Fannie Mae announced a new Loan Quality Initiative designed to help reduce the alarming increase in “repurchase requests” (that’s where they make us buy the loan back) resulting from things like new car loans that didn’t show up until after the loan closed.  According to an Equifax analysis, up to $142 million in car loan payments were missed during underwriting in 2009, resulting in loans applications that were substantially misrepresented and in loans which the borrowers were incapable of repaying.

“As part of the Fannie Mae Loan Quality Initiative, mortgage lenders will have to meet additional guidelines to ensure that the borrower has the propensity and capacity to repay a debt. For loan applications dated on or after June 1, 2010, Fannie Mae will require lenders to verify at pre-funding that borrowers have not incurred new debts or liabilities that may affect their ability to fulfill a mortgage payment obligation. If additional credit was obtained up to the funding date, a borrower must be re-qualified with the monthly payment included in the debt-to-income calculation. Any debts or liabilities incurred during this period, which are not reflected on the credit report or disclosed in the final loan application, may subject the lender to the risk of loan repurchase.”

We may even be required to directly contact any creditor who has inquired recently into your credit to determine if there are pending obligations not yet appearing on your credit report.  So caveat emptor: once your credit has been pulled for a mortgage application, do NOT apply for, accept, borrower against, or make any new purchases on credit without first talking with your lender.

With the amount of information–not all of it accurate, multiple lien holders on many “short” sales,  and potentially devastating consequences of the tax, legal, and credit variety, this is a good summary and a good place to begin if this is something you must consider.

In this particular article, Peter notes the effective adoption by HUD of the HVCC appraisal rules that now prohibit loan originators from selecting appraisers.  He writes from the regulators’ viewpoint that advocates this separation in the belief that it will “allow borrowers to get a better shot at a fair valuation of their property”.  While in theory this sounds reasonable, in practice the cure is worse than the disease.  Here are my comments:

Even if one believed that the mortgage world was coming to an end with this new rule, it would take a few weeks for its effects to be felt by buyers. And I don’t think any of us feel that. After all, we’ve been dealing with this HVCC processon conventional loans for awhile now already. What we do feel and see is that this new procedure has empowered and unriched a new “middle man” in the process–the Appraisal Management Companies (AMC), often just subsidiaries of the big banks themselves.

Granted, the old appraisal system allowed unethical mortgage originators to coerce weak or desperate appraisers with threats of non-payment or withholding of future business, but there were already good systems in place for appraisals to be reviewed and for appraisers themselves to be monitored and removed from list of “approved appraisers”. These rules could have been strengthened. But at the same time that the HVCC process was brought to life, we witnessed the disappearance of “approved appraiser” lists and the easing of the requirements by HUD to become an FHA appraiser. How does that make sense?

Now we have a mortgage analogue to “managed care” in the health industry, a new tier of companies who raise the costs to borrowers, reduce the fees to the providers who do the actual work, and redistribute the difference as profit to themselves. That has been reflected in several ways anithetical to the notion of helping the consumer who wants to know the real value of what they are buying.

First, less experienced and out-of-the-area appraisers are often the only ones who will accept the reduced fees paid by the AMCs. These fees are often half of what appraisers used to earn. Recently, an agent told me she had met such an appraiser at the property. He was late because he couldn’t find the town and then walked up to the house barefoot and smelling as though he hadn’t showered in several days. I am told that the appraisal code requires an appraiser to be familiar with the area in which he is conducting an appraisal. Someone from out of the area may not understand the differences between neighborhoods, even if they eventually can find the town. And when paid half of their normal fee at a time when regulations require more work, few appraisers will put the time and effort into researching and understanding a home’s true value. They put as little effort in as possible and use the low end of the value range to cover themselves.

Second, despite this separation of originator from appraiser, the banks do not trust the outcome. One would think that if this process truly met its objective of creating greater accuracy and objectivity, the banks would embrace the results. Instead, they appear more nervous than ever. Most appraisals seem to then require “desk reviews” or “field reviews” at an additional cost. So, the consumers pays more for each appraisal and often has to pay for multiple appraisals. Additionally, the banks still run AVMs (automated valuation methods..think Zillow) in the background. When these inferior computer valuation tools yield a lower value that the actual appraisals, banks will still often use those value, despite the acknowledged quality discrepancy. This kills deals and costs consumers money.

The time required to deal with all of this is certainly another cost issue to consumers. Escrows are frequently delayed, per diem fees incurred, interest rate locks blown….all at a cost to the consumer who has not in fact received a more reliable opinion of value.

