At the conclusion of its September meeting on Wednesday, the Fed announced that it will extend its remaining purchases of $1.45 trillion in mortgage-related debt through March 2010 instead of concluding the program in December 2009. With about two-thirds of the scheduled purchases completed, the change will reduce the amount of the remaining monthly purchases and help keep mortgage and other interest rates low through the end of the first quarter of next year.
"Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn," the Fed said in an statement released after the meeting. "Conditions in financial markets have improved further, and activity in the housing sector has increased."
The statement went on to note that household spending and business activity also show signs of improvement, but predicted that the economy will remain weak for some time. It predicted that inflationary pressures will remain subdued for an extended period due to the overall weakness of the economy.
Home sales, unemployment filings down
Ironically, the Fed's statement was followed by a report Thursday morning that existing home sales fell 2.7 percent in August, according to figures from the National Association of Realtors, reversing a strong increase the month before. The drop came despite continued low mortgage interest rates and an $8,000 first-time homebuyer tax credit that has been generally credited with boosting sales. Home sales remained 3.4 percent ahead of their August 2008 level, however.
At the same time, the Labor Department reported today that initial jobless claims fell again last week, to their lowest level in two months. A total of 530,000 people filed first-time applications for unemployment benefits, down from 551,000 the week before. The total number of people receiving unemployment also fell slightly, to 6.14 million.
Fed wrapping up credit stimulus program
The Fed's announcement of the extension of purchases of mortgage-related debt marks its exit plan from a program that dramatically drove down mortgage interest rates and led to a flood of mortgage refinancings after it was announced last March. According to the Mortgage Bankers Association, interest rates on 30-year fixed rate mortgages fell to 4.61 percent, the lowest rate in at least half a century, within weeks of the Fed announcing the purchase program.
The Fed is currently scheduled to complete purchases on $1.25 trillion in mortgage-backed securities and $200 billion in agency debt by the end of March. Another $300 billion in purchases of Treasury securities are due to be completed Oct. 9, as scheduled.
The Fed also left its target for the federal funds rate, the interest banks charge each other on overnight loans, unchanged at zero to one-quarter percent, and said it expects to keep it there for the foreseeable future. An increase in the rate would be an indication that the economy is picking up steam and that the Fed is growing concerned over inflationary pressures.
125 Percent Refinance May Present Challenges
n essence, the options allow you to refinance your mortgage for more than your home is currently worth - up to 25 percent more, to be exact. It's designed for homeowners who can't get a regular mortgage refinance because their homes have lost value, leaving them "underwater" on their mortgages.
The 125 percent option is presently available for mortgages backed by Fannie Mae and will be available for Freddie Mac mortgages as of Oct. 1. The FHA has also announced that it will allow 125 percent refinances under its own program, which has different rules from the other two.
Criteria vary by program
To qualify for a 125 percent refinance, homeowners must meet several criteria. First, their mortgage must be backed by Fannie Mae, Freddie Mac or the FHA - which together account for the vast majority of U.S. mortgages. You can check on the Fannie Mae and Freddie Mac web sites to determine if either of them backed your loan; an FHA mortgage would have been designated as such when you took it out.
To obtain a Home Affordable Refinance on a Fannie Mae or Freddie Mac mortgage, you need to apply through a participating lender. It doesn't have to be the same lender that currently services your mortgage, although there'll be less fees and paperwork if you do. On the other hand, your original lender might not wish to refinance - the program is optional - so you might have better luck shopping around.
Can't combine secondary mortgage
You can have some fees, such as for origination and the mortgage application, rolled into the new mortgage, but you can't combine a primary and secondary mortgage into a single loan - the rules prohibit taking cash out of the refinanced mortgage, which also applies to using part of the proceeds to pay off a second lien. If you do have a second mortgage, the holder of that lien will have to agree to resubordinate it, so that the refinanced mortgage gets paid off first in the event of a foreclosure.
The refinanced mortgage must also provide a borrower benefit, which can be a lower interest rate, faster payoff of the mortgage or a lower monthly payment.
Obtaining that borrower benefit might be difficult when refinancing a conventional 30-year loan, because you're going to have to pay a higher interest rate on a 125 percent loan than you would on a 80 percent loan to value refinance - perhaps a lot more, enough so that refinancing is no longer worthwhile. For borrowers looking to get out of a zero-interest loan, option ARM or other "exotic" mortgage, though, the higher rate might make it worthwhile.
