May 5, 2024

FHA – Ready To Join Fannie And Freddie

Multiple Reasons For High FHA Default Rates

Massive default rates in the FHA loan program are starting to raise a few eyebrows.  Without major reform of fundamentally poor lending policies, the FHA could soon join the failed ranks of her sister agencies Fannie Mae and Freddie Mac.

Delinquencies Rise

A spokesman for the FHA said 7.5% of FHA loans were “seriously delinquent” at the end of February, up from 6.2% a year earlier. Seriously delinquent includes loans that are 90 days or more overdue, in the foreclosure process or in bankruptcy.

The FHA’s share of the U.S. mortgage market soared to nearly a third of loans originated in last year’s fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA’s reserves prove inadequate to cover default losses.

FHA Cash Cushion Has Fallen by 39% – The latest annual audit of the Federal Housing Administration shows a steep drop in the capital cushion the U.S. agency holds against losses from mortgage defaults.

As lenders shy away from risk, the number of loans insured by the agency has soared in recent months, fueling concerns it may be taking on too much risk.

If the FHA runs short of money to pay claims, Congress would have to provide taxpayer funds to make up the difference.

MBA Delinquency Survey

The Mortgage Bankers Association report on delinquency rates (loans that are at least one payment past due) shows the real potential for how many defaults the FHA could be facing.

Change from last quarter (second quarter of 2008)

The seasonally adjusted delinquency rate increased 41 basis points to 4.34 percent for prime loans, increased 136 basis points to 20.03 percent for subprime loans, increased 29 basis points to 12.92 percent for FHA loans.

FHA loans saw an eight basis point increase in the foreclosure inventory rate to 2.32 percent.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure.

Add the percentage of FHA loans in the foreclosure process to the total loans that are delinquent at least one month and we have a total default/delinquency rate of 15.24%.  Something is clearly wrong with the FHA loan program and another major bailout of a federal lending agency seems inevitable.  Let’s examine some data from an excellent article by Whistleblower to understand why the FHA default rate is so high.

FHA Delinquency Crisis: 1 in 6 Borrowers in Default

At a time when borrowers, lenders, regulators, and lawmakers are scurrying for cover from the subprime lending crisis, a new crisis appears to be emerging with FHA.
Just take a look at FHA delinquency rates:

Could FHA’s rising delinquency rate be due to FHA incorporating risky practices that have become standard in the mortgage industry? Since industry experts often cite 100% financing as being a major factor in the mortgage meltdown, let’s take a look at borrower down payment sources:

In 2008, borrower funded down payments declined 38% to total only 47% of endorsements while non-profit provided down payment assistance increased a whopping 1750% to 37% of purchase endorsements. These are staggering statistics, but could they possibly correlate with FHA’s delinquency rate? Let’s take a look.

The delinquency rate clearly rises in tandem with the increase in non-profit funded down payments. But why would down payment assistance from non-profit agencies possibly impact the delinquency rate so materially?
While legitimate non-profit agencies provide much needed assistance to deserving buyers in a manner that promotes successful homeownership, certain so-called “non-profit” agencies merely advance the borrower the down payment from the seller for a fee. Companies such as Nehemiah Corporation of America, H.A.R.T. and Ameridream are prime examples of companies that provide down payments that are dependent upon seller reimbursement. Since the down payment is seller funded, whether directly or indirectly, a Quid Pro Quo clearly exists. Furthermore, because sales prices are increased to absorb the down payment grant, down payment assistance is said to skew prices for everyone.
In 2005, HUD commissioned a study entitled “An Examination of Downpayment Gift Programs Administered By Non-Profit Organizations”. Later that year, another report titled “Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance” was completed by the U.S. Government Accountability Office. Both studies concluded that seller funded down payment assistance increased the cost of homeownership and real estate prices in addition to maintaining a substantially higher delinquency and default rate.

Note: The down payment assistance program was ended last year but special interest groups are lobbying for its reinstatement – see Campaign to Stop FHA Subprime.

