FHA opens window to more borrowers

Kenneth R. Harney on Aug 28, 2015

WASHINGTON – If you’ve got a low FICO credit score but believe you can handle monthly mortgage payments instead of rent, here’s some potentially good news- The government is now willing to give you a better shot at obtaining a low-down-payment home loan from the Federal Housing Administration.

Under a key policy change that took effect last week, lenders nationwide now have more leeway to approve mortgages to borrowers who qualify under FHA’s underwriting guidelines but may have below-par FICO scores. Some analysts say the revised approach could create a pathway for as many as 75,000 to 100,000 new loans a year to borrowers who are currently frozen out of consideration.

FICO credit scores run from 300, considered the highest risk of default, to 850, the lowest risk. Though FHA for years has accepted applicants who have FICO scores in the 500s, the practical reality has been that most lenders ignore borrowers whose scores are under 620 or even 640. Lenders have avoided low FICO borrowers in large part because FHA itself has employed a statistical evaluation system that scrutinizes – and sometimes severely penalizes – banks and mortgage companies that make what FHA considers too many “high-risk” loans compared with other lenders active within the same geographic area.

Under the revised policy, lenders will be judged under a fairer metric. This will allow companies located in communities with large concentrations of residents who have lower than average FICO scores – these tend to include young, first-time buyers, minority households and moderate-income working families – to make loans without fear of being penalized solely because of their business focus.

“This is going to really open the doors – I think it’s a huge step in the right direction,” says Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, California. “There are a lot of people out there who have good credit but low FICO scores simply because they lost their jobs during the recession” and got behind on paying bills. “They are working two jobs. They’ve been slowly rebuilding their credit and have been saving money for a down payment. They are good risks” – they’re not going to mess up on mortgage payments. Equally important, Ziroli told me, they are eager “to build wealth by owning a home” rather than paying rent to a landlord. Ziroli’s company originates roughly 7,000 FHA-insured loans a year, many to Latino and African-American first-time buyers.

David H. Stevens, president and CEO of the Mortgage Bankers Association and a former head of the FHA, says the revised policy should help “some” borrowers whose FICO scores in the low 600s and upper 500s currently bar them from obtaining any type of mortgage, FHA or otherwise. But those who fully qualify under FHA’s regular underwriting standards – reliable income, acceptable debt-to-income ratios, solid ability to repay – “will now be more likely to find some lenders who will do their mortgages.”

That’s significant, he said. Even so, many lenders will not rush in and immediately start doing more low-FICO loans. They’re going to wait and watch how FHA treats lenders who do increased volumes of these mortgages.

“So this emphasizes the importance of shopping,” Stevens said in an interview. If the first couple of lenders say no, borrowers should keep shopping until they locate a lender who – encouraged by the new flexibility from FHA – says yes.

Why is the government opening FHA’s doors wider for buyers who previously would have been rejected? In large part it’s because just about everybody – from Fed Chair Janet Yellen to prominent economists and financial experts – agrees that credit standards have gotten too strict in the years since the bust, especially given the payment performances of borrowers recently.

Brian Chappelle, principal at housing consulting firm Potomac Partners and a nationally known expert on FHA, says mortgages with low FICO scores originated during the past two years “are performing better than the total mix of FHA business (including much higher score levels) from 1999 through 2011.” Serious delinquencies of 90 days or more where applicants had FICOs below 640 were at just 1.82 percent as of June 30.

The takeaway here- Just because your credit reports and scores continue to bear the wounds of the recession and financial crisis, don’t assume you can’t buy a house. Shop aggressively among FHA lenders in the coming weeks and months, and you’re likely to find a better reception than you feared.

New rules could further complicate closings

Kenneth R. Harney on Aug 21, 2015

WASHINGTON – Could home sale closings get delayed in the coming months, even more than they are now? Bankers, real estate agents and title insurers think they might. They are worried that the new federally mandated mortgage and real estate disclosure procedures scheduled to take effect nationwide Oct. 3 will lengthen the typical time span from sales contract signing to settlement.

The new rules, which mandate longer document review times for buyers and impose an entirely new set of disclosures in place of the traditional Truth in Lending, Good Faith Estimates and HUD-1 settlement forms, are likely to take a while for mortgage and closing service providers to get accustomed to using.

Some industry experts warn that today’s 30-day to 40-day turnaround times could extend to 45 days or longer, depending on the number of complications that arise during the process.

But then again, complications in real estate transactions are nothing new. Talk to any experienced realty agent and ask about issues that lead to delays – or total derailments – and you’re likely to get an earful. The sobering fact is that even without the new closing rules coming in October, nearly two of every five of all home sale transactions don’t proceed to closing on time or as planned.

Most buyers and sellers are unaware of the statistical probabilities, but a surprisingly large percentage of sales involve problems that push closing times beyond what was originally agreed to by the sellers and buyers. Roughly one out of 14 deals actually implodes after the sales contract signing – they don’t make it to or through the closing at all.