Lender participation is key
Another potential obstacle is whether lenders will embrace the 125 percent program. Fannie Mae and Freddie Mac don't actually issue mortgages themselves; they purchase them from lenders who follow their guidelines. However, participation in the program is voluntary and lenders can be choosy about who they decide to help.
Cameron Findlay, chief economist for Lending Tree, said restrictive underwriting standards for high loan-to-value mortgage refinances are leading many lenders to conclude the program just isn't worth the trouble.
"On the 125 percent program, we haven't seen a lot of traction," he said. "I don't think you'll see any improvement until you see some relaxation of the process."
On the other hand, Tom Kelly, a spokesman for JP Morgan Chase, said adjusting to the new guidelines has been relatively straightforward, unlike the delays experienced after the government first announced the Making Home Affordable program last spring.
"We're able to get up to speed faster on it than on the original one, because the mechanics are similar to 80/105," he said, referring to the program's original 80 percent/105 percent refinancing guidelines.
Different program for FHA loans
The FHA's 125 percent refinance program is also new, but works differently from the Fannie Mae and Freddie Mac refinances. On an FHA mortgage, the FHA provides incentives for lenders to break out part of the mortgage principal into a second mortgage, which is tacked onto the end of the first. The primary mortgage is then modified to lower the monthly payments, and the second mortgage only comes due after the first is paid off. It's not yet clear how readily homeowners will be able to participate in the program.
The 125 percent option is presently available for mortgages backed by Fannie Mae and will be available for Freddie Mac mortgages as of Oct. 1. The FHA has also announced that it will allow 125 percent refinances under its own program, which has different rules from the other two.
Criteria vary by program
To qualify for a 125 percent refinance, homeowners must meet several criteria. First, their mortgage must be backed by Fannie Mae, Freddie Mac or the FHA - which together account for the vast majority of U.S. mortgages. You can check on the Fannie Mae and Freddie Mac web sites to determine if either of them backed your loan; an FHA mortgage would have been designated as such when you took it out.
To obtain a Home Affordable Refinance on a Fannie Mae or Freddie Mac mortgage, you need to apply through a participating lender. It doesn't have to be the same lender that currently services your mortgage, although there'll be less fees and paperwork if you do. On the other hand, your original lender might not wish to refinance - the program is optional - so you might have better luck shopping around.
Can't combine secondary mortgage
You can have some fees, such as for origination and the mortgage application, rolled into the new mortgage, but you can't combine a primary and secondary mortgage into a single loan - the rules prohibit taking cash out of the refinanced mortgage, which also applies to using part of the proceeds to pay off a second lien. If you do have a second mortgage, the holder of that lien will have to agree to resubordinate it, so that the refinanced mortgage gets paid off first in the event of a foreclosure.
The refinanced mortgage must also provide a borrower benefit, which can be a lower interest rate, faster payoff of the mortgage or a lower monthly payment.
Obtaining that borrower benefit might be difficult when refinancing a conventional 30-year loan, because you're going to have to pay a higher interest rate on a 125 percent loan than you would on a 80 percent loan to value refinance - perhaps a lot more, enough so that refinancing is no longer worthwhile. For borrowers looking to get out of a zero-interest loan, option ARM or other "exotic" mortgage, though, the higher rate might make it worthwhile.
Lender participation is key
Another potential obstacle is whether lenders will embrace the 125 percent program. Fannie Mae and Freddie Mac don't actually issue mortgages themselves; they purchase them from lenders who follow their guidelines. However, participation in the program is voluntary and lenders can be choosy about who they decide to help.
Cameron Findlay, chief economist for Lending Tree, said restrictive underwriting standards for high loan-to-value mortgage refinances are leading many lenders to conclude the program just isn't worth the trouble.
"On the 125 percent program, we haven't seen a lot of traction," he said. "I don't think you'll see any improvement until you see some relaxation of the process."
On the other hand, Tom Kelly, a spokesman for JP Morgan Chase, said adjusting to the new guidelines has been relatively straightforward, unlike the delays experienced after the government first announced the Making Home Affordable program last spring.
"We're able to get up to speed faster on it than on the original one, because the mechanics are similar to 80/105," he said, referring to the program's original 80 percent/105 percent refinancing guidelines.
Different program for FHA loans
The FHA's 125 percent refinance program is also new, but works differently from the Fannie Mae and Freddie Mac refinances. On an FHA mortgage, the FHA provides incentives for lenders to break out part of the mortgage principal into a second mortgage, which is tacked onto the end of the first. The primary mortgage is then modified to lower the monthly payments, and the second mortgage only comes due after the first is paid off. It's not yet clear how readily homeowners will be able to participate in the program.
