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.

Annual Percentage Rate (APR), Amount Financed, Finance Charge, and Total Payments…the Truth In Lending Disclosure Statement is one of the most challenging disclosure forms to explain to borrowers at a Massachusetts real estate closing. I like to call it the “Confusion In Lending” Statement because the form is what happens when the government attempts to recalculate your interest rate and closing costs in a way most human beings would not even consider.

To explain the Truth In Lending Disclosure, we’ll use a dummy form for a $500,000 purchase transaction with a $400,000 loan (20% down payment), a 30 year fixed rate loan at 5.00% at a cost of 1 point.

Annual Percentage Rate

The confusion begins. The Annual Percentage Rate, or APR, as you can see is not 5.00%, which is the contract interest rate for the loan. Why? Because the APR does not use the loan amount for its calculations but rather the “Amount Financed.”

Amount Financed

And the confusion continues. The Amount Financed is not the $400,000 loan amount, but is about $6,600 less than the loan amount. That is because the Amount Financed equals the loan amount ($400,000) less prepaid loan and closing fees and payments. Fees included in the amount financed are: points, lender fees such as underwriting, process, tax service, mortgage insurance, escrow company fees, prepaid interest to end of closing month, and Homeowners Association fees. All of these fees are added up and subtracted from the loan amount to reach the Amount Financed figure. Note that depending on when the loan closes in the month, and fees from third parties such as escrow companies the Amount Financed will vary and therefore so will APR.

How The APR Is Calculated

Now that we have the Amount Financed, we can calculate the APR. For a 30 year fixed loan such as this, the true loan amount is amortized for the loan period using the interest rate. In our example $400,000 amortized for 30 years at 5.00% has a payment of $2,147.29 per month paying principal and interest.

To calculate the APR, we use the same payment –$2147.29 every month for 30 years– to pay off an Amount Financed of $393,372.22 (loan amount less costs) to reach an APR of 5.141%. So the APR is higher than the interest rate because the Amount Financed is lower than the loan amount for the same monthly payment and term.

ARMs–Adjustable Rate Mortgages

If you are taking out an adjustable rate mortgage (ARM), you may as well just throw the Truth in Lending Disclosure out the window. The TIL is allowed to be based on the introductory interest rate through the entire life of the loan. Your adjustable rate mortgage, however, will reset its interest rate after 3, 5, 7, or 10 years depending on the type of product. There’s no way to predict where interest rates will be in the future, so the Truth in Lending Disclosure is inherently inaccurate for ARMs.

Explaining the Truth in Lending Disclosure is one of the many functions of a Massachusetts real estate closing attorney. In other states which aren’t required to use closing attorneys, they will not explain these complicated forms to you.

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Richard D. Vetstein, Esq. is an experienced Massachusetts Real Estate Closing 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.

It’s that time again for our annual review of hot topics and top posts for the last year, 2010.

#5. The Great Flood of 2010. Ah, who can forget the flooding in the spring of 2010. I sure remember bailing out my flooded basement every 30 minutes through the night, into exhaustion. Good times… FEMA declared a “major disaster” and the IRS granted taxpayers in 7 counties an extension to file their taxes.

Read More: Federal Aid And Tax Extension To May 11 Available To Massachusetts Homeowners Affected By Flooding

#4. The Obama HAFA Short Sale Program. The Obama short sale program, announced at the end of 2009, was aimed to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program (HAFA) provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed. By all accounts, however, the HAFA program has been a dismal failure.

#3. On Jan. 1, new RESPA rules went into effect, significantly changing the way lenders disclose settlement services, in particular closing attorneys’ fees, and title insurance. Read more: New RESPA Rules 2010: Disclosure of Settlement Services, Closing Attorneys’ Fees, And Title Insurance .

#2. Our popular primers on the Massachusetts Offer to Purchase and the standard form Purchase and Sale Agreement, checked in with over 16,000 reads. Great to see posts about buying a new home ranking so highly. An indicator of the recovery of the Massachusetts real estate market perhaps?