FHA Approval Process Outsourced To FHA “Direct Endorsed Lenders”

Besides the factors mentioned above that contribute to the large amount of FHA defaults there is also the issue of the unique manner in which the FHA “outsources” the loan approval process.   The FHA does not directly approve loans but instead allows this to be done by HUD “direct endorsed FHA lenders”.  The direct FHA lenders are in turn supposed to follow lending standards set by the FHA.  Problems arise with this arrangement since loans can be underwritten and approved by the direct FHA lender’s own staff, an obvious conflict of interest.  The lender only makes money on loans that are approved.  This process is equivalent to leaving the bank vault unlocked and unguarded.

Theoretically, the FHA has the responsibility for policing the lenders who can approve FHA loans.   In practice, FHA oversight is almost nonexistent.    In the past two years, as the number of FHA lenders has doubled to almost 2,500 lenders, the FHA supervisory office has had no staffing increase.  If the FHA was fulfilling their supervisory responsibilities properly, the default rate would not be at a staggering 16% and outrageous examples of fraud and abuse in the FHA lending system would not be occurring.  Consider the curious case of the large number of FHA loans experiencing first payment defaults (the borrower never makes a single payment).

The Next Hit – Quick Defaults

In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.

Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.

If a loan “is going into default immediately, it clearly suggests impropriety and fraudulent activity,” said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA.

Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves.

More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis. The pace of these instant defaults has tripled in one year.

The overall default rate on FHA loans is accelerating rapidly as well but not as dramatically as that of instant defaults.

Under the FHA’s own rules, there’s a presumption of fraud or material misrepresentation if loans default after borrowers make no more than one payment. In those cases, the lenders are required by the FHA to investigate what went awry and notify the agency of any suspected fraud. But the agency’s efforts at pursuing abusive lenders have been hamstrung. Once, about 130 HUD investigators teamed with FBI agents in an FHA fraud unit, but this office was dismantled in 2003 after the FHA’s business dwindled in the housing boom.

William Apgar, senior adviser to new HUD Secretary Shaun Donovan, agreed that early defaults are a worrisome sign that a lender is abusing FHA-backed loans.

The Palm Hill Condominiums project near West Palm Beach, Fla., exemplifies the problem. The two-story stucco apartments built 28 years ago on former Everglades swampland were converted to condominiums three years ago. The complex had the same owner as an FHA-approved mortgage company Great Country Mortgage of Coral Gables, whose brokers pushed no-money-down, no-closing-cost loans to prospective buyers of the condos, according to Michael Tanner, who is identified on a company Web site as a senior loan officer.

Eighty percent of the Great Country loans at the project have defaulted, a dozen after no payment or one. With 64 percent of all its loans gone bad, Great Country has the highest default rate of any FHA lender, according to the agency’s database. It also has the highest instant default rate.

Some of the country’s largest and most established lenders are so concerned about this new threat to the credit market that they are not waiting for the FHA to tighten its requirements. Instead, they are imposing new rules on the brokers they work with. Wells Fargo and Bank of America, for instance, now require higher credit scores on certain FHA loan transactions and better on-time payment history.

Some experts who track FHA lending say the agency should not wait for lenders to take the lead on toughening the rules, especially given the mortgage industry’s poor track record for policing subprime and other risky home loans.

“Even if the market eventually gets these guys, they shouldn’t have to wait for the market to do it,” said Brian Chappelle, a former FHA official who is now a banking industry consultant. “The most frequent question I get asked by the groups I talk to is: ‘Is FHA going to implode?’ . . . They haven’t seen HUD do anything significant in the past two years to tighten up its lending.”

FHA Losses Mount As Regulators Snooze

The FHA escaped the financial collapse that occurred at Fannie and Freddie by an accident of circumstance.  During the lending boom, the FHA attracted few borrowers since putting a borrower into a sub prime loan was faster and more profitable.  Since the collapse of the sub prime lenders, the FHA’s share of the mortgage market has increased to around 33% today from 2% three years ago.  The reason for the big increase in loan volume is due to one factor – the FHA now has the lowest lending standards and its loan delinquencies prove it.

Will The FHA Be The Next Government Bailout?

Without immediate reform of the FHA loan program, the FHA will be the next lending disaster and government bailout.  The flawed lending policies that will eventually cause the collapse of the FHA include:

1. Minimal or no down payment purchases.  Study after study has shown the correlation between low down payments and increased mortgage defaults.

2. Lax lending standards.  FHA loans are routinely approved with low credit scores and insufficient income, resulting in high default rates.