Consider this- According to an internal survey of members conducted by the National Association of Realtors, during the months of April, May and June this year, only 63 percent of purchase contracts settled on time. Twenty-nine percent experienced delays and 7 percent fell apart.

What gets in the way? According to the survey, problems with financing in deals that were delayed but eventually settled accounted for 39 percent of the trouble, followed by appraisal disagreements (16 percent), title and deed problems (11 percent) and home inspections (9 percent), contingencies in the contract (8 percent) and a long list of others, including sellers and buyers getting cold feet and backing out, homeowner associations creating obstacles and buyers losing their jobs.

What specifically interferes with mortgage financing, the No. 1 cause of delays and cancellations? Things like buyers not being able to back up the income numbers they claimed at application, not being able to come up with the down payment cash. Or doing something ill-advised that affects their credit negatively.

For example, in a post earlier this month on ActiveRain, a popular blog for real estate professionals, Fred Griffin, owner of a brokerage in Tallahassee, Florida, said he had a buyer who decided to purchase an SUV one day before the scheduled closing. That’s a major no-no- Any credit transaction during the period from loan application to final settlement – buying a diamond ring or even a refrigerator – can throw off your credit scores or increase your debt-to-income ratio beyond what’s acceptable.

Lenders routinely run follow-up credit checks ahead of closings, and any new activity shows up on national credit bureau files almost instantaneously. In Griffin’s client’s case, the SUV purchase killed the sale, even though the buyer pleaded with the auto dealer to take the vehicle back and unwind the car loan.

Beth Brittenbach, an agent with Century 21 Schutjer Realty in Vallejo, California, had a buyer do the same thing recently, then had the sad experience of having to tell the home seller the deal was dead, just as she was having furniture loaded into the moving van.

Sometimes deal-threatening complications can get a little testy. Even weird. In an ActiveRain posting, Jennifer Monroe, an agent with Savvy + Co. Real Estate in Charlotte, North Carolina, cited several types of issues that can endanger deals at the last minute. Among them- Fights between husband and wife buyers- “As in near break-up fighting. It’s more than just ‘I like this but she likes that’ or a philosophical disagreement over the smartest financial move. No, there can be some truly dangerous ground here. Example- turns out he was married before but never told you. True, it lasted all of 27 days and they promptly split, but now the lender needs a certified copy of those divorce papers he burned all those years ago.”

Yikes.

That new car could drag down your housing options

Kenneth R. Harney on Aug 14, 2015

WASHINGTON – Could that shiny new car you just financed with a big dealer loan or lease put a damper on your ability to refinance your mortgage or move up to a different house? Could your growing debt load – for autos, student loans and credit cards – make it tougher to come up with all the monthly payments you owe?

Absolutely, and some mortgage and credit analysts are beginning to cast a wary eye on the prodigious amounts of debt American homeowners are piling up. New research from Black Knight Financial Services, an analytics and technology company focused on the mortgage industry, reveals that homeowners’ non-mortgage debt has hit its highest level in 10 years.

New debt taken on to finance autos accounted for 81 percent of the increase – a direct consequence of booming car sales and attractive loan deals. The average transaction price of a new car or pickup in April was $33,560, according to Kelly Blue Book researchers.

Student loan debt also is contributing to strains on owners’ budgets. Those balances are up more than 55 percent since 2006. Credit card debt is another factor, but it has not mushroomed like auto and student loans. Nonetheless, homeowners carrying balances on their cards owe an average $8,684, according to Black Knight data.

The jump in non-mortgage debt is especially noteworthy among owners with Federal Housing Administration (FHA) and Veterans (VA) home loans. These borrowers, who typically have lower credit scores and make minimal down payments – as little as 3.5 percent for FHA, zero for VA – now carry non-mortgage debt loads that average $29,415. By contrast, borrowers using conventional Fannie Mae and Freddie Mac financing have significantly lower debt loads – an average $22,414 – but typically have much higher credit scores and have made larger down payments.

Is there reason for concern here? Bruce McClary, vice president at the National Foundation for Credit Counseling, believes there could be if the debt-gorging pattern continues.

“Some people have lost sight” of the ground rules for responsible credit and are “pushing the boundaries,” he told me last week. For example, McClary says auto costs – monthly loan payments plus fuel and maintenance – shouldn’t exceed 15 percent to 20 percent of household income. Yet some people who already have debt-strained budgets are buying new cars with easy-credit dealer financing that knocks them well beyond prudent guidelines.

According to a recent study by credit bureau Equifax, total outstanding balances for auto loans and leases surged by 10.5 percent in the past 12 months. Of all auto loans originated through April of this year, 23.5 percent were made to consumers with subprime credit scores.

Ben Graboske, senior vice president for data and analytics at Black Knight Financial Services, cautions that although rising debt loads may look ominous, there is no evidence that more borrowers are missing mortgage payments or heading for default. Thanks to rising home-equity holdings and improvements in employment, 30 day delinquencies on mortgages are just 2.3 percent, he said in an interview, the same level as they were in 2005, before the housing crisis. Even FHA delinquencies are relatively low at 4.53 percent.

