FHA announces significant policy changes
Jan 20, 2010
The Federal Housing Administration (FHA) insures about 30 percent of new loans, and its health is vital for the housing market. But as foreclosures have risen, the government agency has seen its losses rise and its reserves sink below the minimum level required by Congress. According to the Mortgage Bankers Association (MBA) more than 18 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 14 percent for all loans. In addition, some unscrupulous operators have shifted their business to the FHA after the subprime business went bust. Last week, the FHA served subpoenas on 15 mortgage companies with suspiciously high default rates for FHA loans, part of a broad crackdown on dubious lenders. To address the problems, the FHA announced policy changes designed to more revenue into the agency, while at the same time keeping loans available. The changes include: 1) homebuyers will Pay an upfront mortgage insurance premium of 2.25 percent of the total loan amount, up from the current level of 1.75 percent. FHA officials also plan to ask Congress to increase the maximum annual premium that FHA can charge. Borrowers will still be able to wrap these fees into the total amount borrowed. 2) homebuyers will need a credit score of at least 580 to qualify. Borrowers with a score lower than 580 will need a down payment of at least 10 percent.Mortgage demand up for third week as rates drop Borrowers are rushing to take advantage of low borrowing costs and other incentives while they last. The Mortgage Bankers Association (MBA) released its Weekly Mortgage Applications Survey for the week ending January 15, 2010. The Market Composite Index increased 9.1 percent on a seasonally adjusted basis from one week earlier, and on an unadjusted basis it increased 10.4 percent compared with the previous week and decreased 52.3 percent compared with the same week one year earlier. The Refinance Index increased 10.7 percent from the previous week and the seasonally adjusted Purchase Index increased 4.4 percent from one week earlier. The unadjusted Purchase Index increased 9.8 compared with the previous week and was 19.1 percent lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is down 1.0 percent. The four week moving average is up 1.1 percent for the seasonally adjusted Purchase Index, while this average is dow n 2.4 percent for the Refinance Index. The refinance share of mortgage activity increased to 71.7 percent of total applications from 71.5 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 4.1 percent from 4.0 percent of total applications from the previous week. Average 30-year mortgage rates dropped to 5 percent last week, and it's still before the deadline to take advantage of the government's extended and expanded federal tax credit. Despite these lures to buyers, the fallout from unemployment, underemployment and the ongoing sale of foreclosure properties continue to keep many potential buyers out of the market, and housing is unlikely to gain much traction until these barriers start to fall.Brown win a major upset for Obama's agendaRepublican Scott Brown won a bitter U.S. Senate race in Massachusetts yesterday against Democratic state Attorney General Martha Coakley, sending shudders of fear through Democrats facing tough races in November's congressional elections. Massachusetts last elected a Republican to the Senate in 1972, and 62 percent of the state's vote in the 2008 presidential election went to Obama -- if the Democrats have lost in a heavily Democratic state like Massachusetts, they are on track for a nationwide drubbing in the November elections. Just as important, the Massachusetts result dealt a stunning blow to President Barack Obama's current legislative agenda and cast doubt on the fate of his sweeping healthcare overhaul, by robbing Democrats of the crucial 60th Senate vote they need to overcome Republican procedural hurdles. Brown, a Massachusetts state senator, had promised to be the pivotal 41st Republican vote against the healthcare overhaul in the 100-member Senate. "People don 't want this trillion-dollar healthcare plan that is being forced on the American people," Brown told cheering supporters at a Boston hotel who chanted "41" and "Seat him now." He said voters were rejecting the closed-door deals that were driving the healthcare debate and he took satisfaction in proving the experts -- and Democrats -- wrong. "They thought that they owned this seat. They thought that they couldn't lose," Brown said. "You all set them straight." Independent, moderate voters swung heavily in favor of the Republican Brown, backing a widely held belief that they are shrinking away from the extremely liberal agenda Obama and the Democratic Congress have been pursuing.BOA reports lossLosses at Bank of America (BOA) were $5.2 billion in the fourth quarter, as its results were squeezed by the company's decision to return bailout money owed to the government. The nation's biggest bank said Wednesday that repaying funds from TARP, or the Troubled Asset Relief Program, hurt profits by $4 billion during the quarter. Not including the one-time charge, the company would still have reported a loss of $194 million. Bank of America's latest results were worse than Wall Street was anticipating. The company said it lost 60 cents a share while analysts were expecting a loss of 52 cents a share, according to Thomson Reuters. Bank of America's results were also worse when compared to a year ago. The Charlotte, N.C.