3. Allowing the use of “direct endorsed lenders” who approve FHA loans without adequate oversight by the FHA is an invitation to fraud and abuse.  The direct FHA lenders have a vested financial interest in approving unqualified loan applicants – the results can be seen in the number of first payment defaults and loan delinquencies.

Putting borrowers into homes that they cannot afford is an injustice to the homeowner and perpetuates the foreclosure cycle.  The cost of the FHA losses to the taxpayer is a an expense we cannot afford.  It is time to rein in the FHA’s irresponsible lending practices.

30 Year Fixed Rate Of 3.5% Likely As Mortgage Rates Plunge

Fed Goes All In

The Federal Reserve announced that it intends to purchase massive amounts of mortgaged backed securities and long term treasury debt.  Yields on the 10 year treasury, from which mortgage rates are based, saw the biggest drop in yield since 1962.

Since mid December of last year the yield on the 10 year treasury had risen from a low of 2.07% to a high of almost 3% yesterday.  Almost half of that 50% increase in yield was erased today as the ten year closed at 2.53%.

Given the Fed’s open ended determination to lower mortgage rates, it is very likely that we may see the 30 year fixed rate mortgage at 3.5% or lower.  The Fed’s plan to purchase a massive amount of mortgage backed securities is certain to cause a large drop in mortgage rates.

U.S. central bankers decided yesterday to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to lower home-loan and other interest rates.

Yesterday’s decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government- sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.

The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt

The rationale for seeing generational lows in rates is the same as I proposed on January 12, 2009.

30 Year Mortgage Rates – Is 3.5% Possible?

The Federal Reserve’s direct purchases of mortgage backed securities initiated late last year was successful in its goal of lowering mortgage rates.   The Fed’s direct purchases of MBS has stabilized the mortgage market and lowered rates.  There are arguments being put forth that due to the Fed’s intervention, mortgage rates have artificial price support.  Nonetheless, if the historical yield spread between the bond and the 30 year mortgage is re-established, we may see a 30 year fixed rate in the 3.5% range.  Something to think about for those contemplating a mortgage refinance.

Last week, a borrower with excellent credit, necessary income and home equity was able to obtain a par rate of 4.5%.   The question of whether the Fed is manipulating mortgage pricing at this point or how long such price support can last is somewhat irrelevant.  The major fact to keep in mind is that the Fed appears to be relentless in its campaign to drive down mortgage rates.   If the Fed can stabilize the MBS market we may be looking at mortgages rates in a range we never thought possible a short time ago.

30 year fixed rate mortgages in the mid 3% range would cause a huge refinance surge.  Keep in mind that over the past five years, homeowners had multiple opportunities to refinance in the low 5% range.  Unless the borrower is taking cash out, it usually does not pay to refinance for less than a one percentage point reduction.   At 3.5% rates, it would make sense for almost every homeowner with a mortgage to refinance again.

Does The FHA Owe You A Refund?

FHA MIP

Any one who has paid off an FHA mortgage loan may be entitled to a refund of a portion of the mortgage insurance premium (MIP) that was paid by the borrower upfront when the loan was taken out.

The MIP is the mortgage insurance that is paid upfront when a borrower takes out an FHA loan.  In 2009 the MIP amounts to 1.75% of the loan amount.  Prior to 2009, the MIP was 1.5% of the mortgage loan.  The insurance premiums can be large.  For example, on a $200,000 loan taken out in 2008, a borrower was charged $3,000 in upfront premiums.  This upfront premium is in addition to the monthly mortgage insurance premium that is paid with each month’s mortgage payment.  A borrower may be unaware that the MIP was paid since it is not due in cash, but rather is added to your original loan amount.

Who Is Entitled To A Refund?

When an FHA loan is paid off through a refinance or sale, your mortgage company notifies HUD of the termination of the FHA mortgage insurance and any refund due should thereafter be automatically sent to the borrower.   Although this process usually works well, mistakes can happen.   If you have paid off an FHA loan either through a refinance or sale of your home and have not received an MIP refund, here’s an easy way to check if you are entitled to a refund.

Does HUD Owe You A Refund?

If you had an FHA-insured mortgage, you may be eligible for a refund from HUD/FHA.

