At RE/MAX Gateway, we strive to bring the most current information and speakers to our agents enabling them to rise above our competition. This past Friday was no different. Our office of just 90 agents was able to secure the Commissioner of FHA to speak one on one with me and answer all of our agent’s questions – as candidly as he could – and took nearly 2 hours out of his busy schedule help us understand the role of FHA and the direction it is headed to aid in our economic recovery. As we sat down with Dave Stevensfrom FHA, we thought we would share some highlights from our conversation.
· Where do you get your info? There is no number one source, market data is complied on a weekly basis. His belief is that Realtytrac has ineffective data and their foreclosure numbers are way off. NAR’s numbers aren’t accurate either, so FHA scrubs data from different sources. SIFMAis one of those sources (a bond tracking market group on Wall Street that reviews mortgage data). Looking at bonds reflects mortgages that are securitized, they won’t count any other mortgages that aren’t securitized. The majority of mortgages are securitized with Fannie Mae as the servicer for all Fannie and Freddie loans. As a part of Dave’s plan, he wants to have more numbers up on the HUD website for everyone to see and use.
· Information for policy changes depends on the policy. For RESPA, that change started in 2005 and took until 2010 to be complete, pass and get out to the public. Sometimes they can happen more quickly as is the case with mortgagee letters.
· We have been reading about upcoming changes for mortgage brokers, what will these changes reflect? Lenders will need to be directly responsible to FHA for the loans they underwrite for brokers. As it stands today, lenders have different guidelines for loans they originate for themselves and others that they originate for brokers. So, at this time, brokers don’t underwrite or fund loan their own loans and therefore if someone defaults, it is on the US taxpayer to foot the bill on the defaults for loans they originate. Today the guidelines to be FHA approved are: a broker only needs $250,000 in net assets; only $67,000 needs to be in tangible assets; of the $67,000 only 20% of theses tangible assets need to be in cash – only $13,400. This change was proposed because brokers can’t back the loans they are originating, so when goes into default, who do they go after? The taxpayer. FHA wants to make sure that they can stand up to what the loans they are generating.
· The world has no faith in our mortgage system right now. The Bank of China was the largest buyer of MBS (mortgage backed securities); basically they were buying our debt. The government had to step in and start buying because China has lost their faith in our system and stopped buying them. They got burned from the foreclosures so many people had from the loose underwriting policies of lenders. Not everyone should be a home owner – some need to be renters.
· So what are some other policy changes on the horizon at FHA? Some noted changes that we will see in the coming months are…
o Currently, the Streamline Refinance will allow you to refinance and give you a new fixed rate, no questions asked. No appraisal, no credit check and at 105% loan to value. In January, streamlined FHA Refinance’s will be full document loans with appraisals, etc. One of the reasons behind this is because a company, Fortress bought MBS and bought distressed assets, got them to perform, turned them into FHA loans, then streamline refinanced them and then went into default – with no recourse. Now, one true streamline refinance is left. It’s a refinance from balance to balance where the owner pays closing costs, etc. and it will stay in effect for a while. All other refinances through FHA will be subject to full document review.
o Appraisals will see a new policy which takes the good parts of HVCC (House Values Code of Conduct) to create a new model. FHA would like to see more arms length transactions. They are going to discontinue allowing the lender to order the appraisal because FHA feels they are too involved in the transaction as it is. FHA is also working on shortening the term of getting another appraisal if a contract falls through and a new buyer purchases that home. The new buyer will be assigned a new FHA case number and would not have to utilize the first appraisal. Going forward, they would be able to get a new number and appraisal even if it’s within that 6 month window that is currently in place. Also, FHA is not mandating that lenders use an AMC (Appraisal Management Company) just the originator and appraiser cannot speak. The lender could designate someone in their office to order the appraisals and that is acceptable with FHA. Additionally, the appraiser must know the local market in which they appraise. There will not be a required mile radius for appraisers because of rural areas vs. suburban areas. As agents we will also be able to deal with appraisal issues through dispute resolution which can be an issue for lenders who send appraisers without local knowledge and could result in litigation.
o The capital reserves required for lenders to indemnify loans (loan loss) will go up to one million dollars immediately! Then $2.5 million in 2 years. Again, 20% of that number has to be in tangible capital and even that number might change. FHA wants lenders to have more skin in the game. There will be more changes to come from Fannie, Freddie, etc. and for lenders who can participate with these programs will have to be more legit and have more money.
o Brokers are not going to be approved by FHA. They have no ability to pay for loans they originate that go into default.
o For Short sales, the Treasury Department and HUD have created a new process and it will take some time to figure it all out. There is a lot of concern with flips, unfair advantages of the system, etc. These new guidelines roll out April 5th. Dave is meeting with servicers on Monday to discuss these guidelines. As we know, the government is pushing for loan modification. Going forward, FHA will publish a scorecard monthly on how lenders are doing with loan modifications. FHA is very concerned about moving distressed properties off the market while their main concern is keeping people in their homes. Short sales guidelines discussion started in July. FHA felt that we put too many people in houses who couldn’t afford them, now they have to do something to fix it. Not every bank will sign up for the new program. To see who is participating, a list of the banks that will be uploaded on the HAMP website. A couple of large banks refuse to participate and they didn’t take tarp money, so there is nothing FHA can do to make them abide by the guidelines.
