HARP 2 refinance plan a boost to borrowers, banks

The Obama administration announced broad outlines of the revised Home Affordable Refinance Program on Oct. 24. Fannie Mae and Freddie Mac issued guidance last week that filled in most of the details.

Making sense of the story

• HARP 2 greatly reduces or eliminates the risk-based fees Fannie and Freddie charge on many loans and virtually eliminates the chance that lenders will have to pay for losses on loans that go into default if they made underwriting mistakes. It also vastly streamlines the underwriting process.
  
  
• Although lenders can begin taking applications Dec. 1, it could take several months before the new loans are made. Fannie Mae said it won't begin buying certain types of refinanced loans until March.
  
  
• To qualify, the existing loan must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009. The loan balance must be more than 80 percent of the home's market value. The loan must be current for the past six months, with no more than one late payment in the past 12 months. Those who previously refinanced through HARP are ineligible.
  
  
• The new program improves on the existing HARP refi program by letting borrowers refinance into a new fixed-rate loan regardless of how much is owed. The existing program caps the new loan at 125 percent of the home's market value.
  
  
  
• Homeowners also can refinance into a new adjustable rate loan that has a fixed rate for at least the first five years, but in this case the new first mortgage cannot exceed 105 percent of the home's value.
  
  
• In most cases, borrowers won't have to pay for a new appraisal (Fannie or Freddie will use their automated in-house appraisals) or have any particular debt-to-income ratio or credit score.
  
  
• Borrowers who refinance through their existing loan servicer generally won't have to document their income or assets or have a particular credit score or debt-to-income ratio. The lender will only have to verify that one borrower on the loan has a job or other source of income, but not the amount of income.
  
  
• Homeowners who refinance through a new lender will have to meet additional underwriting requirements, but not as many as people who are refinancing through traditional routes.
  
  
• Borrowers can have a second loan on the house of any amount and still qualify, as long as the holder of the second mortgage resubordinates it to the new loan. Most of the big lenders have agreed to do so, but there is no guarantee they or others will.
  
  
• If borrowers have mortgage insurance on the existing loan, they must maintain it, but they should be able to transfer that insurance to the new loan at the old premium rate, according to Freddie Mac. The big mortgage insurers have agreed to allow this, but again there is no guarantee all will.
  
  
• There are still many questions about the program, such as what interest rates banks will charge, whether they will impose additional fees or underwriting requirements beyond what Fannie and Freddie require, and whether investors will be willing to buy securities backed by these new HARP 2 loans.

Existing Home Sales Beat Expectations:

Americans bought previously owned homes at a much higher level than economists had forecasted.

Economists had forecasted that October Existing Home Sales would decline -2.20%. But they actually improved by +1.3%. The National Association of Realtors reported that the annualized rate of sales is 4.97 million units which was also better than the forecasted 4.8 million units. The September reading was revised upward as well. Sales were up 13.5% from the same month a year earlier. Even though we have a soft economy, high unemployment, tight lending standards, and an uncertainty about the direction of prices.

The report showed the median sales price in October was $162,500, down 4.7% from $170,600 a year earlier.

The inventory of previously owned homes remained high but did slide down to 3.33 million units or a 8 month supply. Sales rose 4.4% in the West, 2.1% in the South, and 2.8% in the Midwest but fell 5.1% in the Northeast.

So, to recap - Existing Home Sales gained 13.5% from this month last year and had a month-over-month gain of 1.3%. Also, inventories shrank. This certainly shows that there is positive momentum in the housing sector.

Home Price Index shows decline in August

The average home price nationwide has declined 28.3 percent since the market peaked in June 2006, according to the most-recent Home Price Index by Lender Processing Services. The LPS HPI summarizes national home prices by tracking monthly prices in more than 13,500 ZIP codes. Within each ZIP code, it tracks five price levels from low to high. The total value of U.S. housing inventory covered by the LPS HPI stood at $10.6 trillion at the peak. As of the end of August 2011, it was $7.65 trillion. During the period of most rapid price changes, from July 31, 2007, through December 2009, prices declined $56,000. The average annual decline during that time was 13.8 percent.

Since December 2009, prices have fallen more slowly, interrupted by brief seasonal intervals of rising prices. Since then, the LPS HPI national average home price has fallen $20,000. This corresponds to an average annual decline of 3.6 percent. Price changes were largely consistent across the country during August. Prices increased in only five percent of ZIP codes in the LPS HPI. Higher-priced homes had smaller declines: -0.72 percent for the top 20 percent of homes (prices above $321,000) compared with -1 percent for the bottom 20 percent (below $103,000).

California housing affordability improves in Q3

The percentage of home buyers who could afford to purchase a median-priced, existing single-family home in California rose to 52 percent in the third quarter of 2011, up from 51 percent in second-quarter 2011 and was up from 46 percent in the third quarter of 2010, according to C.A.R.’s Traditional Housing Affordability Index (HAI). Home buyers needed to earn a minimum annual income of $61,530 to qualify for the purchase of a $292,120 statewide median-priced, existing single-family home in the third quarter of 2011. The monthly payment, including taxes and insurance, would be $1,540, assuming a 20 percent down payment and an effective composite interest rate of 4.63 percent. The effective composite interest rate in second-quarter 2011 was 4.85 percent and 4.78 percent in the third quarter of 2010.

Regionally, housing affordability rose in most counties in the San Francisco Bay Area but was down in Los Angeles County and Fresno County. At 77 percent, San Bernardino County was the most affordable, while San Mateo County was the least affordable, with only 25 percent of households able to purchase the county’s median-priced home.