Search our database to find out if you are due a refund

  • Enter your last name or
  • Enter your FHA case number (first 3 digits, a dash and the next 6 digits, example, 051-456789).

Name:
Case #:

You do not need to pay another person or firm to assist you in collecting your refund or share payment. If you need help with this form, call our support center at 1-800-697-6967 or email us at sf_premiums@hud.gov:

The above calculator is on the HUD website and can be accessed by clicking this HUD link.   It is a quick and easy way to find out if you are owed an MIP refund.

Some Basic MIP Refund Facts

The amount of a potential MIP HUD refund from a paid off FHA loan will vary based on the loan amount, the date the loan was taken and how many months that mortgage payments were made on the loan.   Restrictions have increased over the years on the amount of the refund due.  For example, for FHA insured loans closed on or after January 1, 2001, no refund is due after the fifth year of insurance.  For loans closed after December 8, 2004, no refund is due the homeowner unless the homeowner refinanced to a new FHA insured loan and no refund is due after three years of insurance.

Since HUD makes public the information on MIP refunds that remain unpaid, you may be contacted by a commercial organization offering to obtain your refund for a fee.  There is absolutely no reason to pay anyone for this service, since the refund can easily be obtained by contacting HUD.

Major Lenders Publish FHA Loan Limit Increases

CitiMortgage, along with other major lenders published their FHA loan limit increases.  The higher temporary FHA loan limits were authorized as part of the Economic Stimulus Act of 2008.  CitiMortgage will begin accepting FHA loan registrations as of March 17, 2009.  The higher loan limits will remain in effect until December 31, 2009.

Economic Stimulus Package Update

Fannie Mae, Freddie Mac and FHA have released requirements resulting from the Economic Stimulus Act of
2008, which include loan limit availability by Metropolitan Statistical Area (MSA), Area Median Income (AMI) and
eligible products. CitiMortgage is diligently working to implement changes as quickly as possible.

FHA Loans:
As a result of the recently released HUD Mortgagee Letter 2008-06, we are pleased to announce we will begin accepting FHA loan registrations at the new temporary loan limits as of Monday, March 17.
New Maximum Conforming Loan Limit: Lesser of 125% of the area median home price or $729,750; the FHA
maximum loan amount shall not be less than $271,050 (for 1st lien single family residence). Revisions to local limits are listed below by unit:
Revisions to lowest local limits by unit:
1-Unit: $271,050 3-Unit: $419,400
2-Unit: $347,000 4-Unit: $521,250
“High Cost” local limits by unit:
1-Unit: $729,750 3-Unit: $1,129,250
2-Unit: $934,200 4-Unit: $1,403,400

The higher FHA loan limits had been announced by HUD on February 24, 2009, in Mortgagee Letter 2009-07.

Revisions to Current Limits:
Under ARRA, the revised FHA loan limits for 2009 will be set at the higher of the loan
limits established for 2008 under the Economic Stimulus Act of 2008 (ESA) or those established for
2009 under the Housing and Economic Recovery Act of 2008 (HERA).

Loan Limits and Pricing

To determine the higher loan limits for your county, it is best to check directly with your lender.  Exact pricing and adjustments for the higher loan balance FHA loans is still being resolved.   It is expected that investors will demand  .5% higher pricing on these high balance loans.

FHA Increases Minimum Credit Score Requirement



FHA And VA Increase Credit Score Requirement

Effective March 6, 2009, a minimum credit score of 620 will be required to be eligible for FHA and VA loans.

The credit score requirement had recently been changed less than a month ago.  As of February 9, 2009 the credit guidelines had required only a minimum credit score of 580, subject to certain exceptions.

The increased credit score requirement is an attempt to lower the large number of FHA defaults, which have been running at about 12%.  A 580 credit score reflects a sub prime borrower and in conjunction with minimal down payment requirements, the risk of mortgage default is very high, as reflected in the FHA default ratios.

New Home Buyers With Empty Pockets After Closing

Another area that should be examined by the FHA in their underwriting guidelines is the amount of reserves that a borrower has after closing on a home purchase.  Many borrowers are left with empty pockets after paying for closing costs and the down payment to purchase a home.  As every homeowner knows, the expenses of maintaining a home are never ending.  In addition, a major and unexpected repair could be thousands of dollars that can put a severe strain on the family budget, leading to the inability to maintain the mortgage payments.

