FNMA (Fannie Mae) and FHA Tighten Capital Reserve Requirements For Condominium Mortgage Lending

Since the condominium market meltdown, both Fannie Mae and FHA have passed increasingly stricter and tighter lending guidelines on condominium financing. Of particular concern to the agencies and potential buyers is the capital reserve account. For those who don’t know, a condominium capital reserve account is an emergency fund set aside for major capital common area repairs and expenses, such as a leaky roof, a new boiler system, or other major structural issues. In a new condominium, the developer will establish a capital reserve account through mandatory contributions by new buyers, then a certain percentage will be allocated towards that capital reserve account every month through condo fees. In established condominiums, some have already set up a healthy capital reserve fund, while others have little, if any, money set aside. That’s where the problem starts as far as Fannie Mae and FHA are concerned.

10% Of Operating Budget Goal

FHA is now the strictest lending program for condominiums. Ironically, FHA is typically the loan of choice for first time condo buyers. FHA rules now require that condominiums set aside at least 10% of their operating income towards their capital reserve accounts. So if the annual budget is for $200,000, then $20,000 must be set aside in the capital reserve fund.

The lender may also require a review of the annual budget, and where the budget is inadequate, require a capital reserve study.

With regard to Fannie Mae, the 10% rule is often required by lenders although it’s not technically part of the Fannie Mae condominium guidelines. However, arguing with Fannie Mae and lenders about this issue is tough because a healthy capital reserve account is critical for the financial stability of any condominium project, and hence, vital to the underwriting of the condo mortgage loan.

Accordingly, for all FHA and some FNMA loans (i.e, the vast majority of conventional loans), the 10% capital reserve account rule will come into play.

What If My Condo Doesn’t Have 10% Reserve?

Well, you will have a problem selling your unit, and you may have unintentionally picked a fight with the condo trustees. The Massachusetts Condominium Act requires the establishment of an “adequate” capital reserve account but does not specify how much money needs to be in it. Arguably, 10% of operating budget is now “adequate” under the law, but there is no court precedent yet.

I will say this. Condominium trustees, boards and managers who do not keep the condominium’s finances in compliance with current Fannie Mae/FHA secondary mortgage lending requirements run the risk of violating their fiduciary duties towards unit owners. If unit owners are hindered in selling their units to buyers seeking FHA/Fannie Mae loans because capital reserve accounts are insufficient, that’s a huge problem.

Bottom line, I would advise all Massachusetts condominiums to get their capital reserve accounts beefed up to the 10% mark. It’s a win-win for everyone.

If you are in need of comprehensive condo compliance services, I would recommend my friends at National Condo Advisors.

More information:

FHA Tightens Condo Rules

New Fannie Mae Condo Rules

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Richard D. Vetstein, Esq. is an experienced Massachusetts Real Estate Condominium Real Estate Attorney. For further information you can contact him at info@vetsteinlawgroup.com.

Brian Cavanaugh of SmarterBorrowing.com is back with his Massachusetts Weekly Mortgage Rate Update. Scroll to the bottom for Brian’s valuable Massachusetts Mortgage Rate Lock Advice!

Inquire within for current Mortgage Rates or Guidelines   bc@SmarterBorrowing.com  617.771.5021

Overall, I am expecting to see a much more active week in the financial markets and mortgage pricing than last week. The most important day of the week is either Tuesday or Friday due to the reports being posted those days and the FOMC meeting scheduled. Please maintain contact with your mortgage professional if you have not locked an interest rate yet because we may see sizable changes to mortgage pricing more than one day this week.

If I were considering financing/refinancing a home, I would….

LOCK if my closing was taking place within 7 days…

LOCK if my closing was taking place between 8 and 20 days…

LOCK if my closing was taking place between 21 and 60 days…

LOCK if my closing was taking place over 60 days from now…

Busy Week Ahead

This week is fairly busy in terms of the number of economic releases and other events scheduled that may influence mortgage rates. There are only four pieces of economic data for us to watch, but three of them are highly important to the markets. In addition to the economic reports, we also have the last FOMC meeting of the year and two important Treasury auctions that are likely to impact bond trading and mortgage pricing. Those events, coupled with the likelihood of further overseas developments from Europe and possibly others, make it highly likely that we will see plenty of movement in the markets and mortgage rates this week.

