Word is out.  HUD is lifting it’s prohibiting against buyers using FHA loans to buy a property recently “flipped” by an investor.  This should be great news, and I fielded a number of phone calls over the weekend from clients and agents rejoicing (way prematurely) in the change.

But not so fast on….

Although HUD has indicated a change in their guidelines, they only insure FHA loans.  Some investor still has to buy them.  So what about those investors; are they on board? I put an email out over the weekend to find out and also talked today with a mortgage banking insider.  As I suspected, the “investors” are not buying, HUD guarantee or not.

This sentiment is the same one that has caused investors to apply HUD’s anti-flip rule to conventional and VA loans, even though Fannie, Freddie, and VA have no such prohibition.  Statistically, there is still a very level of mortgage fraud associated with flipped properties.  Without a large pool of investors for mortgages securities (remember the U.S. government is still nearly the only buyer), there is no tolerance for anything risky.

This could change, so of course I’ll be keeping an ear to the rail for any good news.  Stayed tuned.  While it’s a shame that capital cannot make its way to the market of distressed homes (individual investors could certainly fulfill a competitive market function by buying, fixing, and selling damaged properties), it is the lack of market demand itself that is inhibiting the process.

This is a repost of an article I wrote in March.  It came to light again because an agent I work with had a deal that hung up last minute over the issue of property taxes.  Here, with a few edits and updates, is  what I wrote:

You’re a shrewd home buyer.  You’ve waited patiently for prices to fall and interest rates have stayed down as well.  Now you’re in Contract, and the price is half of what the seller paid for it.  You won!  Good job.

It’s true, you have made a smart purchase.  But there is one little quirk in all this to which you need to pay close attention.

A Little Nostalgia

Remember the good ‘ole days when homes were appreciating in value?   Back then, each successive owner paid property taxes a little higher than the last. Why?   Because property taxes are reassessed after each sale and rise with values.  In lending, we always estimated the new tax amount based on the purchase price in order to establish the correct amounts for the escrow account.

In this market however, property values are falling. and property taxes should follow along, right?  Yes…eventually.  Remember, property taxes are established for a year at a time, and your purchase does not immediately alter the tax amount.  In fact, with all the activity, it seems to be taking the tax assessor’s office longer than normal to catch up and lower those taxes.

Between property tax appeals by homeowners and an active real estate market, California recently warned that until they are able to complete the reevaluation (and that could take up to a year), new homeowners must continue to pay the previously established property tax amount.  In many cases here in the Sacramento area, that’s several hundred dollars more per month than it will ultimately be.

The Effect on Qualifying

Following that ripple out to the edge of the pond, several things become clear.  First, because lenders are now requiring that borrowers qualify with the higher tax payment in their debt ratios, your debt-to-income ratios may now be too high and your approval worthless.   You may have to reduce the price or increase your down payment in order to qualify to buy that particular home.

Second, if you have a loan that requires impounds for taxes and insurance–FHA, VA, and conventional loans with less than 20% down– your actual monthly payment will be higher until taxes are corrected.  Lenders are insisting on this because they need to ensure that they have adequate money to pay the taxes when due.

Finally, especially at this time of year when lenders are requiring 8-9 months of property taxes at the close to put in the escrow account, this can substantially increase the cash needed to close.

To be sure, the payment part of this problem is temporary.  But you can also end up without a loan if you’re not careful.  In extreme cases, it can result in foreclosure.  I recently spoke with a retired gentleman who is losing his home because his lender had raised his payment from $1300 to $1900 to compensate for incorrectly calculated property taxes.  He couldn’t make the higher payment and the lender, refusing to work with him, had started the foreclosure process.

An Ounce of Prevention

To correct for this problem, check the seller’s current property taxes and use 1/12th of that number for the property taxes and impounds on your purchase.  And be diligent right through the close of escrow.  Despite my practice of using existing taxes, I have had escrow officers reinstate the incorrect numbers at the close of escrow.  So, make sure you can afford the higher payments, and plan to reevaluate each time you find a home you like to make sure your loan isn’t declined at the last minute because your debt ratios suddenly went tilt.

