit that you will live in. Multiply the purchase price by the square footage of the unit you will live in divided by the total square footage of the duplex. Use the same method if you are buying some other multiplex. 

14. I currently own my home, but I am selling it and buying a new home that has never been lived in. Do I qualify for the New Home Credit? 

Yes. You do not have to be a first-time buyer to qualify for the New Home Credit. 

15. I just sold my home in another state. I am now moving to California and buying a home that has been previously occupied. Will I qualify as a First-Time Buyer since I have never owned a home in California? 

No. If you have owned a principal residence within the last 3 years, you do not qualify for the First-Time Buyer Credit, regardless of where the home was located. 

16. I am married, but I have been separated from my wife for several years. I have never owned a home, but my wife purchased a home last year that is now her principal residence. Since my wife will not be purchasing the home with me, can I apply for the First-Time Buyer Credit? 

No. If you are married on the date you purchase the home, you do not qualify for the First-Time Buyer Credit if either you or your spouse has owned a principal residence within the last 3 years. It does not matter that your spouse is not purchasing the home with you or that you are separated. 

17. I qualify as a First-Time Buyer and I am purchasing a home that has never been lived in. Why can’t I choose which credit I want instead of having to get the New Home Credit? 

When buyers qualify for both credits, the law states that the amount will be allocated from the New Home Credit. The money for the First-Time Buyer Credit is expected to run out much faster than the New Home Credit. 

18. I am a First-Time Buyer and I am purchasing a home that has been previously occupied. Do I need to have the seller provide his/her SSN and address? 

No. Seller information is no longer required for the First-Time Buyer Credit. The application (Form 3549-A) was revised May 26, 2010, eliminating the seller information requirement for the First-Time Buyer Credit. If you previously faxed an application to us with the seller information included, do not send a revised application. 

19. I faxed my application to FTB, but I forgot to include the HUD-1 statement. What should I do? 

Fax the HUD-1 statement along with a copy of your original application to the same fax number. Include a note explaining why you are sending the application a second time. 

20. I faxed my application to FTB, but I made a mistake on the application. What should I do? 

Fax the corrected application to the same fax number. Include a note explaining why you are sending the application a second time. Do not send the HUD-1 statement a second time. 

21. How is the two week period to file an application determined? 

Applications (FTB 3549-A) must be received by FTB within 2 weeks after escrow closes. Two weeks means 14 calendar days. A calendar day starts at 12:00 AM and ends at 11:59 PM. Saturdays, Sundays, and holidays are included. We count the day after escrow closes as the first full day. For example, if escrow closes June 1, 2010, the application must be received between June 1, 2010 and June 15, 2010. If the application is received before June 1, 2010, or after June 15, 2010, the application will be denied. 

Information obtained from the CA Franchise Tax Board; 

For more information: http://www.ftb.ca.gov/individuals/New_Home_Credit.shtml

The payroll report has confirmation: new unemployment has held high for five months; May retail sales look soggy and auto sales flubbed in May.

In days ahead, the entire recovery camp from government to stock-pushers has more than explaining to do. It must change its mind.

All in one fur-ball: How can mortgage rates be so low, and home prices so low, home affordability the best ever measured, yet housing defies recovery? One unifying answer: credit. Not enough, and wildly too tight. The credit dearth is perfectly rational. At default rates like these, nobody knows what new loan is safe to make, and underwriting has been overtaken by hand-shaking, eye-glazed panic. The horrifying conundrum: new loans will inevitably produce new losses, yet without enough new loans, losses on existing ones will be greatly higher.

The good thing for us is hidden in the above. Rates are at all-time lows and home affordability has never been better, the perfect storm. And even though it may not seem like it, we’re lucky here in California. Throughout the rest of the country the loss of the $8,000 home buyer tax credit has taken it’s toll as purchase applications are down sharply from a month ago (even though prices are the same and rates are lower) but we have another $10,000 tax credit available to use here in California! The local Sacramento area market is actually looking up with an every so slight month-over-month and year-over-year price increases in housing. Uber-low rates, dropping unemployment rates, and value in home prices coupled with that free $10,000 tax credit available to many Californian homebuyers should help that continue until the economy and national housing starts to pick up as well.

The glass is half empty, but it’s actually more than half full. Somehow…

- Marriage certificate with bridal dress will be required if both husband and wife are required to qualify for the loan.

- GFE will not require signature, but will require blood sampling from a recognized institution within three days of application.

- DNA test will be performed at closing to avoid any non-arms length transactions. Loan funding will be contingent upon satisfactory receipt of DNA results.

- Verification of deposit will be acceptable only if Bank representative is present at the closing. Copy of Pay stubs and W2 will only be acceptable through IRS and only with a wax-sealed envelope mailed directly to the lender.

- Seven witnesses from the neighborhood will be required as proof of primary residence in case borrower owns more than 1 property.

- All appraisers will be required to use masks and ear plugs at the time of inspection to avoid any personal influence by the borrower or broker for the appraised value.

- In order to correctly calculate DTI and true housing ratio a list of grocery items, monthly usage and brand names will be required with receipts and projected 12 month consumption chart.

- Closing will not occur without loan officer presence at settlement and loan officer picture will be taken at the closing in a mug shot format with loan number. Picture should meet standard guideline of 2 X 2 inch in color format with one facing and one side view.

- Loan officer picture will be attached to the Deed and note and will be made available for general public and security agencies in case borrower defaults on the loan.

~ Greg

P.S. OF COURSE THESE ARE ALL JOKES!!!!

