Government Shutdown - Impacting Mortgages

With the prolonged government shutdown, and it appearing as though it won't be resolved for the next few days, here are some helpful tips as we work through the shutdown.

·         FHA and VA are the most commonly affected programs as they are funded by the government.  However, there is no change to the ability to complete VA or FHA loans due to the government shut down.  Both departments will continue to operate and since most of what is needed is automatic, there should be little noticed as a result of the shutdown. 

o   Word of Caution – if the file has a “hair” on it or is difficult and an UW needs to speak to a live FHA person or get a specific answer from FHA – this is where it could take a bit longer.  Normally they return calls and answer questions in 24-48 hours, with the shutdown and running a “skeleton” crew for FHA, then plan for longer time.

o   I would give the deals an extra week or so to close if the government shutdown continues.

·         4506T – Tax Transcripts and SSA Form

o   The 4506T is an internal item completed for all loans but the lenders rely on the IRS to get these back.  Again, with the shutdown, we have waived the need to have the transcripts for loans with note dates after 09/26 until the government shutdown has ended. The SSA Form also impacts loans.  Most often there are no issues when a lender pulls the SSN from a borrower.  In the event that there is a discrepancy or verification is needed on the borrower from the Social Security Administration, due to the shutdown, this loan scenario would not be able to close.  This has to do with the fact that the lender doesn't want to complete a loan to the wrong person and the SSA form helps verify the identity of the borrowers on the transaction.

 

·         Rural Development

o   Due to a lapse in appropriations for Rural Development as of October 1, Rural Development has initiated the process of orderly shutdown of nonessential operations.  You can view USDA’s plans for a lapse in appropriations at http://www.whitehouse.gov/omb/contingency-plans.

·         Market Changes

o   The longer the shutdown continues the greater impact will be felt in the market.  As we approach the debt ceiling deadline of 10/17/2013, the markets continue to be influenced by this prolonged stalemate.  Ultimately a decision will be made and when it does, that decision will have an influencing factor on the mortgage market.

 

How are Mortgage Interest Rates determined?

What drives mortgage interest rates?  In a very general sense, mortgage rates are determined by the overall economic environment.  Since 2008, and the Great Recession, we have seen a steady drop in the mortgage interest rates for consumers.  As the overall economy has begun to see some improvement, we have started to see those borrowing costs increase.  But what contributes to these changes?

1. Inflationary Pressure - When inflation is likely to occur, the future value of the money that is lent now will be worth less.  Inflation, on average since the creation of the FED, is somewhere between 3%-5% per year.  The greater the rise in inflation, the higher the mortgage rates will be.  Since April of 2013, we have continued to see the inflation rate increase.  Inflation isn't bad though as it points to a healthier economy. 
2. Bond Prices - As Bond prices drop, the rates increase and alternatively, as bond prices rise, mortgage rates decrease.  Since most loans are paid off via refinance or other method within 7-10 years, most lenders base their mortgage rates (even the 30 YR Fixed rates) on the 10 YR Treasury.  The higher the Yield the higher the mortgage rates to make the investor money (who owns the note).  We have seen yields increase from low's in April 2013 of 1.636% - since then it has raised to as high as 2.98%.  This change has increased rates from the low - mid 3% range on a 30 YR fixed to a higher rate of the upper 4% range.
3. Employment Data, Jobs Reports, Fed Monetary Policy - As the overall economy improves mortgage rates for home loans will continue to go up as well.  Some of the key factors to watch are employment data.  How many people file for unemployment - the more unemployed the slower the economy will grow.  How many new jobs are being created - again, the more new jobs, the less unemployed and the healthier the economy.  What is the FED doing with the FED funds rate, their quantitative easing policy, etc.?  As the overnight FED funds rate stays low, rates will do the same.  If they pull bank on their bond purchases, which keeps prices up, mortgage rates will increase as well.

Mortgage rates have many varying factors as to the overall picture of average rates.  The factors not discussed are the specific client factors that impact rates.  These include credit score, down payment, type of mortgage loan, etc.  All of these will also influence mortgage rates, however, they will be in about the range of what the economy is dictating.

While this is very rudimentary, it gives an idea of what types of economic factors to watch when determining interest rates.   

Foreclosure and Short Sale Waiting Periods - New FHA Changes

"How long do I have to wait until I can buy a new home after..." - the question that begins with a heavy pause and usually ends with a heavy sigh.  However, there have been some great new programs that can help borrowers who have faced difficult financial times and are ready to buy a new home.

Let's start with the bad news - in 90% of the cases, you will need to put down a significant amount of money to get into a new home (20% +).  This is because the lenders are private lenders who definitely don't have access to mortgage insurance and they don't want to lend without a fallback option if the borrower goes belly up again. (the fallback option being to sell the home and recoup the money lent out.)

Here is the good news...if the 20% down is available, Homeowners Financial Group, USA, LLC, has a "Clean Slate" program designed for borrowers who need a little help.  Essentially, the only waiting period is they must be 6 months from the BK.  There is no waiting period for Short Sale or Foreclosure.

Now onto the new FHA "Back to Work - Extenuating Circumstances" program.  While, in my own personal opinion, this new Mortgagee Letter 2013-26 is about 2 years too late.  Perhaps when a borrower faces a difficult "economic event" in the future, they will be able to get into a home sooner rather than later.  The idea behind this mortgagee letter, aptly titled: Back to Work - Extenuating Circumstances, is that if a borrower can establish credit history for 12 months, they are potentially eligible for FHA financing. 

• This is important because FHA allows only 3.5% down payment and so the borrower who doesn't have the 20% down - could essentially get into a new home sooner.

Here are a couple key items to be aware of:

• 12 months must have passed since the short sale or foreclosure
• Must be able to document credit impairment, i.e loss of employment or significant loss of Household Income (20% or greater) - Prove the economic event that was the trigger for the short sale/foreclosure
• Additional layers of credit requirements
• Each borrower has to go through Housing Counseling

Those you can read directly from the Mortgagee Letter.  The letter gets even tougher because they really only consider those borrowers with stellar credit history who had this one time event.  They can't have a history of other delinquencies with housing, no other collections, no more than 1x30 day delinquency on any debt.  While this makes sense, most that have these economic events probably have had trouble with other credit lines as they worked through their difficult circumstance.  Furthering the complication - it all has to be proved!  That's right - the previous employer will need to show when the borrower was terminated and the loss of income will need to be proven as well (which is standard so this shouldn't be too difficult if there was in fact a loss in income).

It's not that the program won't work - it's just once again, the masses tout it as a great thing for borrowers and then we come to find that only a handful actually had this occur.  Some people definitely will benefit but too many people will have one thing that doesn't quite fit and it will be more heartache to that borrower. 

Ultimately, it's a good start for FHA.  When life circumstances that are unexpected hit families, they shouldn't be unnecessarily punished.  This will help those people who faced an economic event and had no option but to short sale or foreclose.  Let's just not get too excited - it's definitely not a "Get out of Jail Free" card.  If you choose to foreclosure or short sale strategically - well then, be ready to wait.