The new Home Valuation Code of Conduct (HVCC) appraisal rules went into effect here in Sacramento on May 1 and the sh*t is hitting the fan.  They are a nightmare and a perfect example of the law of unintended consequences.   What started as an investigation by New York Attorney General Andrew Cuomo of Washington Mutual and eAppraiseIT,  ultimately entangled Fannie Mae and Freddie Mac.  To stop further scrutiny into their business practices, Fannie & Freddie agreed to adopt the new appraisal code which professed to isolate appraisers from the unwelcome influence of interested parties (the Realtor and the lender) and allow appraisers to come up with more objective and reliable conclusions.

While it is unfortunately true that too many lenders adopted a coercive approach to handing out appraisal orders, there were certainly other ways to tighten things up.   And, at the same time that these new rules were being put into effect, HUD was loosening the criteria by which appraisers were able to become certified to do FHA appraisals.   How does that make sense?   Well, it doesn’t.

Now we have a new parasitic and profit hungry private beaurocracy–the Appraisal Management Companies (AMCs)–to obstruct deals.   All conventional and some government appraisals must now be ordered through a specific bank who in turn orders the appraisal through one of their “approved” AMCs.  The AMCs pay a fraction of what appraisers are accustomed to earning, extracting the difference for their profit while attracting  the least qualified and geographically most distant appraisers. The results are awful.

Ironically, the banks seem to trust these new HVCC appraisals even less then before.   They subject them to computerized valuation methods that frequently result in a requirement for an appraisal “review” that creates at additional expense to the consumer and delays on the transaction.  Oh and delays often cost the consumer further in the form of “per diem” penalties for closing late.

So, to summarize, HVCC frequently attracts appraisers willing to work cheap, produces very poor quality work that the banks don’t trust, costs the consumer more, causes delays,  and drives seasoned appraisal professionals out of work.    Nice work boys.

“Fannie Mae is committed to providing financial opportunities for high-credit quality, bona fide investors.  Experienced investors play a key role in the housing recovery and Fannie Mae’s continued support for investor borrowers is consistent with its mission to provide stability, liquidity, and affordability to the nation’s housing system.”

With that, Fannie Mae just announced the reversal of its recent restriction that had prevented investors from financing more than 4 properties.   Reopening the door to sidelined investment capital that could help soak up the excess foreclosure inventory, Fannie chose to increase down payment, credit score, and reserve requirements rather than blindly locking investors out of the market.   Kudos for that.  It’s never to late to admit a mistake.

So now, investors can finance up to 10 properties, provided they have a 720 mid Fico score and 25% down (30% for 2-4 units).  Also, BK’s and foreclosure in the last 7 years or mortgage lates in the last 12 months are a no no, and the investor must have 6 months reserves for each property owned included the subject property.  The are stiff requirements, but better that than not at all.

With foreclosures and short sales in the bullseye, property repairs are a big issue.  Many foreclosed homes are in desperate need of TLC; some appear to have been ground zero of angry evictions.  And many buyers actually want “fixers” where the price might be lower  and they can do some work themselves.  Whatever the cause, the banks have a double standard.  When selling, they don’t want to fix them first, but they also don’t want to finance them either, at least until they’re fixed up a bit.

FHA vs. Conventional Financing

Many people believe that FHA financing will impose tougher repair conditions than will Conventional financing.  This notion is a holdover from the pre-reform days of HUD.  My recent observation is that one isn’t any worse than the other.  The banks are fussy about everything these days, and one cannot safely predict with certainty where the bank will dig in its heals.  Some don’t care about the dishwasher is missing, others want to know what caused the stain in the carpet (true story).   To confirm whether they have expressly different repair standards for FHA vs. Conventional financing, I contacted a number of banks today to ask this question:

“With all of these semi-ratty REO properties for sale, do you see much difference in the way your underwriters address property issues on FHA vs. Conventional loans? I have an “as is” sale with some issues that many would consider cosmetic in nature, while others might consider them more serious.  From my viewpoint, the underwriting responses are unpredictable whether FHA or Conventional.”

Here are seven responses from different banks:

“I don’t see much difference. We are directed by our corp office which is quite strict. All sinks, toilets etc need to be in place even you have 1 fully functional bathroom. All built in appliances need to be in place. If carpet has been pulled but tack strips left then you need to replace the carpet. You can have a hole in a wall, as long as the insulation isn’t oozing out of it. Exposed wiring is an issue. Give you an idea?”

“My experience has been that there is no difference between the two.  It sounds like we are more flexible than most lenders with items that need to be repaired.  Call me case-by-case and I can let you know what we will be able to fund without having done.”