There are no guidelines per se that require a potential home buyer to have a specific amount of savings available after purchasing a home.   The ability to save should be viewed by the FHA as a prerequisite for home ownership.  Additional mortgage defaults do not benefit the FHA nor the homeowner.  Savings (reserves) of 3 to 6 months of mortgage payments should be considered by the FHA as a part of their underwriting guidelines.  Buyers might have to postpone the purchase of a home to acccumulate some savings and strengthen their financial position, but the end results would benefit all – a stable housing market with fewer defaults.

Update Regarding 620 FICO Score Requirement – April 2009

There are now some lenders that will do FHA loans at sub 620 FICO scores – see Sub 620 FICO Score Lenders

Update on This Topic: 

-See FHA Introduces New Minimum 580 Credit Score Requirement, September 6, 2010

-See FHA Zero Down Payment Financing Returns

FHA Increases Loan Limits

FHA Announces Higher Loan Limits

As part of the Economic Recovery Act, the FHA loan limits were increased.  The new higher loan amounts are effective until December 31, 2009.  The higher loan limits will allow many borrowers with jumbo mortgages to refinance at much lower rates than would be available under jumbo mortgage pricing.

Due to the high level of defaults, banks are becoming very reluctant to approve jumbo mortgage loans for either purchases or refinances.  Since Fannie Mae and Freddie Mac  will not buy or insure jumbo loans, the lending bank must assume all the risk, keep the loan on their books and set aside additional reserves for possible losses.  All of these additional risk factors are reflected in the higher jumbo rates and strict loan underwriting guidelines – see Jumbo Mortgage Rates.

FHA Announcement

PRESIDENT’S ECONOMIC RECOVERY PACKAGE TO MAKE MORE FAMILIES ELIGIBLE FOR FHA-INSURED MORTGAGES
FHA implements temporary higher loan limits to help families keep their homes

WASHINGTON – More American families will be eligible this year to purchase or refinance their homes using affordable, FHA-insured mortgages, thanks to the economic stimulus package signed into law by President Obama last week. The American Recovery and Reinvestment Act of 2009 will allow HUD’s Federal Housing Administration to temporarily increase its maximum loan limit, allowing FHA to insure larger mortgages at a more affordable price in high-cost areas of the country.

“This is one of many elements of the President’s recovery plan that will help homeowners and homebuyers in these high cost areas secure lower cost mortgage financing,” said HUD Secretary Shaun Donovan. “These loan limit increases will help FHA continue to provide safe, affordable mortgage products to families in all areas of the nation. Today’s announcement is just one example of how the President’s recovery and homeowner affordability plans work together to make homeownership more affordable for those looking to buy a house or refinance their current loans.”

HUD will increase FHA loan limits up to $729,750 in high-cost metropolitan areas such as New York, Los Angeles, San Francisco and Washington, D.C. There are 73 counties in the U.S. that will now be eligible for the highest loan limit of $729,750. Previously, FHA’s loan limits in these high-cost areas were capped at $625,500. The change in loan limits is applicable to all FHA-insured mortgage loans originated until December 31, 2009.

Increasing loan limits will help FHA continue to provide needed stability to housing markets across the country. As conventional sources of mortgage credit have contracted, FHA has been filling the void. From September to December 2008, FHA facilitated $97 billion of much-needed mortgage activity in the housing market, $35 billion of which was through FHA’s refinancing products. By focusing on 30-year fixed rate mortgages, FHA helps homeowners avoid and escape the risks associated exotic subprime mortgage products, which have resulted in rising default and foreclosure rates.

Banks Tighten Lending By Restricting FHA Cashout Refi

FHA Loans Become Tougher To Qualify For

Effective January 1, 2009 HUD announced that any FHA cash out refinance would require two appraisals when the loan to value exceeds 85% – see FHA Takes A Closer Look At Home Values. Since the customer usually has to pay for the appraisal, this adds around $350 to the cost of refinancing with the FHA.  In addition, many underwriters are taking a very close look at appraised values, due to the continuing drop in home prices.   In turn, the close scrutiny of appraised values by the underwriters are making many appraisers more conservative in the values that they assign to a home.  The FHA also raised the down payment requirement on purchases to 3.5% and increased mortgage insurance premiums.