But Graboske agrees that there are other consequences of high debt totals that could limit homeowners’ financial options- They “are going to have less wiggle room” when it comes to refinancing their current mortgages or obtaining a new mortgage to buy another house.

Why? Because debt-to-income (DTI) ratios are a crucial part of mortgage underwriting and are stricter and less flexible than they were a decade ago. The more auto, student loan and credit card debt you’ve got along with other recurring expenses such as alimony and child support, the tougher it’s going to be to refinance or get a new home loan.

If your total monthly debt for mortgage and other obligations exceeds 45 percent of your monthly income, lenders who sell their mortgages to giant investors Fannie Mae and Freddie Mac could reject your application for a refi or new mortgage, absent strong compensating factors such as exceptional credit scores and substantial cash or investments in reserve. FHA is more flexible but generally doesn’t want to see debt levels above 50 percent.

Bottom line- Before signing up for a hefty loan on that new car, take a hard, sober look at the impact it will have on your DTI. When it comes to what Graboske calls your mortgage wiggle room, less debt, not more, may be the way to go.

Renewed tax benefits would pay off for homeowners

Kenneth R. Harney on Aug 7, 2015

WASHINGTON – Just before Congress headed out for summer vacation this week, a Senate committee started something that’s likely to prove important to thousands of homeowners and buyers across the country- Extensions for popular but expired tax benefits for energy-efficient home improvements, mortgage-debt forgiveness, and deductions of mortgage-insurance premiums.

By a lopsided bipartisan margin, the Senate Finance Committee voted to approve the 2015 version of what has become an annual event that often carries on well into December. The issue- What to do about the tax “extenders,” a grab-bag bill that reauthorizes 50-plus tax code provisions designed to benefit special interests, including real estate. All these targeted subsidies – ranging from tax credits for research and development to favorable tax treatment for race horses and car racing tracks – are much beloved by the niche constituencies they benefit.

But they all have temporary status in the federal tax code and need to be renewed periodically or they disappear. Homeowners’ special tax deals expired last Dec. 31 and currently cannot be used by taxpayers for 2015 unless extended retroactively.

Among the key real estate provisions in the Finance Committee’s bill now heading for full Senate action this fall-

- A retroactive extension through 2016 of the mortgage debt relief law that allows owners to escape federal taxation on any loan amounts forgiven – written off – by lenders in connection with mortgage modifications, short sales and foreclosures. Without this amendment to the tax code, owners who receive debt reductions from their lenders this year would face potentially staggering tax bills. All principal amounts written off by the lender would be treated by the IRS as ordinary income, taxable at ordinary rates. The same rule generally holds for other types of debt.

Since its first enactment in 2007, this special exception – designed to help taxpayers struggling through the horrors of the housing bust – has saved tens of thousands of owners in financial distress from having to pay the IRS billions of dollars in tax levies. By extending the exception, people who receive debt cancellations this year and next on their principal homes could save a lot of money. Senate tax experts evidently expect large numbers of underwater and financially stressed owners to make use of the extension. They estimate the cost in uncollected federal revenues for the two-year extension to be $5.1 billion.

- Reauthorization of the popular tax credits for home-related energy-efficiency improvements, such as high-performance windows, insulation and appliances. This allows owners to qualify for a maximum tax credit of $500. Unlike a deduction, a credit is a direct subtraction from your bottom line tax owed. The credits are for 10 percent of the cost of purchasing energy-efficient windows (maximum credit $200), furnace or boiler (maximum credit $150) and up to $300 for other improvements, including insulation. According to estimates by the National Association of Home Builders, this extension alone is expected to save owners who are remodeling their homes nearly $700 million in federal taxes during 2015 and 2016.

- Extension of the deductibility of mortgage insurance premiums, whether for conventional private mortgage insurance or the premiums or guaranty fees paid on Federal Housing Administration (FHA) insured loans and Veterans (VA) loans and rural housing mortgages backed by the Department of Agriculture. This writeoff is of special significance for first-time and middle-income buyers. That’s because it is generally restricted to taxpayers with incomes of $100,000 or less and gets phased out in graduated steps for borrowers with incomes up to $110,000.

The extenders bill also renews authority for a tax incentive widely used by new home builders that provides a $2,000 credit for construction of highly energy-efficient residences. According to industry estimates, the bill would save builders $380 million annually in taxes during 2015 and 2016.

So where’s all this headed and when? Probably there’s a slow and bumpy ride ahead, not because the extenders bill itself is controversial, but because Congress has an overloaded plate of other, weightier issues to deal with during the remaining weeks of scheduled sessions this fall. These include the federal budget, the debt ceiling, highway funding and possibly international tax reform.

Lobbyists say the House and Senate are likely to eventually agree on and approve an extenders bill in some form, but maybe not until late fall, possibly even mid-December.

That’s not guaranteed of course. Nothing is on Capitol Hill.