“I echo your thoughts on this. I’ve really not seen any uniformity to draw a fair assessment of what we can realistically try to predict. (How is that for double talk). I’d be interested to hear what you find.”

“Yes case by case that’s why the answers are all over.  If cosmetic in nature, we are trying to go with that on REO’s only.  If things like missing stoves, sometimes we are accepting the paid receipt for the purchase of the stove and let it close to install afterwards.  It really does depend on each transaction.”

“Conventional is easier as we are allowing some holdbacks now.  See attached, this is new.  Watch out for the part about seller paying and us escrowing (actually, we hold the funds) 1.5% x’s and any overage of the actual amount to cure goes back to borrower in the form of principal paydown.  It’s Fannie’s rule and crazy but we’ve confirmed it.  That’s the only sticky part. We don’t do holdbacks on govies.”    

“Fha is more strict then Conventional.  The main issues are health and safety.  Broken windows (not cracked).  Exposed wiring, pool so green you can’t see the bottom etc.   I will ask Lynne her opinion as well.”

“Marc, probably reason that you can’t nail it down is that there are investor overlays. Our investors do not want properties that have to have anything done to them beyond paint, carpet cleaning etc.  Regardless of what fha’s guidelines are, we have to follow the investor overlays.   I guess to answer your question, there is not much difference between fha & conventional in regards to the condition of the property. –Lynne”

So there you have it.  Three say FHA and Conventional are the same.  Two say conventional is easier–one because they do holdbacks again; the other because FHA is theoretically tighter.  A sixth says says “case by case,” in other words no difference.  And the last one–a seasoned underwriter I’ve known for many years–nails it perfectly:  the investors are calling the shots, and what they say goes.   It doesn’t matter what FHA or Conventional guidelines require, the investors who are the ultimate owners of these loans paper do not want ratty properties as collateral.  And they’re the “deciders” now.

Bottom Line?

Don’t turn FHA buyers away or avoid FHA financing because you think a conventional loan will be easier.  But do be cautious when buying a beat up property.  Call your lender to discuss its condition before you write the offer. An ounce of prevention is worth a pound of cure.  And remember that a mortgage banker like me, who can broker your loan to a variety of banks, may be able to find the one who won’t object to your repair issue.

For most of 2008 we have operated with temporarily increased conforming loan
limits, $580,000 here is Sacramento. As we near the end of the year, the question we’ve all asked is what will the 2009 limits be?

Yesterday, the announcement came. On January 1, 2009, most of the country will return to the 2007/2008 limit of $417,000. However for High Cost areas of the country, the new maximum loan amount will be

“calculated as 1.15 times the median house price for the highest priced county in the property’s metropolitan or micropolitan area or the median house price for the property’s county if it is in a rural county. “

In Sacramento that translates to $474,950 for a single family home, higher for 2-4 units of course. If you’re not in Sacramento and wish to check your area, click here for the list of High Cost areas and their loan limits.

The recent housing bill eliminates Nehemiah and other seller-funded down payment assistance programs. Although legislative efforts are under way to restore these programs, these efforts won’t bear fruit before the October 1st deadline set by the recent bill.

Lenders are interpreting the deadline in different ways. Most have already begun closing the door on new applications. That’s tough on buyers who have spent months looking for a home and counting on Nehemiah. But even Wells Fargo, who until recently boasted that it would continue take Nehemiah deals right through September, just announced that you must be locked by September 2nd. And of course rate locks are tied to property addresses, so unless you’re under Contract in the next week, you’re going to need to find that 3% down payment someplace else.

FHA Down Payment Increases

Speaking of needing to find down payment money, the recent housing bill also increases the FHA down payment from less than 3% to 3.5%. That doesn’t seem like a lot, unless you were planning on getting the 3% from Nehemiah. That one-two punch is going to put a lot of buyers back into the saving mode or looking for gifts from family members.

The recent Housing bill sailed through Congress and across the President’s desk, easily gathering the required ink along the way.   Although complicated enough that some provisions won’t take effect until next year, it appears that the Nehemiah, a popular seller-funded down payment assistance program (SFDAP),  and it’s clones are headed to the freezer on October 1, 2008.

The problem with these types of programs lies in the phrase “seller-funded”.   It’s one thing to qualify for a government agency grant or silent 2nd loan, because those are designed to help low income folks who couldn’t save up the required down payment.   It’s another thing for a program to be funded by the seller and to require only that the buyer’s first loan allow for a gift from a non-profit.