The net result is that an FHA loan not only has higher costs but also a higher probability of being turned down due to insufficient equity and more stringent underwriting guidelines.

Some Banks Reduce Cash Out Limits On FHA Loans

Two smaller banks today have reduced the cash out limits on FHA loans to 85% loan to value, despite the FHA guideline allowing 95% cash out.  Rumor has it that larger banks will also follow through on lowering the loan to value limits on FHA cash out refinances.   Tougher guidelines quickly spread industry wide, so expect many more lenders to make it more difficult to cash out on an FHA refinance.

Since FHA loans have a very high default rate (roughly 12%), it is only logical that banks are imposing tougher guidelines for borrowers.   The banks simply cannot afford to take on additional default risk given their weak financial position.

Many potential borrowers will continue to find it difficult to obtain mortgage approval until the economy recovers and the housing markets stabilize.  Based on the way things are going, it could be a long wait.

Jumbo Mortgage Rates Reflect Default Risk

Economic Crisis Impacts All Borrowers

Jumbo mortgages, typically loan amounts above $417,000, are defaulting at a rapid pace as the economic crisis affects borrowers at all income levels.  Bloomberg is reporting that jumbo mortgages, typically associated with higher income home owners, are becoming the next black hole for the banking and housing industry.

(Bloomberg) — Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest.

About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. They got to that level within 10 months, almost twice as quickly as 2007 borrowers and the fastest rate since at least 1992, when LPS Applied Analytics began tracking the market.

The jump in late payments on jumbo loans, while still lower than the 20 percent delinquencies in subprime mortgages, signals that the borrowers with the most money and the best credit are hurting as the U.S. recession deepens in its second year. It also means these loans will be even more difficult to obtain and more expensive to pay off.

Most of the mortgage defaults do not appear to be caused by poor loan underwriting but rather by growing job losses among high income earners.  Due to the higher level of defaults, banks are becoming very reluctant to make jumbo mortgages for either purchases or refinances.  Since Fannie Mae and Freddie Mac  will not buy or insure jumbo loans, the lending bank must assume all the risk, keep the loan on their books and set aside additional reserves for possible losses.  All of these additional risk factors are reflected in the higher jumbo rates and strict loan underwriting guidelines.

The difference in interest rates between jumbo loans and prime conforming mortgages, or mortgages eligible for sale to Fannie Mae and Freddie Mac and available to borrowers with top credit scores, had been about 20 basis points “for several decades,” according to BanxQuote CEO Norbert Mehl.

The difference between the jumbo interest rate and the prime conforming rate was 181 basis points on Feb. 18, according to Bloomberg data.

“The only jumbo mortgages being written right now have strict qualification criteria both in the credit rating of the borrower and the down payment requirements and they are nearly impossible to qualify for,” Mehl said. “Some lenders quote a jumbo rate but they don’t make the loans.”

Conforming Loans At 7%?

An interesting point to note is that the size of a mortgage loan is not the determining factor for the interest rate.  Mortgage rates are based on many factors but the primary reason for higher rates on jumbo mortgages is the lack of a government agency guarantee.  This implies that without price support from the government, conforming mortgages would also be in the 7% range to reflect the actual risk of mortgage lending in today’s environment.

No Relief In Sight For Jumbo Mortgage Homeowners

Given the higher risk on jumbo mortgages due to the factors cited above, homeowners who have high rate jumbo mortgages are unable to refinance to lower rates.  In addition, the proposed mortgage plans meant to help distressed homeowners provides no assistance for jumbo mortgage homeowners.

Jumbo Mortgage, Jumbo Headache – Wall Street Journal

Washington is trying to ease the mortgage crisis by helping people refinance into home loans with better terms. But one group is being left on the sidelines: borrowers with loans too big to qualify for government backing.

President Barack Obama’s housing stability plan, announced last week, excludes such borrowers from nearly all of its mortgage-bailout provisions. Instead, it focuses on middle-income consumers who have lower, so-called conforming loans. Such loans top out at $417,000 in most parts of the country

Anything bigger is called a “jumbo” loan — and not only is the government ignoring this segment of the market, so are lenders, few of whom are originating or refinancing jumbo mortgages. The reason: Jumbo loans are too large to be guaranteed by a government-backed mortgage agency, such as Fannie Mae or Freddie Mac, meaning banks assume the risk if the loan goes bad. In the current lending environment, few banks want to take on any risk.

