Critics hit FHA on condo financing

Critics hit FHA on condo financing

Kenneth R. Harney on Oct 30, 2015

Democrats and Republicans on Capitol Hill don’t agree on much lately. But a bipartisan coalition of 56 House members has come together to file a protest about a housing issue that’s been festering since 2011- the federal government’s dramatically diminished role in helping buyers finance condominiums.

In a letter to Housing and Urban Development Secretary Julian Castro, the congress members complained that the Federal Housing Administration has imposed “significant restrictions” on condo financing, despite the fact that condo units often are “the most affordable homeownership options for first-time buyers, small families, urban and older Americans.” A HUD spokeswoman said the department is reviewing the letter but had no immediate response.

The House members’ condo complaints come in the wake of sharp criticism from consumers, condo association boards, builders and real estate agents over the Obama administration’s failure to maintain the FHA’s once prominent role in helping to finance condos, especially in the starter-home, moderate price ranges. During the past decade and a half, low down payment FHA-insured mortgages sometimes financed 80,000 to 90,000 condo purchases annually. But since 2011, those numbers have been plummeting. During 2014, they totaled just 22,800 loans. Through August of this year, condos have accounted for just 2.8 percent of FHA loan volume.

As the result of onerous new “recertification” procedures, which require entire condo developments to pass prescribed standards or be banned from FHA lending on any individual units, only about 20 percent of previously eligible developments can now use FHA financing. This reduced number, in turn, represents barely 10 percent of the total market for condominiums, according to congressional estimates. The agency has also imposed a variety of other requirements – tight limits on the percentage of rental units in any one project, caps on the amount of commercial space a project can have, restrictions on fees that many condo associations depend upon to support their activities – that have frustrated buyers and sellers across the country.

In one large condo development in Orange County, the condo association’s inability to deal with FHA’s rules has knocked 7,000 units out of eligibility for favorable low down payment financing, according to Rita Tayenaka, president of the Orange County Association of Realtors. The ineligibility not only makes it impossible for would-be purchasers to use an FHA loan to buy a condo unit in the development but also reduces the ability of current owners to refinance or to sell. Condo owners who are seniors have been cut off from the dominant source of reverse mortgage money – FHA’s home equity conversion program, which provides more than nine out of 10 reverse mortgages nationwide, according to lending industry estimates.

“It’s been very frustrating trying to work with FHA” to solve these issues, Tayenaka said in an interview. “Nothing happens.”

Seth Task, a real estate broker with Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says FHA problems with condos are “a daily occurrence.” He cited the recent example of a buyer who was pre-approved to purchase a $145,000 condo unit with an FHA loan. But because the condo development was no longer certified under FHA rules, the buyer could not obtain a mortgage. Weeks later, the unit sold to an all-cash buyer for $139,000 – a $6,000 loss in value for the seller.

FHA’s current rules are “not fair to millennial buyers” who need low down payments and favorable credit underwriting, said Task, and they’re “not fair to sellers.”

The condo drought at FHA is beginning to stimulate more than congressional letters of protest. Last week a House subcommittee heard testimony on a bill (H.R. 3700) that would mandate many of the changes critics have been demanding.

HUD officials in earlier years have explained that the tightening of rules governing condo financing were prompted by losses FHA suffered in connection with fraudulent condo mortgages originated in Florida during and immediately after the housing crisis in 2009-2010. Yet the agency’s own data now show that FHA’s overall portfolio of insured condos has been performing 22 percent better – that is, producing fewer defaults and losses – than the agency’s regular single family loans, according to Brian Chappelle, a principal at consulting firm Potomac Partners and a former official at FHA.

“Their mission is affordable housing for people who need it,” said Task. “But FHA has set the (condo) system up to fail” – and it’s doing precisely that.

Homebuyers Pay Price For New Rules

Homebuyers Pay Price For New Rules Taking Out A Loan May Require More Time, Money

By Kenneth R. Harney Washington Post Columnist

t’s barely been two weeks since the nationwide changeover in mortgage and settlement procedures took effect, but the early results are trickling in: Lenders and brokers say just about everything is taking longer and the costs to home buyers are moving up.

On Oct. 3, under a directive from the federal Consumer Financial Protection Bureau, lenders, title insurers and settlement agents were required to comply with a nearly 1,900-page new rule book designed to improve transparency and accuracy in real estate and mortgage transactions for home buyers and refinancers. The regulations impose potentially heavy penalties on lenders who get their cost estimates wrong or fail to deliver accurate disclosures to consumers on prescribed timelines at application and closing.

Though the new disclosures are widely regarded as improvements over the ones they replaced – the traditional good-faith estimates, truth in lending and HUD-1 settlement forms – there have been concerns for months that the reformed process would increase the typical time span between loan application and the final closing.

What has received less attention, however, are the impacts of longer timelines on how much consumers pay to do the deal. Now those increases are coming into clearer focus, as lenders take new applications and quote rates and fees.

Focusing In On Fees

Diann Tyler, president of Everest Home Mortgage LLC in Philadelphia, says she’s received and begun processing multiple applications since Oct. 3, and nearly every one carries higher loan-fee charges than would have been the case under the old rules. Why? Because most clients are opting for longer rate-lock periods and those longer locks cost more money. Typical rate locks guarantee borrowers that they will pay no higher rate than what is stated in the loan quote. They can run anywhere from 15 to 60 days or more, and involve capital market hedges by the lender to obtain the rate guarantee.

