There have been many consequences of the subprime mortgage meltdown. But one which has received very little attention so far is the repricing of risk by investors who buy mortgages. That is about to change. What’s important to understand about this fuzzy term is that mortgage rates will now rise even for consumers with decent credit scores. Meet risk-based pricing.

In the 2007 mortgage meltdown, investors realized that the low interest rates previously offered didn’t adequately cover the risk of default. Past projections floated on a rising tide of appreciation that kept every one off the reef. Now that the tide has rolled out and shipwrecked many lenders, those left afloat are raising rates to compensate for the soaring level of defaults.

Are You an “A Paper” Borrower?

Long before subprime came along, there were two general categories of mortgages; “A Paper”, and everything else. Those of us involved in “A Paper” lending rarely visited the dark underworld of B, C, & D paper. But the advent of subprime brought light to that world and introduced us to risk-based pricing as the industry opened wider the gates of home ownership. So think of the current repricing of risk as a further striation of the A paper segment. This will mean that higher risk borrowers will now pay higher rates.

Pricing Adjustments

The long and short of this is that A Paper borrowers will no longer be treated equally. For instance, if Fannie Mae’s Desktop Underwriter (DU) approves your loan and your Fico score is below 620, expect to pay a rate 1/2 point higher than your friend whose score is 720, unless you’re putting 30% down. If you want an interest-only loan, a hybrid ARM, an owner occupied duplex, or a manufactured home, expect further adjustments to your rate, depending upon your loan-to-value (LTV) ratio.

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For those contemplating the choice between doing a short sale or a regular foreclosure, the potential tax liability that may result associated with debt relief on a short sale is definite negative. At least one piece of helpful legislation appears to be making its way through the congressional maze.

This yesterday from Peter Miller’s FHA Mortgage Guide:

FHA Mortgages — Senate Passes Bill To End Tax on Mortgage Forgiveness

Posted: 17 Dec 2007 10:43 AM CST

The Senate has passed the Mortgage Cancellation Relief Act of 2007, a measure which would end the income tax borrowers face when lenders forgive up to $2 million in outstanding mortgage debt.Sponsored by Sen. Debbie Stabenow (D-MI), the measure would also extend the deductibility of mortgage insurance for three more years. The current legislation making mortgage insurance deductible applies only to loans made between January 1st and December 31st of this year.

Under Section 108 of the Internal Revenue Code, forgiven mortgage debt is seen as “imputed” — and taxable — income. Many of those who negotiate a “short sale” with a lender wind up owing thousands of dollars to Uncle Sam because the forgiven debt is considered to be income under the tax rules.

Previously, the House had passed a similar bill, HR. 3648.

The bills are likely to zoom through the conference process and to be signed by the President. Why? Just how much money can the government collect from distressed, foreclosed and bankrupt borrowers?

This is encouraging news for sellers and agents who wish to pursue this option but were worried about have a big tax bill. Now, I still maintain that a short may be no better for your credit and Fico score than a foreclosure, but we now reasonably expect to see relief from the tax consequence.

Got a question or concern? Contact me here. Or apply for a loan. I do loans in most of the western U.S. and I’ve been doing FHA and VA loans for nearly two decades.

The Senate’s FHA Modernization Bill, S 2338 flew through with a 93 to 1 vote yesterday. The House previously passed its own slightly different FHA reform bill in September. The measure will now go to a committee to work out compromises between the two competing version before the final draft is forwarded to the Oval Office for signature.

Two of the key issues are:

1. Raises the maximum FHA loan amount to $417,000, putting it in parity with conventional loan limits.
2. Lowers the required down payment to 1.5% from 3% (the House version eliminates the down payment requirement altogether)

Passage of this legislation to modernize FHA would complete a series of reforms that began a couple of years ago as FHA began eliminating many of the disincentives that drove buyers and sellers to subprime mortgages.

No longer are pest reports and clearances automatically required for all structures, and the old FHA “non allowable” costs have been virtually eliminated. With the increased loan limits and falling prices, these consumer-friendly loans will be available to more homeowners and will fill the ugly void left by the departure of the sub prime lenders.

Did you know that most lenders today are not approved to do FHA loans? And unless a lender was in the business before 2000, it isn’t likely they’ve ever done a single FHA or VA loan. Do you really want to trust your escrow or your client’s escrow to someone like that?

So ask your lender: Are you HUD approved?

More importantly, ask: how many FHA loans have you actually done?

If you don’t like the answer, Contact me for a quote or apply for a loan here. I do mortgage loans in most of the western U.S., and I’ve been doing FHA & VA loans for almost two decades.

It was a rough week for the mortgage market. The Fed lowered short term rates only by a quarter point rather than the half-point some expected, retail sales were strong, and inflation at the wholesale and retail levels were both higher than expected.

All of this apparent economic strength handcuffs the Fed and makes the probability of further cuts in January less likely. Rates today are moving higher. Fears of inflation could prevent rates from falling further. According to Freddie Mac’s weekly survey, 30 year fixed rates rose to an average of 6.11% with half a point.

So, if you’re planning to buy a home, don’t wait for interest rates to fall. This may be as good as it gets for awhile.

Contact me for a quote, or apply for a mortgage here. I can do loans in most of the western U.S.

The Federal Reserve today lowered the Federal Funds rate by a quarter point to 4.25% and the Discount rate by a quarter point to 4.75%.

Now remember that the Fed is playing with overnight lending rates between banks and between banks and the Federal Reserve itself.   This does have an impact on mortgage rates, but it does so in advance.  In other words, as economists and bond traders build consensus about what they think the Fed will do, mortgage rates adjust before the actual event.  

Then, when the Fed meets, the markets move based not on what the Fed did but rather upon what the Fed did compared to what they were expected to do.  This past week, mortgage rates moved higher as hopes for a half-point cut evaporated.  The stock market was still hopeful and had been rallying, pulling money from bonds and pushing bond yields (hence mortgage rates) higher.

So today, the stock market was disappointed by the conservative Fed move and was off 175 points a little while ago.  The bond market is rallying helping push mortgage rates lower.  I started getting minor price adjustments from my lenders this afternoon.  

Hank Paulson’s plan to freeze sub prime rates for trouble homeowners was the mortgage topic of the week. Since the discussion–like elevator music–seems to come from everywhere and nowhere at once, I thought I’d link to a menu of sites where you can get more on any particular piece of this issue.

In case you’ve been on vacation or just boycotting the news (for which I couldn’t blame you), the Bush administration announced a plan to freeze the interest rates for homeowners whose sub-prime loans are about to increase. The intent is good: stabilize the real estate market to stop the cycle of declining values, more foreclosures, further declining values, and so on.

First of all, view US Treasury Secretary Hank Paulson’s interview with Maria Bartiromo to hear it from the horse’s mouth.

Here are further Remarks by Secretary Paulson on Actions Taken and Actions Needed in U.S. Mortgage Markets at the Office of Thrift Supervision National Housing Forum.

Here is an article by Felix Salmon discussing the twin risks of litigation and investor perception associated with forcing a revision of mortgage terms on the investors who bought these securities.

The administration claims the plan could help as many as one million homeowners could be saved, though others (myself included) suspect that the real number is a fraction of that.
The questions are many, and the administration is still vague about the details. Here are some of the issues:

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