Mortgage Rates Back Below 5 Percent
The average rate on 30-year fixed-rate mortgages fell to 4.97 percent for the week ending Sept. 18, down from 5.08 percent the week before. That's more than a full point lower than the 6.08 percent rate reported for the same week one year ago.
The current rate was based on an average of 1.12 points paid, up from 0.98 points the week before. Averages are based on loans with an 80 percent loan-to-value ratio.
Applications to refinance existing home mortgages jumped 17.4 percent for the week, with refinances making up 63.8 percent of all mortgage applications. Applications for home purchase mortgages rose 5.6 percent, with applications for government-insured mortgages making up 45.7 percent of all purchase applications.
Most government mortgages since 1990
It's the greatest share that government-insured mortgages have represented since the MBA began tracking weekly mortgage data in 1990. The increase has been driven by the rising popularity of FHA mortgages, which remain one of the only places consumers can obtain a mortgage with little money down, requiring only a 3.5 percent down payment. FHA mortgages are also easier to obtain for borrowers with less-than-ideal credit.
Mortgage applications of all types were up 12.8 percent on a seasonally adjusted basis.
The weeks ahead could see steady or increasing demand for home purchase mortgages, as first-time home buyers seek to beat the November 30 deadline for the $8,000 federal tax credit. With time running short on the program, buyers are expected to redouble efforts to find and close on suitable properties by the deadline.
There have been indications that Congress may extend the program, but it is not yet clear whether it will do so or if the same terms will be continued in an extension.
15-year mortgage rate unchanged
Meanwhile, the average on 15-year fixed rate mortgages remained unchanged at 4.41 percent, though the average points paid, including origination fees, declined to 1.05 percent from 1.12 percent the week before.
The rates reported by the MBA are national averages and will vary by region and credit score. Persons with excellent credit may be able to pay two- to three-tenths of a percent less than the reported average, depending on their lender or broker.
The MBA survey is one of several major weekly mortgage rate surveys that typically report varying results. Two other major surveys, the Bankrate and Freddie Mac surveys, are due out later today and tomorrow morning, respectively.
The current rate was based on an average of 1.12 points paid, up from 0.98 points the week before. Averages are based on loans with an 80 percent loan-to-value ratio.
Applications to refinance existing home mortgages jumped 17.4 percent for the week, with refinances making up 63.8 percent of all mortgage applications. Applications for home purchase mortgages rose 5.6 percent, with applications for government-insured mortgages making up 45.7 percent of all purchase applications.
Most government mortgages since 1990
It's the greatest share that government-insured mortgages have represented since the MBA began tracking weekly mortgage data in 1990. The increase has been driven by the rising popularity of FHA mortgages, which remain one of the only places consumers can obtain a mortgage with little money down, requiring only a 3.5 percent down payment. FHA mortgages are also easier to obtain for borrowers with less-than-ideal credit.
Mortgage applications of all types were up 12.8 percent on a seasonally adjusted basis.
The weeks ahead could see steady or increasing demand for home purchase mortgages, as first-time home buyers seek to beat the November 30 deadline for the $8,000 federal tax credit. With time running short on the program, buyers are expected to redouble efforts to find and close on suitable properties by the deadline.
There have been indications that Congress may extend the program, but it is not yet clear whether it will do so or if the same terms will be continued in an extension.
15-year mortgage rate unchanged
Meanwhile, the average on 15-year fixed rate mortgages remained unchanged at 4.41 percent, though the average points paid, including origination fees, declined to 1.05 percent from 1.12 percent the week before.
The rates reported by the MBA are national averages and will vary by region and credit score. Persons with excellent credit may be able to pay two- to three-tenths of a percent less than the reported average, depending on their lender or broker.
The MBA survey is one of several major weekly mortgage rate surveys that typically report varying results. Two other major surveys, the Bankrate and Freddie Mac surveys, are due out later today and tomorrow morning, respectively.
FHFA Reports Slight Gain in Home Prices
Coupled with a downward revision of June's figures, today's data shows the housing market remains weak, despite a general perception that prices have bottomed out. The June figures were reduced to a 0.1 percent increase from an originally reported 0.6 percent gain. All figures are seasonally adjusted.
The FHFA report is based on purchase prices of home sales backed by secondary lenders Fannie Mae and Freddie Mac, which account for 80 percent of the U.S. residential mortgage market.