Tyler’s standard rate lock used to be 30 days, but now clients need at least 45 days. That can add an extra $500 onto her quotes for average-sized loan requests, she told me, depending on market conditions and the bank or investor she’s using to fund the mortgage.Sometimes the extra charge won’t be obvious to the borrower because the money is being subtracted from the “lender credit” they receive. “But the fact is they’re paying more” than they would have on the identical transaction before Oct. 3, Tyler said.

In Huntington Beach, California, Dennis Smith, co-owner and broker at Stratis Financial, says that in order to cope with the strict compliance requirements of the new disclosure rules, he has had to hire another staff person. He’s not yet certain how this additional expense will factor into individual borrowers’ fees – that will depend on application volume and “market factors moving forward” – but one can assume the added salary and benefits will be reflected in charges somewhere. Tim Kleyla, president of The Mortgage House in Holland, Michigan, says because of the tight time requirements of the new rules, higher rate-lock costs and the danger that shorter-term locks will expire before closings, “we are throwing (short locks) out the window and will be locking for 45 to 60 days.” Given the higher costs for these longer locks, higher underwriting fees from funding sources and his own higher compliance expenses, typical borrowers could see “another $500 and I am sure eventually more” on their total transaction costs, he said.

Michael Fratantoni, chief economist for the Mortgage Bankers Association, says the expenses added by the new settlement rules come on top of a long series of federal regulatory changes in the past several years that have pushed the cost of originating a typical mortgage from $4,500 to $7,000. “A lot of it is personnel, quality control, spending on new technology” and re-programming systems.

So what can a home buyer do to limit some of these costs? Probably not a lot, except shop vigorously and compare lender fees and lock policies. As time goes on and lenders and settlement agents gain experience in managing deadlines under the new rules, maybe 30-day closings will become more common again, making longer locks unnecessary. For now, though, you’re likely to see higher, not lower, charges.

But given the fact that the new regulations also require delivery of your final closing disclosure three days ahead of the settlement date, giving you plenty of time to spot problems and dispute charges, who knows? Maybe the rule changes could actually end up saving you money.

Insurance for your down payment coming soon

Insurance for your down payment coming soon

Kenneth R. Harney on Oct 9, 2015

When you put down thousands of dollars to purchase a home, you’re taking a potentially serious financial risk- You could lose some or all of that money if the value of the house declines or a job transfer, illness or other life event forces you to sell the property during a dip in market demand.

But would you be willing to pay an insurer a one-time premium to protect your down payment against loss? There’s never been such an option – so you can’t be sure. But beginning next January that’s likely to change with the projected nationwide rollout of something called “+Plus by ValueInsured.”

The basic idea is straightforward. For an upfront premium that under some circumstances could be part of the interest rate you pay on your mortgage, your down payment – all the way up to $200,000 – would be insured, with you as the beneficiary. If the value of your house declines and you sell at a loss, you’d be eligible to make a claim for up to the full amount of your original down payment.

The premiums are expected to average around $1,200 on a $20,000, 10 percent down payment on a $200,000 house. If you purchase the coverage as part of a lender credit toward closing expenses, rather than paying cash for the coverage at closing, the +Plus premium could be rolled into the interest rate on the entire loan, raising the rate slightly. It could also be a supplement to lender-paid mortgage insurance, with a higher rate on your mortgage.

Sounds intriguing, right? But as with all insurance products, you’ve got to look hard at the details, especially the terms governing when and how much you’ll receive if you make a claim for a loss. The sponsor of the plan is a company in Dallas, ValueInsured (www.valueinsured.com). For the +Plus program, ValueInsured is partnering with Texas-based specialty insurer Houston International Insurance Group, and Everest Re Group Ltd., a reinsurance company headquartered in Bermuda.

In an interview last week, Joe Melendez, founder and CEO of ValueInsured, told me that the goal of +Plus is “to take the risk element off the table and give (buyers) more confidence.”

So how much risk is really taken off the table? Start with the conditions that have to be met to qualify for a payment on a claim. Simply documenting that you suffered a loss after a sale won’t necessarily get you your down payment money back. You can’t file a claim during the first two years after your purchase or after seven years.

Next comes the really tricky part. The +Plus plan keys its payouts in part to a property value index published by the Federal Housing Finance Agency (www.fhfa.gov/DataTools/Tools/Pages/HPI-Calculator.aspx). If your state index hasn’t dropped during the period of your ownership but the sale price of your house has gone down, or if the FHFA index hasn’t declined as much as your home’s value since the date of purchase, you’re not likely to get all of your money back. Or maybe anything at all.

Here’s an example provided by ValueInsured- You put down $20,000 down on a $100,000 house. Five years later you sell at a loss of 20 percent, $20,000. If your state home price index as measured by the FHFA has declined by only 10 percent, the most you can obtain on a claim is $10,000. If your house declined in sales price by 30 percent but the FHFA index remained flat, you’d get zero on your loss. But if the index declined by 30 percent and your home price also declined by 20 percent, you could claim your full $20,000 back.

The payout formula is this- +Plus will pay the lesser of- (1) your original down payment, (2) the actual equity you lost, or (3) the purchase price or your house times the reduction in your state’s FHFA index.

Not so simple. For this sort of down payment insurance to provide you maximum coverage, your house essentially cannot be losing value faster than the statewide average, which of course, may not show any decline at all.

Good deal or not? It might make sense for you if unexpected economic reverses depress property values in your state. It might make sense as peace-of-mind coverage. But do the math and figure the likelihood that the premium you pay – which could raise your interest rate for long beyond the point where your coverage expires if it’s included in your mortgage rate – is worth the coverage you’ll receive.