There is nothing of relevance scheduled for tomorrow. This means we can expect the stock markets to drive bond trading and mortgage rates again. If the major stock indexes open the week with gains tomorrow morning, bonds may move lower, pushing mortgage rates higher. But a weak open in stocks could lead to slightly lower mortgage rates tomorrow. We could also see traders position themselves ahead of the week’s agenda, so even though there is nothing concerning on the calendar, we could see mortgage rates change.

Consumer Price Index Out

The week’s most important economic data comes Friday morning when November’s Consumer Price Index (CPI) is posted. It is similar to Thursday’s Producer Price Index, except it tracks inflationary pressures at the more important consumer level of the economy. Current forecasts call for an increase of 0.1% in the overall index and a 0.1% rise in the core data reading. The core data is watched more closely because it excludes more volatile food and energy prices, giving a more stable reading for analysts to consider. This data is one of the most watched inflation indexes, which is extremely important to long-term securities such as mortgage related bonds. Rising inflation erodes the value of a bond’s future fixed interest payments, making them less appealing to investors. That translates into falling bond prices and rising mortgage rates.

Retail Sales Report

Tuesday has two important events, starting with November’s Retail Sales report. This 8:30 AM ET release will give us a key measurement of consumer spending by tracking sales at retail level establishments. This data is highly important to the markets because consumer spending makes up two-thirds of the U.S. economy. Rapidly rising consumer spending raises the possibility of seeing solid economic growth. Since long-term securities such as mortgage bonds are usually more appealing to investors during weaker economic conditions, a large increase in retail sales will likely drive bond prices lower and mortgage rates higher Tuesday. Current forecasts are calling for an increase of 0.6% in November’s sales.

Last Fed Meeting

The last FOMC meeting of the year will also be held Tuesday, adjourning at 2:15 PM ET. There is not much debate about what the Fed will do at this meeting with no chance of them raising key short-term interest rates. Therefore, the post meeting statement will likely be the sole source of a market reaction. This statement has the potential to have a significant influence on the markets and mortgage rates as investors look for any indication of what and when the Fed may do next. One potential move would be more debt purchases by the Fed. An announcement of another round of quantitative easing (QE3) could help boost bond prices and improve mortgage rates Tuesday afternoon. Besides that, it is believed that there isn’t much more the Fed can do to help boost economic activity.

Treasury Auctions

There are Treasury auctions scheduled for several days this week, but the two important ones are the 10-year Note sale Tuesday and the 30-year Bond sale Wednesday. Tuesday’s auction is the more important of the two and will likely influence mortgage rates more. Results of each sale will be posted at 1:00 PM ET. If they were met with a strong demand from investors, particularly international buyers, we should see afternoon strength in bonds and improvements to mortgage pricing those days. On the other hand, a weak interest in the auctions could lead to upward revisions to mortgage rates during afternoon hours.

Wednesday has little to be concerned with, except for the 30-year Bond auction. November’s Producer Price Index (PPI) will be posted early Thursday morning. It measures inflationary pressures at the producer level of the economy. There are two portions of the index that are used- the overall reading and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices. If Thursday’s release reveals stronger than expected readings, indicating that inflationary pressures are rising, the bond market will probably react negatively and drive mortgage rates higher. If we see in-line or weaker than expected numbers, the bond market should respond well and mortgage rates should fall. Current forecasts are showing a 0.2% increase in the overall index and a 0.1% rise in the core data.

Nov. Industrial Production Report

November’s Industrial Production data is also scheduled to be posted Thursday morning, but a little later than the PPI. This report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. Analysts are expecting it to show a 0.2% increase in output, indicating modest manufacturing growth. A smaller than expected rise would be good news for bonds, while a stronger reading may result in slightly higher mortgage pricing. However, the PPI release is more important to the markets than this data is.