Forget for a moment the vast legal and moral reasons to keep your home and make the payments you agreed to when you bought (or refinanced) it in the first place, even though those reasons have become easier to dismiss in today’s world, and realize there are some very real consequences to defaulting on your mortgage, not limited to killing your credit score and making it so you can not buy a home (and lose all of the REAL benefits of being a homeowner) for at least 2 to 3 years. In the short-term it seems obvious, why keep making payments on something that isn’t even worth the debt that is carries? One big piece of the American financial system is how much leverage is built into the housing market and being a homeowner. People who wouldn’t consider borrowing money to invest in anything else gladly pile on the leverage when it comes to Real Estate, often borrowing close to the full purchase price of the home (a great financial strategy if used correctly). Of course that is because most of us don’t have the cash to buy a home outright – and if we did it would be the worst financial decision we could make, but that is another story for another day - but however our homes are an asset like any other. Like all assets, values go up and down and leverage magnifies both losses and gains.

Lets look at a home that sold in Roseville during the height of the market in 2005 or 2006, it sold for $450,000 and the family put 10% down when escrow closed obtaining a conforming mortgage of about $405,000. Lets assume all homes in Roseville have dropped about 25% in value since, and the home is worth now $337,500. If this homeowner stops making payments and “walks away” from the home they automatically lose their $45,000 down payment, all interest paid, and principal payments as well. A huge financial loss. People looking at this option sometimes still seem to think walking away from their home and the mortgage is the right move, capping the losses there. The Sacramento real estate market is not good for sellers and probably wont be for a while and they can probably rent the nicer house next door for less than their current mortgage payment. In a simple world this makes sense, but our world is not that simple.

This decision assumes a static housing market where home prices are fixed at their current low values (real estate always appreciates when viewed over the longer-term period and we’re already seeing prices stabilize and start to rise since last Summer). Everyone knows the ABC’s of investing, buy low sell high, but just like the stock market people do it backwards. Selling on the bad news and buying when prices have come back up, in this case it’s no different with Real Estate. People are essentially “selling” low, the exact opposite of what they should. Assuming prices continue to stabilize and appreciate at a modest annual rate of 5% (the National Association of Realtors data shows average appreciation of 6% historically, even taking into account the huge drop in home prices of the last 2-3 years) until the loan is paid off in 2035, this Roseville home will be worth approximately $1,200,000. Of course this homeowner might not want to wait 25 more years, they may want to sell 10 years from now, when this home will be worth $549,750, a decent gain of more than $200,000 more than today’s value, and still $100,000 more than the original purchase price. Which we’ll remember was purchased at the height of the market back in 2005. In my opinion that doesn’t seem too long to realize a $200,000 gain compared to almost a $100,0o0 loss by walking away today. Especially considering this investment is your home, the place you live, where you keep your stuff, raise you kids, etc. There’s a real good chance you’d been keeping it for 10 years anyways.

Then there is the opportunity cost of walking away with home prices at the bottom of the market and likely to go up. By the time those walking away today are again credit-worthy enough to obtain financing for a new home they’ll have missed years of appreciation, low interest rates, and today’s rental rates will have gone up. Possibly stuck as a renter forever because they can’t afford the current home prices at current rates five years from now. Before long their rent will assuredly be more than they original mortgage payment was and there will be nothing they can do about it.

In the end I hope you see the case for staying in many situations, and that that case is far more compelling that first it seems. Not to mention fulfilling one’s obligations is just the right thing to do. So there is more than just financial reasons for doing so (and we didn’t even take into consideration all of the lost tax benefits of not owning a home, higher interest rates paid on all other credit and other accounts, such as utilities, chance of not getting a job, a deficiency judgment levied by the current lender, massive IRS fees, etc that we won’t have to face/lose if we make the decision not to “walk away”). If anything I recommend homeowners talk to their lenders to try and get a loan modification or modified payment plan. In reality it’s the payment that matters most right now, and that payment was just fine when your home was worth more, if you can get your payment lowered it’s just the obvious and right thing to do.

~ Greg

Is this bad news? Well no, not for most people. FHA will still be available and the best choice for those with low down payments or troubled credit. The increase in the mortgage insurance premium is financed over the life of the loan and will have a very minor impact on monthly payments (for most people it will amount to the price of lunch on Wednesday). The 6% to 3% cut on seller contributions is no big deal either. At least not int he Sacramento – Roseville markets. In my business I see purchase contracts every day and I can’t remember the last time I saw one with the seller giving more than 3% back to the buyer for closing costs (if your closing costs are more than 3% YOU’RE WORKING WITH THE WRONG LENDER!!!!!).

~Greg

Of course Fannie does not control everything and this will only apply to foreclosed homes that are currently in the agency’s possession but that is a big chunk of the foreclosure market and this program may make a difference. As many of you may know it’s been difficult for many people trying to buy their first home to have as they continue to lose bidding wars with cash investors. The program will also help buyers in this part of the market by accepting offers with as little as $500 in earnest money deposits, and making the process of renegotiating after a low appraisal easier.

The other GSE, Freddie Mac, says they have plans for a similar program but have not announced any detials so far.

Of course all things are relative… Prices are not up much, in some areas it’s hard to tell they are even up at all, but they are up and it’s a trend that has been proven since early Summer. Giving a real sign of stability and, most likely, the signal that the future will have more “normal” growth (1-5% a year, averaging about 3% a year) in home values over the comming years. As far as I’m concerned that is more than good enough. Some normalcy is what is needed in these times! We’re looking at what would be considered a normal income-to-home-price ratio for the first time in many years, one of the most important signals of a healthy, but normal, real estate market.

~Greg.