Consumer Sentiment Increases Again:

Confidence among U.S. consumers rose more than projected in November, offering additional support to the biggest part of the economy. It was the third straight month of increases in consumer sentiment.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 64.2 this month, the highest since June, from 60.9 in October. The median estimate of economists surveyed by Bloomberg News called for a reading of 61.5.

U.S. consumers are entering the holiday shopping season with a more optimistic outlook than they had a month ago, largely because of a recent decline in gas prices, according to the widely watched index.

Consumer Sentiment is very key to the housing industry. As consumers feel more confident in their expectations about the economy, they are more likely to finally make the move to purchase their next home

Mortgage aid open to more Calif. borrowers

The state-run program, “Keep Your Home California,” which helps homeowners struggling to pay their mortgages now has broader eligibility guidelines. Borrowers who did “cash-out” refinances and own multiple properties now are eligible for the program, according to California Housnig Finance Agency officials.
Making sense of the story

• To date, Keep Your Home California has helped approximately 8,000 low- and moderate-income households that are behind on loan payments or close to default.
  
  
• There are four parts to the program: Mortgage help for the unemployed, mortgage aid for homeowners with documented financial hardship, relocation help for those in the midst of a short sale or deed-in-lieu of foreclosure, and reduction of principal.
  
  
• Homeowners who completed “cash-out” mortgage refinancing now are allowed to take part in the four programs outlined above, and borrowers who own more than one property also can apply for the program. Previously, these two groups of borrowers were excluded from participation.
  
  
• Mortgage aid to unemployed borrowers also has been extended to nine months, instead of six. Such homeowners can receive up to $3,000 a month. To qualify, borrowers must be receiving unemployment benefits.
  
  
• Additionally, the program has reinstated up to $20,000 in past-due mortgage payments instead of the previous $15,000 cap.

Homeowner vacancy rate remains steady in Q2

The national vacancy rate for homeowner housing was at 2.5 percent in the second quarter, according to the Dept. of Commerce’s Census Bureau. The rate was approximately the same as that of second quarter 2010 and 0.1 percentage points lower than the rate in the first quarter.
The homeownership rate of 65.9 percent was 1 percentage point lower than the second quarter 2010 rate (66.9 percent) and 0.5 percentage points lower than the rate in the previous quarter (66.4 percent).

Approximately 85.7 percent of the housing units nationwide were occupied and 14.3 percent were vacant in the second quarter 2011. Owner-occupied housing units made up 56.5 percent of total housing units, while renter-occupied units made up 29.2 percent of the inventory in the second quarter of 2011. Vacant year-round units comprised 10.8 percent of total housing units, while 3.5 percent were for seasonal use.

Private Sector Sees Job Growth:

We received a couple of reports on employment levels last week. The ADP Private Payroll report continued to show gains in hiring in the private sector. Their monthly gauge came in at 110K which was much better than market expectations of 101K.

In a separate report, the national Unemployment Rate fell from 9.1% to 9.0%. The total non-farm payroll gains were 80K which was below market expectations. However, the prior period was revised upward significantly.

Bright spots: Professional and business services up 562K in 2011. Hotel and restaurants up 344K this year. Health Care up 313K for the year. Retail Trade up 156K this year. And mining jobs are up 152K during the year.

What's not doing well? Construction, government, financial services, insurance and real estate.
ales of new homes rose in September after four straight monthly declines.

Obviously, housing demand is very closely tied to employment levels. While employment levels still have a long way to go, there is some improvement which is a positive for housing.

Handling high closing costs

Closing costs can increase the price of a home by as much as $10,000, sometimes more. Borrowers who are “cash-poor” can ask for assistance, or talk to their lender about a lender credit toward closing costs.

Making sense of the story

• Some lenders advertise that if borrowers agree to accept a mortgage interest rate from a quarter to a full percentage point higher than they would ordinarily qualify for, they can receive credit toward their closing costs.
  
  
• These mortgages are sometimes called no-closing-cost loans, though the term is misleading. The credit usually covers only fees charged by the mortgage broker or bank, like the loan origination fee, the underwriting expense, and the appraisal. That generally leaves title insurance, mortgage-recording taxes, insurance, and escrowed taxes to cover.The amount of credit depends on total closing costs and other loan details. Generally, for every one-eighth of a point increase in interest rate, borrowers receive a credit worth half a percentage point of the principal amount.
  
  
• While these mortgages can be helpful to some, borrowers should carefully review all the details. There are pluses and minuses to these loan types. A downside is the higher rate and monthly payment remain in place through the life of the loan.
  
  
• Doing a side-by-side comparison of loans with and without the credit can be helpful.

Home buyers unrealistic about home value appreciation

A recent survey by Zillow found that 42 percent of prospective home buyers believe home values typically appreciate by 7 percent a year. Historically, home values in a normal market tend to appreciate by 2-5 percent annually. In the survey, Zillow surveyed prospective home buyers and asked basic questions about the home-buying process. Despite the unrealistic expectations about home value appreciation, respondents seem fairly knowledgeable about the home-buying process, answering 65 percent of questions correctly.

However, several important parts of the process confused them. Two in five (41 percent) buyers think they are required to buy private mortgage insurance (PMI) regardless of the amount of their down payment. Additionally, more than half of prospective home buyers who were polled confuse appraisals and inspections. Fifty-six percent said the purpose of an appraisal was to determine if the home is in good condition, when in fact, that is the purpose of an inspection.

Additional Survey Findings:

• More than one-third (37 percent) of prospective home buyer respondents believe buying homeowner's insurance is optional.
• Nearly half of polled prospective home buyers in the study do not understand when they will actually own the home they intend to buy. Forty-seven percent said a prospective buyer owns a home after the purchase contract is signed.
• The majority (87 percent) of polled prospective home buyers know that closing costs are negotiable and can vary by bank and lender.