• Are you a possible Massachusetts First Time Homebuyer?
• Do you have a Real Estate client inquiring about current Mortgage Rates?
• Do you have any Refinancing questions?
• Should you be thinking about Refinancing out of your ARM (Adjustable Rate Mortgage)?
• Have your Real Estate clients been Pre Approved?

bc@smarterborrowing.com  617.771.5021

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Home Affordable Refinance Program (HARP) Revamped

Homeowners who have not been able to refinance because they are “underwater” — their loans are more than the value of their home due to depressed real estate values — are being thrown a lifeline by the Obama Administration’s latest housing market rescue plan, announced yesterday.

Regulators are revamping a program rolled out in 2009, the Home Affordable Refinance Program, or HARP, which lets borrowers with homes whose values have dropped to refinance. So far, only 894,000 borrowers have used it, of which just 70,000 are significantly underwater. The refinancing program is open to homeowners whose mortgages are owned or guaranteed by Fannie Mae (FNMA) or Freddie Mac (FMCC), the two government-controlled mortgage giants whose rescue three years ago has cost taxpayers $141 billion to date.

The FHFA said the changes could at least double the number of homeowners enrolled. Analysts at Barclays Capital, however, estimated that between 1.9 million and 3.1 million homeowners could be eligible for help.

But underwater homeowners, as long as they have made all their mortgage payments on time in the past six months and meet a few other basic criteria, such as being gainfully employed, would be eligible for a new refinance product just rolled out by the Obama Administration.

According to Scott Van Voorhis at Boston.com, an estimated 230,000 homeowners across Massachusetts are underwater on their mortgages, owing an average of $120,000 more than what their properties are actually worth now. The savings could prove substantial, with $3,000 in savings each year on a $200,000 mortgage that is refinanced from 6 percent down to 4.5 percent, according to this explanatory piece put out by the Associated Press.

Given higher home prices here in Greater Boston, that could amount to $6,000 in savings a year for a homeowner with a $400,000 mortgage — nothing to sneeze at.

If this HARP finally sings a tune, it will be cause for joy among borrowers, mortgage bankers, and closing attorneys across the state. Let’s keep our fingers crossed.

________________________________________________

Richard D. Vetstein, Esq. is an experienced Massachusetts real estate closing attorney. Please contact him if you need a mortgage referral or assistance with a refinance or purchase transaction.

Fannie Mae and FHA Conforming Loan Limits Dropping.  Close by 9/30/2011 or sooner!

A guest post by David Gaffin, Senior Mortgage Lender, from Greenpark Mortgage.

David Gaffin, Greenpark Mortgage

As Congress lets the temporary increase in conforming loan limits expire October 1st, we have received word that some investors will require that all loans affected by these limits close on or before September 30, 2011. Other investors will have their own timelines and will require closings earlier, perhaps weeks earlier.

I have attached a chart below indicating the new loan limits for 1-4 family residences through 12/31/2011 for some investors. 2012 Loan limits for Fannie and Freddie have yet to be announced. For Massachusetts this reduction will impact the these areas as follows: Martha’s Vineyard and Nantucket: Reduced from $729,750 to $625,500; , Essex, Middlesex, Norfolk, Plymouth and Suffolk Counties reduced from $523,750 to $465,750; Bristol county will be reduced to $426,650; Franklin, Hampden, Hampshire and Worcester Counties will remain at $417,000.

Please follow the attached chart for the max loan amounts. It is indicated by county.

                                               1 Family 2 Family 3 Family 4 Family

You can also access other states via the website: http://www.fhfa.gov/Default.aspx?Page=185 and click on the HERA Loan Limits at the bottom of the page.