We have heard about some policy changes at Fannie such as the increase in minimum credit scores and lower debt to income ratios, can you speak to these changes?
· Fannie is going to 640 min credit scores and FHA is going to follow suit shortly more than likely.
· 18% of borrowers with FHA loans are in default and FHA feels that raising the FICOscore will lower that default rate. As of the beginning of 2009, the average FICO score of an FHA borrower is 693 and virtually none of those borrowers are in default. The previous problems in 2004-2008 was in the down payment assistance programs which caused $10.4 billion in losses going forward…it was a disaster.
If 2009 programs are working, then why change now?
· FHA forecasters are concerned about a double dip in home prices. Home price forecasts that at a minimum there will be another 9-10% drop in home prices through the first quarter of 2010…nationwide. They are looking at current unemployment trends as a huge factor in determining this drop. It has been forecasted to remain high and as such, we are looking at a jobless recovery. Surprisingly, 2009 has been the best quality book (year economically overall) in a long time.
· Scenario forecasting in a jobless recovery shows that you won’t get the home appreciation rates that you normally would. Growth is predicted at .7% over the inflation rate which is very low and will take several years to have housing prices come back to the levels they are today. They are looking for ways to make it work to avoid another bailout.
· The real estate industry will be a better industry once it’s all done with better lenders in business. FHA is looking at the rent vs. own index, MSA (Metropolitan Service Area) by MSA, borrower behavior, etc. in order to make cautious decisions as we bottom out and experience a slow recovery. Some factors, if not approached soon enough, could have us go into a recession again.
So what’s next – with the extended tax credit, no more government purchase of MBS, there will be a raise in rates, fewer first time home buyers, and then a predicted foreclosure release in the second quarter of 2010?
· Dave said there is an expected ¾ to 1 ½ point rate increase when the Fed backs out of the market (the Fed has already spent $1 trillion and has committed to spend a total of $1.4 trillion). At this time the government is not buying Ginnie Mae MBS as they are selling verywell in foreign markets. China continues to waitand doesn’t want to start buying again until we decide what we are going to do with Fannie and Freddie. If the government doesn’t continue to purchase MBS, then the MBS will become worthless. Banks who have huge deposits with no loan demand and may possibly start buying MBS to offset their deposits. When the Fed pulls out, we will feel an immediate effect of an increase that is expected to be 300-600 basis points above current interest rates which equates to .75% to 1½% in rate increase.
· Before the Fed bought MBS, rates were up 1 ½% above where they are today , so they think that will be the premium to get investors to start purchasing MBS. Currently, we are totally dependent on foreign capital to keep our housing market afloat and America is bankrupt in that department.
· The tax credit is the single biggest expense of the government. The government stimulus is an artificial growth for the economy. A lot of people in the government want out of helping the housing market. They feel they have done enough. By slowly pulling out of purchasing MBS and discontinuing the tax credit, the housing market should be able to sustain itself.
· If the Chinese economy starts to take a downturn, the first asset they are likely to sell will be US Treasuries and then we’ll really feel it because currently they are the largest buyer of US Treasuries!
· There is a legislative cap of $1.4 trillion for the rest of MBS that the government will buy and they might hit that cap before the program is phased out.
· So Dave’s advice for Realtors is to be prepared and look forward for what is going to happen, keep growing, invest in your business, get back to basics, don’t deal with uncontrollable and drive forward.
· The government has no money, social security will run out on paper, but the money is already spent. In order to buy these MBS, they have to sell debt; the more debt auctions will drive prices up, so have to drop the price for debts and treasuries which would almost equal the cost for the debt. The spread will have to be there or it’s not good for taxpayer.
· Dave’s big concern is about the disadvantaged as well as sustaining safe housing for all.
· FHA’s HAMP loan modification program, where they tack the excess loan balance due to the back of loan and adjust the payment to a level to a level they can afford, has a 96.6% success rate for no defaults. The majority of the distressed market is due to cultural and language barriers. Dave’s asked for a budget of $75 million for next year to add more counseling services in distressed communities.
· Hardship will be a big factor in the new short sales guidelines. Too many people are taking advantage of the process which is a moral hazard.
· Condo approvals will be more stringent. They will have a permanent policy in place soon and currently have a temporary policy in place.
FHA needs to back out of the market and get back to why it was created; Freddie and Fannie can’t be government owned forever and a lot of work has to be done in the process.
Anyone who predicts the future is wrong, homeownership=community stability. Agents are the key to this recovery. They did it all wrong and the only way to get out is with the real estate agent.
We need to get faith back in the system. Safe act for loan officers, RESPA changes, etc. are just the beginning of the changes that have to take place to stabilize the industry.
Finally, be excited about the work you do and remember, you are key to the economic recovery.