Read More:

• There’s Nothing Standard About The Massachusetts Standard Purchase and Sale Agreement
• The Massachusetts Offer To Purchase: A Binding Contract

#1–Fannie Mae & FHA Condominium Regulations:  Our series on the Fannie Mae and FHA strict new condominium lending rules were incredibly popular, combining for over 25,000 reads during 2010.  The new guidelines had condominium developers and associations, buyers and sellers in a tizzy, as Fannie and FHA imposed much tougher pre-sale requirements, condominium financial guidelines and the imposition of unit owner HO-6 insurance policies, among other requirements.

Read More:

• The Catch-22 Impact of New Fannie Mae Condominium Regulations.
• New FHA Condominium Lending Guidelines Sure To Slow Financing and Chill Sales
• HO-6 Policies Required By Fannie Mae & FHA

Honorable Mention: With Old Man Winter upon us, our post on the changes in Massachusetts snow removal law is very popular:  Massachusetts Property Owners Now Have Legal Responsibility To Shovel Snow & Ice.

What To Expect In 2011

Final Ruling In the Ibanez Foreclosure Case

Early 2011 should bring the final word from the Mass. Supreme Judicial Court on the very controversial foreclosure case of U.S. Bank v. Ibanez which invalidated foreclosures across the state for sloppy paperwork. Thousands of property owners and their ownership rights to their homes hang in the balance. Click Here For Our Entire Series Of Post On the Ibanez Case.

Fate Of Real Estate Attorneys

Year 2011 should also bring the final word in the The Real Estate Bar Association of Massachusetts, Inc. (REBA) v. National Real Estate Information Services, Inc. (NREIS) case. This case pits Massachusetts real estate closing attorneys versus out of state non-attorney settlement service providers which are attempting to perform “witness or notary” closings here in Massachusetts. At stake is merely the billion dollar Massachusetts real estate closing industry.

What are your predictions for 2011?

David Gaffin of Greenpark Mortgage,  www.massmortgageblog.com, is here with a superb summary of what’s now going on with Massachusetts (and national) residential mortgage market.

The National and Massachusetts Mortgage Lending Picture

Lot’s has been happening in the Mortgage World lately. Refinance business is very good. Purchase business is fair, heading into the all important year end buying season.

I will let this post be a little more free-form than my taking a particular topic and expounding on it (or beating it to death) depending on your perspective.

FHA has changed guidelines… Again.

USDA is still not guaranteeing loans.

Fannie and Freddie need another $200 billion of taxpayer money.

Foreclosures stopped and started again. What could that mean to you and me?

The Fed is meeting on Nov 3 to either lay the hammer down on Quantitative Easing II or will do nothing and really mess up interest rates.

Refinance Now!

1.  So you want to refinance? My suggestions:  A. Get started now! Loan pipelines continue to be backed up. Remember the bad old days when rates were an exorbitant 4.75% for a 30 year fixed rate and everyone re-fied? When was that again? Oh, right. JUNE. Well many of those same people are now re-fiing again in the low 4′s, possibly high 3′s. And people who were late to the party are adding on. So don’t expect your file to be closed in less than 60 days. Many lenders are at 120 days for refinances. If you have a current home equity line of credit that you plan to keep open, add another 30 days or so.

It is not all doom and gloom. I know of many files that were closed in less than 45 days. Purchases always get priority and about 30-35 days is the requirement. If you lender can’t get it done in that time, well my contact info is below.

Don’t be cranky with your loan officer or processor when they request enough paper work to rebuild a forest. The secondary market has really toughened its verification guidelines, cause no one wants to be left holding the bag on a loan that goes bad. Everyone wants to ensure that the underwriting, appraisal and income verification has been double and triple checked.