With respect to FHA, more pain is ahead as FHA seeks to lower its market share and reduce exposure. Loan limits decreases will affect Massachusetts dramaticaly, as the chart below indicates:

Worcester County will get killed! With Loan Limits dropping by almost $100,000, FHA will be effectively increasing the down payment requirements for buyers, if they wish to purchase a home over $298,000. This will have an impact on home prices. FHA is also good for buyers who have less than 740 credit scores. Fannie has price adjustments for lower Ficos and these raise the interest rates to borrowers. The towns of Milford, Westborough, Northborough, Shrewbury, Northborough, among others could be hard hit.

Bottom line, Take advantage of the low interest rates and higher loan limits now. Greenpark is currently accepting purchase loans for the higher limits until 8/25/2011, to close by 9/30/2011.

Please send me an email me, dgaffin@greenparkmortgage.com with any questions and thank you for reading.

Good News For First Time Condo Buyers

FHA loan programs offer low down payment mortgages which are often ideal for first time home buyers who lack cash for a 20% down payment but are otherwise strong borrowers. On June 30, 2011, FHA confirmed its commitment to financing condominiums with the issuance of revised lending guidelines (HUD Mortgagee Letter 11-22). The new FHA Condominium Project Approval and Processing Guide can be downloaded here.

“Today, we institute revised guidelines that preserve FHA’s role in the condo marketplace during these difficult times while making certain we manage risk in a responsible way,” said FHA’s Acting Commissioner Robert Ryan. “This guidance formalizes and expands the policies we put in place in 2009 and lays the groundwork for a more formal rulemaking process going forward.”

Highlights Of New Guidelines

1.  Reserve Study Requirements:
New guidelines require reserve studies on all conversion (i.e., new) developments. Reserve Studies are valid for a period of 2 years.

2.  Reserve Funding
In addition to a reserve study determination, a minimum of 10% of the operating budget must be set aside as a baseline in a reserve account. Funds to cover the total cost of any item in the Reserve Study or that will require replacement within 5 years must be deposited in HOA’s reserve account. The insurance deductible must also be included in the reserve fund.

3.  Delinquent Condo Fees

On existing projects, the condominium cannot have more than a 15% delinquency rate on unpaid condo fees. This could be a problem for struggling condominiums. A waiver may be granted, however, with supporting documentation.

4. Pending Litigation

Litigation impacting the financing soundness of the condominium must be disclosed and explained to FHA. Again, this could be problematic if the condominium is involved in, for example, a lawsuit with the original developer over construction defects.

5. HO-6 Policies

Individual HO-6 insurance policies are required if the master condo insurance policy does not provide interior unit coverage (which most don’t).

6. Fidelity Bonds For Large Projects

Fidelity insurance to protect against employee dishonesty is required for projects over 20 units.

7. New Construction Pre-Sale
New Construction pre-sale requirements remain at 30%, although only for one year after the first closing. After the first year, it increases to 50% for the development.

8.  Maximum Commercial Concentration
Remains at 25%, however, new guidance allows for possible waiver request up to 35% of the development.

9. 10% Investor Concentration
No longer includes sponsor unsold units or units required to be rented by State or Municipality, ie; rent stabilized/rent controlled.

The “Standard Form”

In Massachusetts, buyers and sellers typically use the standard form purchase and sale agreement created by the Greater Boston Board of Real Estate. This form has been around since the late 1970′s and last updated in 1999–which might as well be 100 years ago in real estate life. Along with the standard form, attorneys for sellers and buyers customarily add specialized Riders to the agreement which modify the standard form and add contingencies particular to the deal.

A Vastly Changed Landscape

The legal and mortgage financing landscape has changed so much in the last few years, with Fannie Mae and regulatory agencies issuing a new policy what seems like every other week, and short sale and REO transactions becoming much more prevalent. With the recovering market and new appraisal guidelines, some homes are not appraising out. Moreover, lenders have tightened underwriting requirements considerably. As a result, borrowers have more difficulty qualifying for mortgage loans, it takes longer to get a loan commitment, and there are often delays in getting the loan “cleared to close.” All these changes in the real estate landscape require re-thinking of the standard form purchase and sale agreement and the associated riders.