Home prices down 10.5 percent from last year
Overall, U.S. home prices declined 4.2 percent from July 2008 and are down 10.5 percent from their peak in August 2006. According to the FHFA housing value index, U.S. home prices are at about the same level as they were in March 2005. Price declines have varied widely by region, with the Pacific states being hit the hardest, followed by the Mountain and South Atlantic regions.
Overall, prices increased in five of the nine U.S. Census regions in July, with declines limited to the Central and New England states. The largest monthly gains were in the hard-hit Pacific region, where prices were up 1.6 percent on a seasonally adjusted basis.
For the year, prices are down 9.0 percent in the Pacific region, following an 18.7 percent decline the year before. The Mountain region posted the biggest annual decline, down 9.0 percent for the year after a 6.0 decline from July 2007-2008. The South Atlantic region, which has been heavily impacted by steep price declines in Florida, was down 5.6 percent over the previous 12 months after a 6.1 percent decline the year before.
West South Central avoided downward trend
Of the nine Census regions, only the West South Central has posted annual gains over the last two years, increasing 0.1 percent over the past 12 months after a 1.0 percent rise from July 2007-2008. The region covers Oklahoma, Texas, Louisiana and Arkansas.
Comparisons between individual Census districts can be difficult due to the broad variety of their makeup. With relatively few states, the West South Central region is disproportionately influenced by Texas, where prices have remained relatively stable despite severe price declines in other parts of the country. The South Atlantic region, on the other hand, covers the entire Eastern Seaboard from Delaware on south, moderating the influence of Florida, which has seen some of the nation's steepest price declines.
The Mountain region is heavily affected by containing Arizona and Nevada which, along with Florida and California, have been among the four states posting the biggest housing price declines and foreclosure rates.
The FHFA housing price index is released monthly.
The FHFA report is based on purchase prices of home sales backed by secondary lenders Fannie Mae and Freddie Mac, which account for 80 percent of the U.S. residential mortgage market.
Home prices down 10.5 percent from last year
Overall, U.S. home prices declined 4.2 percent from July 2008 and are down 10.5 percent from their peak in August 2006. According to the FHFA housing value index, U.S. home prices are at about the same level as they were in March 2005. Price declines have varied widely by region, with the Pacific states being hit the hardest, followed by the Mountain and South Atlantic regions.
Overall, prices increased in five of the nine U.S. Census regions in July, with declines limited to the Central and New England states. The largest monthly gains were in the hard-hit Pacific region, where prices were up 1.6 percent on a seasonally adjusted basis.
For the year, prices are down 9.0 percent in the Pacific region, following an 18.7 percent decline the year before. The Mountain region posted the biggest annual decline, down 9.0 percent for the year after a 6.0 decline from July 2007-2008. The South Atlantic region, which has been heavily impacted by steep price declines in Florida, was down 5.6 percent over the previous 12 months after a 6.1 percent decline the year before.
West South Central avoided downward trend
Of the nine Census regions, only the West South Central has posted annual gains over the last two years, increasing 0.1 percent over the past 12 months after a 1.0 percent rise from July 2007-2008. The region covers Oklahoma, Texas, Louisiana and Arkansas.
Comparisons between individual Census districts can be difficult due to the broad variety of their makeup. With relatively few states, the West South Central region is disproportionately influenced by Texas, where prices have remained relatively stable despite severe price declines in other parts of the country. The South Atlantic region, on the other hand, covers the entire Eastern Seaboard from Delaware on south, moderating the influence of Florida, which has seen some of the nation's steepest price declines.
The Mountain region is heavily affected by containing Arizona and Nevada which, along with Florida and California, have been among the four states posting the biggest housing price declines and foreclosure rates.
The FHFA housing price index is released monthly.
FHA to Tigthen Credit, Appraisal Rules
The Federal Housing Administration announced on Friday that it will require higher credit scores and tighten credit requirements in general for both lenders and borrowers, effective January 1. The new rules are intended to help the FHA replenish the capital reserves it is required to maintain on hand, which are expected to fall below 2 percent of outstanding loans, the minimum level mandated by Congress, by the end of the month.
Tighter rules for streamline refinance
The agency will also tighten up some of its currently loose requirements for streamlined mortgage refinances, including collecting credit score information when available. Other new rules will address the length of time a mortgage has been held prior to refinancing (known as seasoning), payment history, income verification and a requirement for a demonstration of a net tangible benefit to the borrower.
Previously, the rules for an FHA streamline refinance allowed refinancing of nearly any FHA loan with few limitations or restrictions.
The FHA will also increase it already modest capital requirements for approved borrowers, shorten the length of time an appraisal will be considered valid and hire a chief risk officer for the first time in its 75-year history.