“Every single day I’m talking to people who have a jumbo loan, and I can’t do anything for them,” says Jeff Lazerson, a mortgage broker in Laguna Nigel, Calif.

While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That’s the lowest volume ever tracked by the trade publication, which has figures dating to 1990.

ING Direct, a unit of ING Groep NV, is one of the few lenders that is boosting jumbo originations, though it requires a minimum 30% down payment in the most expensive housing markets, up from 20% earlier last year. For condos, ING requires a minimum 45% down payment.

“If you have been able to … save for a down payment, that to us speaks volumes about your character,” says Bill Higgins, ING’s chief lending officer.

Some banks, though, are quoting much-higher jumbo rates. Mortgage brokers say that indicates that lenders are reluctant to make jumbo loans and are setting their prices high to deter new deals. For example, Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., recently listed a 7% rate on a 30-year fixed-rate jumbo loan, but charges up-front origination fees equal to 5% of the loan.

Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. “The million-dollar-and-above market is sinking like a lead weight,” Mr. Lazerson says.

Jumbo Mortgage Rates Reflect Lending Risks

Jumbo borrowers are discovering the meaning of “pricing for risk”.  Mortgage lending has become a very high risk business due to the continuing decline of real estate values, the high risk of default due to economic conditions, principal impairment and/or rate reductions from loan modifications, the risk of bankruptcy court cram downs and government supported foreclosure moratoriums.   Some may incorrectly believe they are entitled to a low rate mortgage regardless of risk factors.  This peculiar belief by both banks and borrowers helped to create the destructive credit crisis we are now experiencing.  The banks are doing what they need to do with jumbo mortgages- setting rates to properly reflect risk.

Banks Restrict Mortgage Lending To A+ Customers Only

Latest Changes Eliminate More Borrowers From Mortgage Market

As written previously, for those without impeccable credit, adequate income and loan to value below 70%, the low advertised rates are not available.  See All Time Low Rates For A++ Borrowers Only and Few May Benefit From Lower Mortgage Rates.

Much more stringent underwritten guidelines for mortgage approvals were issued today by a major bank as follows:

Important Update Regarding Revised Minimum Credit Score for All Loan Products, Effective Immediately

Effective for locks on or after Tuesday, February 10, 2009, the minimum credit score requirement for ALL loan products is 640. This includes the following loan programs:

· Agency Loan Program

· Agency Affordable Lending Program

· Portfolio Affordable Housing Program

· Texas Cash Out Refinance

· FHA 203b (FHA),

· Veterans Administration (VA), and

· Rural Development (RD) Guaranteed Rural Housing (GRH) Program

Additionally, the following applies:

· a minimum credit score of 640 will be required for ALL scoreable borrowers regardless of the LTV/TLTV.

· A minimum credit score of 640 will be required for all traditionally underwritten and AUS (DU/DO and LP) processed loan transactions, regardless of the AUS approval or recommendation.

These new guidelines are far more restrictive than Fannie Mae, Freddie Mac and FHA guidelines.   The bank and mortgage company guidelines are the ones that really matter because a consumer cannot directly apply to the agencies for a mortgage.

Pricing on mortgages can be described as chaotic.  Guideline changes such as the ones instituted today are basically a message from the banks that the mortgage business is unprofitable to them.   Every customer is seen as a future default.  Simply put, the banks do not want new mortgage business, which is why virtually every major bank has eliminated their wholesale lending operations.   The mortgage bankers who sell their loans to the agencies or larger banks are restricted in lending activities by the lack of warehouse lines of credit.  All of the above factors combined have severely restricted mortgage lending and disrupted the established channels for mortgage lending.  A perfect borrower with a loan to value under 70% can still reap the full benefit of lower rates; all other borrowers will find it very difficult to qualify.

The Fed can buy mortgage backed securities and treasury bonds by the trillions to lower mortgage rates, but with the lending intermediaries either unwilling or unable to make new mortgage loans, the benefit of any rate reductions will be severely limited to  A++ customers.   The borrowers who need the benefit of lower rates the most will see the least benefit since many do not qualify under current guidelines.