As experienced Massachusetts real estate attorneys, it shouldn’t come as a surprise to know that we are on top of the latest changes in the Massachusetts and national real estate landscape, and have adapted our legal forms accordingly. I’ll go through 3 recent changes that I’ve adopted in my practice.

Low Appraisal Contingency

These days, appraisals are administered is a completely different fashion. New rules – the Home Valuation Code of Conduct (HVCC) – hold appraisers to higher standards and sharply limit communication between appraisers and lenders. Mortgage professionals can no longer select their “hand-picked” appraiser now; there is basically a random lottery system to select the appraiser. The downside of this lottery is that the appraiser may not be very familiar with the town or neighborhood being appraised. So the appraisal may fall short of the agreed-upon selling price.

I always insist on this provision to protect a buyer against the risk of the property not appraising out.

Appraisal- The buyer’s obligations, hereunder, are contingent upon the BUYER’s lender obtaining an appraisal of the property in an amount at least equal to the purchase price of the premises.

What happens if the property doesn’t appraise for asking price? Sometimes you can ask for a second appraisal or bring different comparable sales to the appraiser’s attention and he can revise the appraisal. Sometimes, the parties must re-negotiate the purchase price. Talk to your lender and Realtor about the options. This provision, however, gives the buyer an “out” if a low appraisal cannot be overcome.

Condominium Fannie Mae Compliance

Tougher Fannie Mae and FHA condominium rules have made condo financing much more challenging. I add this clause to deal with this situation:

The Condominium, the Unit, and the Condominium Documents (including but not limited to the Master Deed and By-Laws/Trust) shall conform to the requirements of Federal National Mortgage Association (“FNMA” or “Freddie Mac”), Federal Housing Administration (“FHA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) or other secondary mortgage market investor, and shall otherwise be acceptable to BUYER’s mortgage lender.

Rate Lock Expirations

Delays happen. There may be a title problem which the seller needs a few days or weeks to correct. But what if your rate lock will expire and you are facing a higher interest rate loan? This provision protects the buyer in this situation:

MODIFICATION TO PARAGRAPH 10: Notwithstanding anything to the contrary contained in this Agreement, if SELLER extends this Agreement to perfect title or make the Premises conform as provided in Paragraph 10, and if BUYER’S mortgage commitment or rate lock would expire prior to the expiration of said extension, then such extension shall continue, at BUYER’S option, only until the date of expiration of BUYER’S mortgage commitment or rate lock.

There are many other contingencies and new provisions that I use, but I cannot give them all away!

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Richard D. Vetstein, Esq. is an experienced Massachusetts Real Estate Attorney. For further information you can contact him at info@vetsteinlawgroup.com.

A guest post by David Gaffin, Senior Mortgage Lender, from Greenpark Mortgage.

David Gaffin, Greenpark Mortgage

Since Nov. 3rd when the Federal Reserve Bank released details of QEII (Quantitative Easing II), we have seen a very rapid rise in mortgage rates. On a national basis, the Freddie Mac 30 year fixed rate has moved from 4.20% to 5.05% this week. The 10 year Treasury has risen above 3.70% and Inflation seems to be the word of this month.

Last year at this time the 10 year was at 3.73% and it hit 4.00% on April 5th. It then started a fairly rapid descent all spring and summer to its low of 2.38% on October 8th. There were several economic events that brought this about, but the question in every mortgage company’s and consumer’s mind is “Will history repeat itself this year”?

Wishful thinkers will say YES. Many think the stock market is overbought. The Mid-East and Egypt situation is still very unstable. Inflation remains low according to the FED. Unemployment is stubbornly high and the housing market is continues to be very sluggish.  Until these issues are resolved, rates cannot rise too far or consumer demand will fall and economic growth will not be sustained.

HOWEVER, there are a few wrinkles that have nothing to do with Macroeconomics that will be in play in the coming months and years.

