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 Scott Short  Thursday, October 13th, 2011  The subject of investor overlays has been coming up a lot lately. A different angle may clear up some misunderstandings.
REALTORS® and buyers often bring up agency guidelines as if they somehow dictate lending policy.
Most people look at this backwards. They think that the agencies like FHA, VA, Fannie Mae, and Freddie Mac set underwriting guidelines and then lenders layer additional rules on top of this. In reality it’s the opposite. Understanding the reality of this dynamic will go a long way toward understanding “investor overlays”.
None of the agencies listed above dictate lending policy to mortgage lenders. Mortgage lenders develop whatever policies they feel offer the greatest return, while best managing the risk of the loans they make. If a lender wants to do a 100% LTV mortgage for a homebuyer who is being foreclosed on right now and just completed their bankruptcy, they are allowed to do that even if that buyer doesn’t have a job and has federal tax liens. On the other end of the spectrum.If a lender decided that they are only going to do loans with a maximum loan to value of 50% to borrowers with 800 credit scores, they could also choose to do this. Lenders are free to set whatever standards and policies they choose to set, provided that they do not violate any other laws pertaining to things like discrimination.
So let’s look at the actual roles of the agencies. While lenders set their own policies regarding the level of risk in relation to the return they are looking for, they must ensure that they are meeting FHA’s minimum standards if they intend to have the loan insured by FHA. In other words, FHA does not set the underwriting guidelines, but only the minimum standards under which they’re willing to insure those loans. Lenders are free to choose to set a standard that exceeds the FHA minimum.
Continue reading: Maybe This Will Help
Scott Short Wednesday, May 25th, 2011
Automated Underwriting Systems (AUS–when the computer underwrites the loan based on specific lender overlays) are unable to determine the existence of extenuating circumstances that resulted in a bankruptcy, foreclosure, deed-in-lieu, pre-foreclosure or short sale (ie: the computer cannot read written extenuating circumstances). If a client has appropriate documentation that these events occurred, the minimum time period has elapsed, and the program does not require an AUS decision, then the loan may be manually underwritten. (If your client is applying for a conventional loan; good luck finding a lender who will take on the risk of manually underwriting a loan). The loan must meet all manual underwriting requirements, including documentation, minimum credit scores and maximum loan-to-value.
To document the existence of extenuating circumstances, the loan file must include all of the following:
- A signed, written statement from the borrower’s third-party and documentation confirming that this was an isolated occurrence that significantly reduced the borrower’s income and/or increased their expenses
- No evidence that the borrowers had unacceptable credit prior to the problems
- Evidence that the borrowers have reestablished acceptable credit with at least four references for at least two years, including one traditional credit reference (an account that would appear on a credit report), and one housing related reference (e.g. a PG&E, SMUD or Comcast bill).
Note: If the derogatory information involved tradeline credit (an account that appears on your credit report), the reestablished credit must also be for tradeline credit. If the derogatory information involved non-credit payment references, either tradelines or non-credit payment references can be used.
- Evidence on the credit report and other credit documentation that the borrower’s present credit is current
- Evidence that no new public records, no 60-day late payments, no more than two 30-day late payments and no housing lates exist for the most recent 24 months
- If the client is unable to obtain thirdparty documentation confirming the extenuating circumstances or reestablishment of credit, the derogatory or adverse credit information cannot be offset.
For a new FHA loan:
Foreclosure:
A borrower whose previous residence or other real property was foreclosed on, sold through a short sale, or was given a deed-in-lieu of foreclosure within the previous three years is generally not eligible.
If the foreclosure was greater than three years prior to the date of the application, and the risk decision (AUS) received is an accept, the loan does not need manual downgrading (manual underwrite in the eyes of FHA means that your ratios are 31% housing /43% debt-to-income) and foreclosure documentation is not required.
Remember, FHA counts from the day the mortgage insurance claim was paid to the lender, not the trustee sale date – sometimes it can take months before the claim is paid. Have your mortgage professional check with FHA to confirm the date the claim was paid.
Scott Short Friday, March 11th, 2011
On Friday, January 28th, HUD/FHA extended the “Less Than 90-Day” flip rule. Now trying to find a lender who will allow the seller to resell for 20%+ over what they bought it for is becoming more difficult.
Last October HUD/FHA increased the Monthly Mortgage Insurance (MMI) cost from .55% to .90% for a 30-year fixed with a minimum down payment loan. During that time, HUD/FHA also lowered the Up Front Mortgage Insurance Premium (UFMIP) they finance into the loan from 2.25% to 1%.
In a move to increase their capital reserves and encourage private money back into mortgages, HUD/FHA will once again raise the MMI cost. On April 18 MMI goes from .90% to 1.15% for 30- and 15-year fixed loans with minimum down payment. (Since April 18 is a Monday, your loan professional needs to pull the case number on Friday April 15 to avoid this increase.)