Don’t get me wrong; I’m not against Nehemiah.  I have used the program a lot.  But as the lending industry continues to look for scapegoats in the current crisis, it will continue to cite higher default rates on these programs and deter investors from buying these loans in the secondary market.

I just received an email this morning from an underwriter at a prominent bank that was, until just now, allowing a 6% Nehemiah gift plus 6% in seller concessions.  Not any more.  She says the bank is going to get “really restrictive” on SFDAPs in the next few days, regardless of FHA’s policy.  “Investors don’t like these,” she says.   The bank will begin treating SFDAPs as part of the total seller concession and subjecting that to the normal limitations.

The Sacramento Bee reports this morning that the end may be very near for the Nehemiah program.  Included in the housing bill just passed by the U.S. Senate is a provision eliminating the popular down payment assistance program.  The House votes later this week but is expected to go along with the Senate and President Bush. 

It isn’t clear how quickly this would take effect.  Loans in process are often given a reasonable period to close, and buyers pre-approved but not yet in Contract may be given a deadline by which they must successfully entered into Contract for the purchase of a home. 

Recent figures on real estate sales activity showed that 85% of the sales closing in Sacramento involved homes under $350,000.  Many buyers are using FHA and Nehemiah to help them cover the down payment and closing costs.  While buyers can continue to use a seller credit to help cover closing costs, the loss of Nehemiah would mean that buyers would have to save cash for a down payment or secure a gift from family members.  This could throw a wet blanket over the recovering Sacramento real estate market and slow the absorption of the inventory of bank owned properties for sale. 

 Stay tuned…..

Well, it’s time to get back on my pony here. The site hack I experienced recently combined with this crazy market took the wind out of my sails. But like the fires that have brought nuclear winter to Sacramento–maybe I should say nuclear summer since it’s a 111 degrees today–conflagration in the mortgage industry show no signs of coming under control. So here are a few updates:

INDYMAC BANK IMPLODES

Renown for their dismal customer service attitude toward the mortgage broker community, Indymac Bank bellied up this week. Confessing that federal banking auditors had found the bank to be “no longer well capitalized”, Chairman and CEO Michael Perry announced that the company would take a powder, lay off 3800 or so employees (including some very decent folks locally), and completely exit the forward mortgage business until they can “improve their capital ratios.” That’s corporate double speak for “we’re outta here.”

While promising “to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks,” the company has left borrowers stranded and attempted to extort additional fees in exchange for not canceling existing rates locks. I had one refinance ready for docs that isn’t going to fund, and my associates have buyers packed in to the Bekins van who must now quickly find an Extended Stay while they secure alternative financing. At this point, we are having trouble working through the remaining staff to resolve issues. If you have an Indymac loan, find a replacement, now.

PMI IN RETREAT

Kiss 10% down investor loans goodbye. The same is true for owner occupied, cash out refinances. The mortgage insurance (MI) companies are in full retreat. In recent weeks there have been announcements that as of July 14, MI will no longer be available for any investment properties or cash-out owner refinances in declining markets.

That basically leaves only owner occupied purchases and rate & term owner refinances eligible for 80%+ LTV financing.  And MI for 5% down payments are evaporating as well, leaving borrowers scrounging around for at least 10% down on conventional loans.  If this announcement is a canary in the coal mine, it is quite conceivable that we will soon find ourselves in a 20% down payment world again. Wouldn’t that be lovely. If everyone suddenly needed 20% down, do you think that would freeze the recovery in its tracks?

Thank God for FHA and 97% financing, not to mention the Nehemiah down payment assistance program, which brings me to my next update…

NEHEMIAH FACES RENEWED CHALLENGE

Although I think it unlikely that we’ll see any tightening of FHA requirements in this election year, Nehemiah is facing new challenges from HUD. If it is decided that Nehemiah does artificially inflate property values and distort the market, say goodbye to this program. Sacramento’s sub $350k market has been re energized by investors and first-time buyers, the latter category leaning heavily on substantial seller concessions to overcome their lack of funds for down payment and closing costs. For now, Nehemiah is still around. Best to save up some money. FHA won’t go away, but buyers may have to have their own 3% down payment before long.

That’s it for now. Call me if you need help with financing on the west coast.