Changes In Loan Officer Compensation

As part of the Dodd-Frank Bill, loan officers’ compensation is about to undergo a dramatic change. Loan officers will no longer be paid based on certain loan characteristics such as interest rate. The intention is to have consumers with like profiles receive the same interest rate when quoted from one loan officer to another within the same company. One the surface this makes sense. In practice, the policy is very unfriendly to the consumer, limits consumer choice, and is uncompetitive for the marketplace. Loan officers already have a fiduciary responsibility to their clients to put them in the best loan for them, while compensation to the loan officer is not a major factor. This is a higher standard than the financial planning or brokerage environment which must merely come up with a suitable product, not the best product for their clients.

The anticipated effect of this change, coupled with the reduced volume of loan transactions due to rising rates, will further increase the profit pressures on lending institutions, thereby requiring them to make their loans more profitable. This may be done through reduction of expenses and overhead (read layoffs) or higher rates to the consumer, and will eventually lead to fewer choices to the consumer as companies go out of business. The large lending institutions will then be free to control the market even more so.

Fannie/Freddie (GSE) Reform

A bigger factor is the Fannie/Freddie GSE reform now being detailed by the Treasury. This plan, which may take affect over several years, will reduce/eliminate the government’s backing of the mortgage market, except perhaps through FHA, VA and USDA loans. When the government moves to a private secondary market, those investors are going to want a greater return on their investments and rates will almost certainly rise and may do so dramatically. Less than 10 years ago 7.25% was considered a great rate!

Current programs such as a 30 year fixed rate may vanish in favor of the adjustable rate mortgages which move with the interest rate market and would be more profitable for investors. Additionally, for those programs that are somewhat or fully guaranteed by the government, I would expect the fees associated with these programs to rise substantially.

The GSE reform options include reducing the Agency Jumbo Limit to $625,000, down from $729,000 in the highest cost areas. In Massachusetts those high cost areas are Martha’s Vineyard and Nantucket Islands off Cape Cod. The highest max loan amount in other counties is $523,750. Will this reduction of loan size have a big impact? I don’t think so. Current rates may be .250% to .500% higher with portfolio lenders that offer loans over these limits, but these jumbos have come way down in rate compared to the depths of the financial crisis. Most of the risk is relieved through very strict underwriting guidelines.

I have Portfolio lenders offering under 4% on ARM rates on loans to $1MM at 5 year interest only for the right borrower! While ARMs may not be the right product for everyone, they are for certain individuals and these folks are saving tremendous sums compared to where rates were just a couple of years ago.

A big concern for for future homeowners with GSE reform will be the minimum down payment requirements. There is talk that borrower’s may be required to put down 10 or 20% to qualify. Some major lenders have suggested 30%. Yeah, that’ll work…not. If that becomes the requirement you can kiss home ownership goodbye for the next generation or so, and rents will rise very rapidly.

I certainly recognize the need for GSE reform. Taxpayers have been getting killed by the losses from the mortgage giants, and the bleeding will not stop anytime soon. The plan as outlined by the Obama administration will gradually make changes to the GSEs over 5-7 years. But hopefully the market will understand what will be happening well in advance of the changes occuring.

Interest Rate Predictions For 2011 and Beyond

So what do I think? I think (unfortunately) rates will:

• increase to 5.875%-6.125% for a 30 year fixed rate by the end of 2011;
• increase to 6.50% by end of 2012; and
• level out at closer to 7% by 2013.

By that time hopefully there will be a more clear path to GSE reform.

I want low rates. It’s good for my business, helps pay for my mortgage, and keeps the house heated.

All of this rate speculation, however, could be meaningless if Congress decides to finally act on the deficit. If they do, then rates could stay low for a very long period. One thing is for sure, my 3 kids are going to see a very different economic and housing landscape when they are ready to buy a home.

To see the  the full report on Reforming America’s Housing Finance Market, click here .

I welcome comments and your point of view.  I also welcome subscribers to my blog, The Massachusetts Mortgage Blog. Also check out my new Facebook page, Mortgagemania. I can be reached via email by clicking here.