I am an advocate of good regulation. Without it, the invisible hand of self-interest often leads not to promotion of the public interest or transformation of greed into social good but simply to cheating. But this is an example of bad legislation and unintended consequences. There are better ways to fix the appraisal problem.

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.

While the increase has some people concerned, let’s take a second and put things in perspective.  On a $200,000 loan, the financed portion of the MI increases from $3378 to $4343, so your loan balance grows by less than $1,000.  The resulting increase in the monthly payment (I’m using a 5% interest rate) is less than $5.

However, if you’re buying up to the $417k limit and the payment increase is critical, then you’ll want to be in Contract on a home by April 4, 2010, and make sure your lender has pulled your FHA case number before April 5th when the new rule goes into effect.

And just like that mess, the AMCs have failed to improve things for the consumer.  In fact, it can be convincingly argued that they have made things far worse.  The new protocol has consistently produced poor quality appraisals performed often by the least qualified and frequently out-of-the area appraisers, at dramatically increased costs to the consumer.  But in terms of creating new profits for banks who have now created their own internal AMCs, it’s been a resounding success.

Until now, this new process impacted only conventional loans.  Since most of the market activity has required FHA financing, this hasn’t been as debilitating as it might have otherwise been.  However as of January 1, 2010, it applies to FHA loans as well.  What does this mean for you?

It means that on FHA loans, your lender will now have:

• no control over scheduling of the appraisal
• no ability to communicate directly with the appraiser
• no ability to receive notification from the appraiser when there is a value or repair issue
• severely constrained ability to dispute bad appraisals
• higher appraisal costs
• slower appraisal turn around times
• longer escrows

The best thing you can do in the short-term is to plan for longer escrow periods.  I recognize that short-sale banks are not very cooperative on this issue.  But if you don’t attempt to educate them and plan in advance, you’ll be begging for extensions on the other end.  In the long-run, let your voice be heard and contact your congressperson and let them know what you think.

There is finally some clarification:

IRS Sets New Rules for Tax Credit
The IRS has spelled out guidelines for eligibility for the home buyer credit when co-borrowers purchase a property.

When a home-owning parent of an adult child co-signs for a mortgage and both names appear on the note, the IRS says that under some circumstances, the first-time home buyer can qualify for the whole amount.

The IRS says the parent doesn’t qualify for any portion of the credit, but if the child hasn’t owned a home during the three years preceding the current purchase and can qualify based on income, he or she can be allocated the entire $8,000 credit.

When unmarried individuals co-purchase a home and only one of them is eligible for the credit, then the full $8,000 can be allocated to the eligible buyer.

Source: Washington Post Writers Group, Kenneth R. Harney (12/04/2009)

A note about getting the cash: while the law allows home buyers to “monetize” the tax credit to help with cash to close, this requires that banks be willing to make short term loans secured by a buyer’s future tax credit.  For reasons you can imagine, banks are not rushing to be the first in line to do this.  I don’t expect to see this happen any time soon.

That said, there are two things you can do to speed up receipt of that money.  First, after you buy, you can amend your 2008 returns and claim the credit as though you bought the home last year.  This may also help those lucky folks whose income in 2009 disqualifies them but who would qualify for the credit based on their 2008 income.  Second, prospective buyers can adjust their withholding in advance to save for a down payment.  Of course, you might have to pay that back later if you don’t buy a home, so only do this if you are really committed to buying.

The Fed continues to be the primary buyer of mortgage backed securities (MBS), though their purchases declined by $2b to $16b last week.  Year to date they’ve bought $993 b!  Hopefully the Chinese, Japanese, and the petro-states will get back in the game before the Fed runs out of money or stops buying next April as indicated. For those who don’t know this, banks who make home loans sell those loans in the “secondary market” to recoup their cash and make more loans.  Until the credit crisis, foreign investors with fistfulls of US dollars from all our purchases of their stuff (oil, cars, cheap toys, electronics) bought US Treasuries or MBS as a way to park those dollars somewhere safe and avoid the exchange rate risk.

Finally, the First Time Buyer Tax Credit passed in Congress and heads to Obama’s desk.  A lesser known piece is that also eligible are homeowners who have owned for at least five years.  They get $6500. Of course there are phase-outs rules and restrictions on property types.  You have to have Purchase Contract by April 30, 2010 and close by June 30, 2010 in order to qualify.  Call for details…