Good news for Realtors

End of year buying season has begun and the clients that want to be in their new homes by year end must make some decisions soon. We should see a boost in P & S activity over the next 30 days. If that doesn’t come to fruition, it could be a long dark winter for many of my realty friends.  But rates are great! If you bought the same priced home 2 years ago, you would have paid 5-20% more than current prices and your interest rates could have been more than 2.00% higher. Now is a GREAT time to buy. I know that is self-serving, but I am a numbers and value guy. I don’t like seeing the value drop in my house either, but if I were buying I would be psyched!

FHA has changed it guidelines again as of Oct 4

FHA needs money to keep guaranteeing its loans against default. Every borrower pays a fee to get into the program and to ensure its continuation. So the fees got changed.  FHA lowered the UPMIP (up-front mortgage insurance premium) from 2.25% to 1.00%.  Sounds good right? With one hand they giveth and the other taketh away. The monthly mortgage insurance will virtually all FHA borrowers pay has moved from .55% of the base loan amount to .84% monthly. On a $200,000 loan the old cost over  7 years was $12,200 and the monthly MI was $91.67.  Now the projected expense is $13,760 and the monthly MI is $140.00. Most investors have now raised the minimum credit score requirement from 620 to 640. FHA is still the best choice for borrower’s with credit scores under 660 and who may have little equity or down payment or who need higher tolerance levels for debt to income ratios.

USDA Loans

The USDA which offers a great program, or at least did, can’t seem to get its funding in order and therefore cannot issue any conditional guarantees for loans. USDA offers several advantages over conventional and FHA loans but they are proving very hard to get. If  you would like more information on the availability of these loans, send me an email.

Freddie and Fannie are in more trouble with losses.

Do we shut them off and let the private sector take over?  We can but rates would rise dramatically and put an even further damper on the housing market.  Given that TARP actually turned a profit, I think any additional funds to rescue the GSE’s should have an opportunity for the taxpayer to make a return on the re-sold properties even if it takes years to divest the shadow inventory that they own.

Foreclosure Mess

Speaking of shadow inventory… Foreclosures are on again/off again/on again.  For legal thoughts on this check out the Mass Real Estate Law Blog by Rich Vetstein and Marc Canner.

My thoughts are that although there will be a delay to ensure that the legal work has been properly done, people will unfortunately continue to lose their homes. Many will lose them due to the economic downturn or medical reasons. Others will have lost them to predatory lenders or poor decision making on their parts. I don’t really want to get started on “It was all the lender’s fault.” Needless to say, a reason the paperwork requirements exist today, is reliant upon the the lack of paperwork requirements and shoddy underwriting in the past.

I could write several scrolls on this whole mess, but I don’t wish to bore. It may already be too late.

Big Federal Reserve Meeting

Possibly the greatest short to mid-term driver for interest rates will be what the Fed decides or doesn’t decide to do at it’s next meeting. The market has baked in that the FED will ease monetary policy further. If they don’t come through in a big way the stock market most likely will drop and interest rates will rise.  But how much will rates rise? Probably enough that any one who re-fied this summer won’t be able to do so again, or at least until some other economic driver comes to bear. So get off the fence and talk to your loan officer NOW.

The recent historic drop of mortgage rates has created a refinancing boom for qualified homeowners. Unfortunately, the refinancing wave washing over the country has paradoxically left dry homeowners who would most benefit:  those who are “underwater.” Underwater mortgages, or “negative equity” (i.e., they owe more on the mortgage than the property is worth) cause foreclosures and serves to bottle up the housing market. Thus, assisting homeowners who are underwater on their mortgage is good public policy. According to a CoreLogic study, there are currently 11 million mortgages underwater and another 2 million nearly at negative equity in the US housing market – a figure that comprises 28% of all residential properties with a mortgage. In Massachusetts, there are 225,000 properties with negative equity and another 52,000 with near negative equity.