-based lender lost $2.4 billion, or 48 cents a share, in the fourth quarter of 2008. Brian Moynihan, the bank's newly-installed CEO, characterized the company's latest results as "disappointing". Moynihan replaced Ken Lewis, who agreed to step down followin g a wave of criticism from shareholders about the bank's controversial purchase of investment bank Merrill Lynch at the height of the financial crisis, earlier this year. Moynihan did note that there were some encouraging signs during the quarter, namely stabilizing credit trends within some of its consumer-related businesses. Losses in Bank of America's homebuilder loan portfolio, for example, declined from the third quarter. Overall net charge-offs, or debts the company believes it will never be able to collect, also fell, while the company set aside less money for bad loans during the quarter.Housing starts fallThe Commerce Department said housing starts fell 4 percent to a seasonally adjusted annual rate of 557,000 units. Analysts polled by Reuters had expected housing starts to rise to 580,000 units. November's housing starts were revised upwards to 580,000 units from the previously reported 574,000 units. Groundbreaking activity dropped a record 38.8 percent to an all-time low of 553,000 units for the whole of 2009. Starts for single-family homes fell 6.9 percent last month to an annual rate of 456,000 units after rising 4.0 percent in November. Groundbreaking for the volatile multifamily segment rose 12.2 percent to a 101,000 unit annual pace, after surging 69.8 percent in November. New building permits, which give a sense of future home construction, rose 10.9 percent to 653,000 units last month, the highest since October 2008. That compared to analysts' forecasts for 590,000 units. For the whole of 2009, permits dropped 36.9 percent, the department said. The inventory of t otal houses under construction dropped 3.8 percent to a record low of 511,000 units last month, while the total number of permits authorized but not yet started rose 8.4 percent to 95,800 units.Obama's popularity plummetingAccording to a new NBC News/Wall Street Journal poll, President Obama and his Democratic Party have declined considerably in popularity in the year since he took office, weighed down by public discontent over the economy and the health care debate in Congress. The telephone poll of 1,002 adults, conducted Jan 10-14 with an error margin of 3.1 percentage points, showed both the economy and proposed health care legislation as heavy political burdens for the party in power. 55% of Americans disapprove of Obama's handling of health care reform. Nearly half call Obama's health care initiative "a bad idea" that would constitute "a step backward." A majority worries that the proposed legislation before Congress would impair their quality of care and choice of doctors. Eight in 10 Americans call themselves dissatisfied with the economy; six in 10 call job creation a top priority for Washington, twice as many as name health care. Though two-thirds say Obama inherited rather than cau sed economic problems, a 49% plurality disapprove the president's handling of the issue. The survey showed that just 48% of Americans approve of Obama's performance in office, while 43% disapprove. That result is down sharply from the 56% approval and 31% disapproval that Obama received last February, shortly after his inauguration. 38% of Americans express positive views of the Democratic Party, compared to 41% with negative views; last February those views were positive by a 49%-31% margin. The result of this storm of discontent: voters split evenly, 41% to 41%, on which party they want to control Congress after November's mid-term elections. In April, Democrats held the advantage by a 48%-39% margin.Now on to our real estate investing educational section...Price Impact on ROIOne of the most commonly used valuation models for single family homes and short sales includes the Return on Investment or ROI. Despite the ease associated with using this calculation, the ROI is a robust measure of investment value that is both quick and convenient. However, it is also subject to a high level of volatility based upon the price of the property and type of funding in place. In fact, ROI is so dramatically influenced by funding mechanisms it is frequently considered a cornerstone by investment advisors. Let's take a look at a few hypothetical short sale situations to demonstrate the impact of price on the ROI as well as how it can be used to your advantage.Cash is still king and it speaks louder than ever especially with tightening lending standards and other banking irregularities; however, one area where cash doesn't hold up quite as well as the use of leverage is in the calculation of ROI or return on investment. Let's assume a short sale investor opts to purchase a property in cash for $100,000. If the property generated a one year rental return of $10,000 the total ROI is a fairly straightforward 10% or perhaps the property was flipped for a $20,000 profit and thereby the ROI was a handsome 20%. Both are completely realistic examples and certainly above and beyond what stocks, bonds or other inferior investments are currently able to deliver but the total return is a bit misleading. This can be due to the cost of borrowing the money in the first place (ie, what interest rate is being paid on the funds borrowed or the "spread" of the borrowed interest rate versus the total ROI received). For example, if the short sale buyer took out a home equity loan or borrowed against a 401-k plan, the interest rate may be a very reasonable 3 to 4 percent versus a total return of 10% - leading to a "spread" or ROI of 6-7 percent. On the other hand, some properties are truly purchased completely for cash so the entire ROI is theirs to keep...but is this always the best situation? Maybe-maybe not. There are a multitude of reasons to purchase a property for cash - not the least of which is the inability to obtain full financing on a distressed property, the ease and convenience of closing and the cost savings of not having to obtain PMI or other add-ons. However, there are very strong reasons to finance a property or use the maximum amount of leverage possible to maximize ROI. Going back to the former example, let's assume you financed a property for 80% of the value...$80,000 of the total price of $100,000. You used $20,000 out of pocket and received the same $10,000 annual rental or flipped for a quick $20,000. Instead of a respectable 10% to 20% return, you will now realize an eye-popping 50% to 100% return on your investment!Now let's take this one step farther...how important is price when it comes to ROI? The final answer is "it depends". Certainly buying right is a critical consideration in any short sale deal however, when using leverage, price becomes much less important due to the extreme rates of return generated. In the above examples, every $1,000 addition in cost reflects a significant gain or loss in the final cash ROI but in the leveraged position, paying an additional $1,000 for a property results in a paltry difference in the final ROI. Short sale investors should fully understand how to maximize ROI depending upon the price and funding source to be utilized for the deal. By doing so it is often feasible to pay more for a property while still maximizing the full profit potential of your portfolio.See you at the top!