One positive outcome for homebuyers from this new change is that the HUD/FHA system will automatically cancel any uninsured case number where there has been no activity for six months since the last action except for:
- Loans where an appraisal update has been entered, and/or
- Loans where the Upfront Mortgage Insurance Premium (UFMIP) has been received
Last action includes:
- Case number assigned
- Appraisal information entered
- Firm commitment issued by FHA
- Insurance application received and subsequent updates and
- Notice of Return and Resubmissions
Continue reading: The Cost of Working with FHA is Going Up Again
Scott Short Thursday, February 10th, 2011
The only good thing about interest rates going up is the “fence sitting” buyers jump in to the market.
Normally December and January are relatively slow months, but not this time. We are experiencing a high volume of borrowers wanting to buy now. Some of the buyers trying to qualify for a home loan are more challenged. Along with the lenders’ tightening standards, we in the lending industry are taking longer to figure out creative solutions to help more of your clients qualify. We are seeing more credit-challenged, budgetchallenged, employment-uncertaintychallenged and house-challenged borrowers. This is the time your mortgage professional needs to know how loans were structured back in the early 1990’s.
Almost every loan will need full documentation of the following: three months of bank statements (underwriters are scrutinizing the bank statements for overdrafts and unusual deposits), explanation letters for credit (especially all inquiries), job status (state employees need a supervisor to write a letter to address the borrowers’ furlough impact now and in the foreseeable future), motivation to buy (they are not just buying a home for a displaced family member who lost their home in foreclosure) plus other scenarios that defy the imagination some days.
At the time of this writing, HUD/FHA had not issued an extension for the “less than 90-day flip rule.” My sources inform me that HUD is working on it (not sure what “it” is going to look like when it comes out). We have seen a majority of the lenders that offer the program retract from offering the program for flips where the seller re-sells for greater than 20% over their purchase price.
Continue reading: 2011 Starts off with a Bang
Scott Short Thursday, December 9th, 2010
All I can say is WOW! This year has not been boring. Game changing events happened almost every month.
We started out the year with total confusion in the mortgage industry due to the new Good Faith Estimate (aka: GFE 2010). It took most mortgage professionals at least a month or two to understand the new form and the impact it would have on the consumers and themselves.
Consumers received overinflated GFEs to protect the loan officer from underdisclosing everyone’s fees in the transaction. If certain fees were underdisclosed, the loan officer would have to pay for it out of his/her pocket. One of the mysteries with the new GFE 2010 is that there is no place on the GFE 2010 to sign. There is a separate form for signatures. Now where is the consumer benefit from this change?
While struggling with the new GFE 2010, HUD/FHA released a waiver that they will allow “less than 90-day flips” to be financed with FHA loans (another program with a ton of misinterpretation).
Oh, did I forget to mention that HUD/FHA decided January 1, 2010 to adopt HVCC (Home Value Code of Conduct) practices for all their FHA loans. The industry thought HUD would have seen the “train wreck” Fannie and Freddie created with HVCC and steered away. But in the spirit of follow the leader, HUD jumped in with both feet. Can you say complexity, when you have HUD’s version of HVCC and the new appraisal requirements for the “less than 90-day flips?” This is just another reason the industry slowed down even more at the beginning of the year.
Continue reading: Real Estate Finance Forum – The Year in Review
Scott Short Monday, October 11th, 2010
CalHFA just brought back their FHA program as of September 7, 2010
It is a 96.5% of the sales price, 30-year fixed FHA loan not to exceed $417,000 loan amount. The borrower will need a 620 minimum (middle score of the three bureaus) credit score. Purchase money only loan. Requires homebuyer’s education for each borrower. The borrower must be a first-time home buyer (FTHB) or a qualified veteran pursuant to Heroes Earning Assistance & Relief Act of 2008, or located in a federally designated target area. Income and sale price restrictions do apply. Only single family residence, one unit including condo/PUD. Non-owner occupants not allowed. Manufactured homes and non-permitted additions are not allowed on the program. FHA less than 90 day flips where the seller is reselling for greater than 20% of their purchase price also not allowed on the program.
This new CalHFA FHA loan will allow the buyer to utilize the CHDAP (CalHFA Down Payment Assistance) program in conjunction. The buyer can borrow up to 3% of the sales price or appraised value, whichever is less. If you add 96.5% (FHA 1st mortgage) + 3% (CHDAP) = 99.5% loan, the buyer’s down payment would be ½%.
The program requires a minimum investment into the purchase of 1% of the buyer’s own funds. For more in depth details contact your authorized CalHFA mortgage professional. CRHMFA Homebuyers Fund (aka: National Homebuyers Fund) also announced a new loan program called the “CHF Platinum program”. The new CHF Platinum loan program provides downpayment for low-to-moderate income individuals and families purchasing a home in California as their primary residence. The downpayment assistance is currently in the form of a grant, sized at 3% of the first loan amount and can be used for downpayment and/or closing costs. This is not a bond program and not limited to first time home buyers. Eligible first mortgages include 30-year fixed term FHA, VA and USDA.