"To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action," said FHA Commissioner David Stevens. "That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections."
Higher net worth to be required of lenders
Within the next year, the FHA will raise the minimum net worth requirement for approved lenders to $1 million, up from the $250,000 limit established in 1993. Further increases will bring the minimum net worth requirement in line with those of other government-backed lenders, such as Freddie Mac and Fannie Mae. The move is expected to eliminate many of the smallest lenders presently authorized to issue FHA loans, but help reduce risk.
The FHA will also shorten the length of time a home appraisal will remain valid to four months, down from the current 12. The move is intended to help ensure the accuracy of the appraisals on which loans are based.
At the same time, the FHA will raise its loan-to-value maximum on refinancings to 125 percent, in line with Fannie Mae and Freddie Mac guidelines being adopted under the Making Home Affordable homeowner assistance program.
Industry group hails changes
The new rules were hailed by the Mortgage Bankers Association, which said the changes will help the FHA remain viable for years to come.
Today's announcement shows that FHA intends to take significant steps to strengthen its risk management processes and enhance its future financial stability," said MBA Chairman David Kittle in a prepared statement.
"For several years, MBA has been advocating for higher net worth requirements for FHA lenders." he said. "It is important that lenders and brokers be made to have sufficient financial backing so they can be held accountable in the event of problem loans."
Low down payment will not change
The FHA announced no plans to raise its 3.5 percent minimum down payment on mortgages it insures, currently one of the lowest available following the collapse of credit markets last fall. That low down payment is a major factor in the increasing popularity of FHA loans, which made up to nearly one-quarter of all U.S. mortgages currently issued, up from approximately 2 percent only three years ago.
As the popularity of FHA mortgage has increased, so have the credit ratings of its borrowers. CNN reported that the average credit score of FHA borrowers is now 690, compared to 630 in 2007, with only 7.5 percent of all FHA mortgage borrowers having credit scores below 620, compared to 50 percent two years ago.
Tighter rules for streamline refinance
The agency will also tighten up some of its currently loose requirements for streamlined mortgage refinances, including collecting credit score information when available. Other new rules will address the length of time a mortgage has been held prior to refinancing (known as seasoning), payment history, income verification and a requirement for a demonstration of a net tangible benefit to the borrower.
Previously, the rules for an FHA streamline refinance allowed refinancing of nearly any FHA loan with few limitations or restrictions.
The FHA will also increase it already modest capital requirements for approved borrowers, shorten the length of time an appraisal will be considered valid and hire a chief risk officer for the first time in its 75-year history.
"To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action," said FHA Commissioner David Stevens. "That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections."
Higher net worth to be required of lenders
Within the next year, the FHA will raise the minimum net worth requirement for approved lenders to $1 million, up from the $250,000 limit established in 1993. Further increases will bring the minimum net worth requirement in line with those of other government-backed lenders, such as Freddie Mac and Fannie Mae. The move is expected to eliminate many of the smallest lenders presently authorized to issue FHA loans, but help reduce risk.
The FHA will also shorten the length of time a home appraisal will remain valid to four months, down from the current 12. The move is intended to help ensure the accuracy of the appraisals on which loans are based.
At the same time, the FHA will raise its loan-to-value maximum on refinancings to 125 percent, in line with Fannie Mae and Freddie Mac guidelines being adopted under the Making Home Affordable homeowner assistance program.
Industry group hails changes
The new rules were hailed by the Mortgage Bankers Association, which said the changes will help the FHA remain viable for years to come.
Today's announcement shows that FHA intends to take significant steps to strengthen its risk management processes and enhance its future financial stability," said MBA Chairman David Kittle in a prepared statement.
"For several years, MBA has been advocating for higher net worth requirements for FHA lenders." he said. "It is important that lenders and brokers be made to have sufficient financial backing so they can be held accountable in the event of problem loans."
Low down payment will not change
The FHA announced no plans to raise its 3.5 percent minimum down payment on mortgages it insures, currently one of the lowest available following the collapse of credit markets last fall. That low down payment is a major factor in the increasing popularity of FHA loans, which made up to nearly one-quarter of all U.S. mortgages currently issued, up from approximately 2 percent only three years ago.
As the popularity of FHA mortgage has increased, so have the credit ratings of its borrowers. CNN reported that the average credit score of FHA borrowers is now 690, compared to 630 in 2007, with only 7.5 percent of all FHA mortgage borrowers having credit scores below 620, compared to 50 percent two years ago.
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