The government has made attempts to address this crisis. Last year the Obama Administration created a loan modification program, the Home Affordable Refinance Program, to help refinance borrowers whose loans were worth up to 125% of their homes value. The program did not take hold, and only a relatively minor number of modifications/refinances occurred.

Writing in yesterday’s New York Times, former chairman of the President’s Council of Economic Advisors and current Dean of Columbia Business School Glenn Hubbard penned an intriguing column proposing easier refinancing of underwater mortgages.

Under the proposal, quasi-governmental entities like Fannie Mae, Freddie Mac, the FHA, and the VA would require loan servicers:

• To send a short application to all eligible borrowers promising to allow them to refinance with minimal paperwork.
• Servicers would receive a fixed fee for each mortgage they refinanced, which would be rolled into the mortgage to eliminate costs to the taxpayers.
• The agencies would issue new mortgage-backed securities to cover the refinanced mortgages, using the proceeds to pay off the loans held in the existing securities.

The proposal also mandates that existing second lien holders provide a subordination agreement (which benefits the holder because it lowers the default risk).

The program would have immediate benefits: a distressed homeowner could save approximately 15% in their monthly mortgage payment, which would greatly help homeowner’s through the current crisis.

Is there a guarantee that this modification will become law? No, there is not, but it certainly makes sense for policymakers to move on it right away.

In the words of Glen Hubbard, “[i]f we can lower mortgage payments for struggling homeowners, it will reduce future foreclosures on federally backed loans, providing savings to the taxpayers.” And that’s a good thing for everyone.

By Karen Rabinovici, UConn Law ’12

It seems more outdated than hair scrunchies, something we witnessed years ago: discrimination against pregnant women seeking mortgage loans. Apparently it’s still going on and worse than ever which is why the U.S. Department of Housing and Urban Development (HUD) is investigating numerous cases of alleged pregnancy discrimination in lending. The New York Times recently wrote about it: Seeking a Mortgage, Don’t Get Pregnant.

Spurred by the financial crisis, lenders have created more stringent guidelines for granting loans to borrowers looking to buy homes, and have zoned in on pregnant women, essentially deeming them to be liabilities. Lenders are equivocating maternity leave with unemployment, which results in automatic disqualification or reduced buying power for a loan. Although some women on maternity leave can be entitled to temporary disability insurance, this disability insurance may not be used as qualifying income because it is allocated for a period of time less than three years. Women who are on maternity for only a few weeks are also affected, so the range of women denied loans is vast.

In the past, maternity leave was considered a break from work and was not taken into account when considering whether or not to grant a loan. In this financial climate, however, maternity leave has come to be viewed differently – as complete unemployment. So, lenders will not approve a loan until the mother is officially back at work. This subjects women to more red tape:  providing documents from their employers specifying the length of their maternity leave and the date of their return to work, as well as letters from their doctors, and other information deemed relevant.

These new guidelines have resulted in too many claims of discrimination from pregnant women to ignore, and thus has resulted in the HUD investigation. If HUD concludes that discrimination against pregnant women and new mothers is indeed taking place, this could be a violation of the Fair Housing Act, one purpose of which is to protect families.

Some results of all this are that families are forced to wait until the mother returns to work (possibly rushing maternity leave), families are altogether giving up on buying homes, or families are purchasing homes that they can afford on one salary.

Families are feeling punished for having babies, and the irony that most families are buying new homes in the first place because they are expecting children does not fail to come through.

While tougher standards for approving loans have become an obvious step to take by lenders, these types of resulting consequences walk a dangerous line between what needs to be done, and unfair treatment towards one group of people. In either case, the allegations of discrimination against pregnant women reek of the sexism that was rampant in the professional world decades ago.

What do you think? Are pregnant women being treated unfairly, or are they indeed a liability to lenders because of the income gap resulting from their maternity leave?

Related Articles:

Pregnant Women Losing Out On Home Loans, Change.org

Pregnant Women Denied Loans? Realtor.com