Continue reading: Change is Still in the Air
Scott Short Friday, September 10th, 2010
FHA announced as of October 4, 2010 that they will change their mortgage insurance costs to the borrower. Before the change, the up front mortgage insurance (the mortgage insurance that is financed into the loan) was 2.25% on or after October 4. It will drop to 1.00%. The monthly mortgage insurance which is added to the borrower’s monthly payment will increase from .55% to .90% (annually on amortized loans over 15 years). Your clients will qualify for less now that the MMI has nearly doubled. It would have benefited the buyer/ borrower if the upfront mortgage insurance went up and the monthly mortgage insurance went down since the upfront mortgage insurance is financed over 30 years (or whatever the amortization might be).
New competition for Short Sales
FHA has turbo charged one of their existing programs, the Short Refinance for Borrowers with Negative Equity Positions. This is a program designed to help borrowers (non FHA currently) to refinance down to 97.75% of their current appraised value, requiring their current first mortgage lender to reduce their principle by at least 10% or more. Remember, all these programs are voluntary for the servicing lender. If a second mortgage exists they will have to re-subordinate back into second position after the new first mortgage. (Max CLTV or Combined Loan to Value is 115%)
Fannie created a website on August 3, 2010: “Know Your Options”
This site was developed to assist consumers in financial distress. This link https://www.efanniemae.com/sf/kyo/index.jsp enables you, the Real Estate professional, to learn more about Fannie Mae’s new website and what it offers your clients.
Additional Resources
Obama Administration Announces Additional Support for Targeted Foreclosure-prevention Programs to Help Homeowners Struggling with Unemployment (http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-176)
Continue reading: FHA is Busy Making Changes…
Scott Short Friday, May 21st, 2010
It appears the black cloud over California is being lifted by the PMI (Private Mortgage Insurance) companies. When the housing market started to decline, the PMI companies retreated from the “sand” states (California, Florida, Arizona, and Nevada), or at least pulled back on the maximum loan-tovalue (LTV) they would guarantee. They still have a lot of areas they are avoiding (flips, non-owner occupied and condos – just to name a few).
April was the first month mortgage rates were not artificially stimulated by the Fed. (The Federal government bought $1.25 trillion of mortgagebacked securities (MBS) over the past 15 months.) Rates initially jumped up mainly due to the long Easter weekend after a shortened trading day on Good Friday.
Rates settled down the following week mainly attributed to the safer mortgages being produced now than were before. (Meaning that the quality is better and the risk of default is less.) Hopefully the appetite will continue. The Mortgage Bankers Association believes the 30 year mortgage rate will increase to 5.5% by mid-to-late summer and then possibly 6% by year end.
Kudos to the SAR Housing Opportunities Committee for hosting the “Show Me the Money” seminar held on April 29. There is an amazing amount of money being allotted to energy upgrades in the form of rebates, tax breaks and incentives. The REALTOR® community needs to stay current with this information in order to effectively educate clients on how to utilize the available programs.
On April 15, Congress reauthorized and the President signed into law an act that includes reauthorization of the National Flood Insurance Program (NFIP) through May 31, 2010. This temporary measure is retroactive to March 28, 2010, the date the NFIP’s authority expired, and provides the NFIP the ability to issue new and renewal flood insurance policies and increased coverage on existing policies.
Continue reading: More Changes, It’s the Name of the Game
Scott Short Friday, January 8th, 2010
I want to start out by saying a “Big Thank You” to Jim Hanson for running the Real Estate Finance Forum for the past two years. Jim has created great momentum for the forum and I am thankful.
For those who don’t know me, I am Scott Short with First Priority Financial. I have been a mortgage broker for 20 years now. I am married (wife Sandra) and have a son (Cesar – nine years old) and my daughter (Jazmin – four years old). I started in the mortgage industry in early 1990, fresh out of graduate school. (Masters degree in Finance)
My goal for the Real Estate Finance Forum is to continue the momentum that Jim Hanson has created over the past two years. (And the prior Chairpersons’ efforts, too.)
As we all know, our industry is under constant challenge/scrutiny from politicians, Fannie Mae, Freddie Mac, FHA, VA, the media and consumers in general. One thing we can all agree on is to learn from our past to prepare for our future. The Real Estate Finance Forum is one place that helps you be prepared for any changes that could affect your business.
One reason the Real Estate Finance Forum is so successful is: Synergy. This is a word and a business practice we all embrace. Together we can weather the storm; individually we could be picked off. This is another reason for the forum and your attendance.
Continue reading: About the Market – Happy New Year!
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