Bulls & Blogs

FHA crack down on down payment assistance

Loan Guidelines, Residential Mortgage Comments Off

Apr 292019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

One of a myriad of causes of the housing collapse during the Great Recession was the absence of “skin-in-the-game.” Borrowers used no-money down loans to purchase homes, then walked away from those homes when the economy went sour. Given that they had put none of their savings into the homes, walking away was easier.

One way to achieve no-money down during that time was to use seller-provided down payment assistance with an FHA loan. The seller provided the necessary 3.5% down payment and usually boosted the home’s sale price a little to make up for it. Congress outlawed this practice in 2008, mandating that no party with a financial interest in the home sale – including the seller, the agents, and the lender – could provide the homebuyer’s down payment funds. However, the law allowed governmental programs to continue providing down payment assistance.

Well, where there’s a will, there’s a way, and an entrepreneurial fellow in UT partnered with the Paiutes tribal government to create a fund, the Chenoa Fund, that lenders could use for down payment assistance. Whereas government down payment programs target homebuyers in the governmental jurisdictions, the Chenoa Fund was available nationwide, and it made a profit on the transactions.

Borrowers in down payment assistance programs become delinquent about twice as often as those who use their own funds, and the Feds see these programs as an increasing risk to the FHA Mutual Mortgage Insurance Fund, which backstops FHA mortgages.

Last week, HUD published new guidelines that clarify which entities can provide down payment assistance. The guidelines seem to target the Chenoa Fund, and it will be interesting to see how it responds.

But that still leaves the bigger issue of higher default rates for down payment assisted loans unaddressed. Many of these programs offer the assistance in exchange for higher-than-market interest rates, which stretch a homebuyer’s ability to repay the mortgage. In addition, they perpetuate the problem Congress thought it had addressed in 2008 – homeowners with no skin in the game.

FHA changes aim to deny riskier borrowers

Loan Guidelines, Residential Mortgage Comments Off

Apr 272019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Late last month, FHA made some changes to its automated underwriting system that may prevent as many as 50,000 potential borrowers from qualifying for an FHA loan. FHA said the changes are meant to limit exposure of its insurance fund from higher risk situations.

According to the agency’s annual report to Congress, it’s seeing a concentration of mortgages with high debt-to-income ratios and low credit scores. It also reported a 60% increase in cash-out refinances. (This isn’t an issue in TX as TX homeowners cannot take cash out using an FHA loan.)

An FHA official told The Wall Street Journal that the system changes will affect 40,000 to 50,000 loans each year, which is 4 to 5% of all loans FHA insures.

The changes will flag loans with a combination of higher debt-to-income ratios and lower credit scores for “manual underwriting,” which means underwriting performed by a human being. Unfortunately for borrowers, manual underwriting also means more stringent loan guidelines, and many of those who qualified before the system changes no longer will qualify.

Rate update: Stuck in the middle again

Interest Rates, Real Estate Market Comments Off

Apr 122019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

After a quick move lower following last month’s Federal Reserve meeting, mortgage rates have moderated a bit. Concerns of a global recession prompted the move lower, and the Fed seemed to add fuel to that concern with the changes to its policy stance, announcing what is in a sense version 5 of quantitative easing, which has helped keep rates low for years.

Rates rebounded a bit when investors realized the US economy certainly isn’t circling the drain. We’ve had two strong jobs reports, and retail sales rebounded after the government shutdown. The data isn’t as strong as it was last year, but it certainly doesn’t seem to indicate an imminent recession.

Overseas is another story. At its meeting this week, the head of the European Central Bank all but predicted a recession in Europe, and European economic data continues to weaken. Britain still hasn’t figured out how it’s going to leave the European Union, which breeds uncertainty, a close friend of low interest rates. And China’s economy also is slowing, and analysts worry that a resolution to the trade dispute may not be enough to stop the slide.

So, that’s the bad news – the news that’s pressuring rates lower. But investors see a US economy that seems to be chugging along. Thus, rates are stuck in the middle – not sure which force is going to be stronger. And they’re liable to stay that way until new headlines tip the scales.

Among the predictable headlines I’m watching right now are the Chinese trade talks and inflation data. I still believe a good trade deal penned in the next couple months will put some upward pressure on rates. However, it has to happen before the Chinese economy slips too far. On the inflation front, recent reports show inflation sliding lower again, which makes the Fed nervous. Receding inflation should put downward pressure on rates.