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Industry News 4-13-11…

April 13, 2011

Breaking News: The drive to reform the government-sponsored enterprises is raising two questions that could fundamentally reshape the way borrowers obtain home loans: will a revamp effectively eliminate the 30-year fixed rate loan, and would that be a good thing? For decades, it’s been conventional wisdom that the 30-year fixed rate home loan is the best option for most homeowners, and any attempt to restrain or supplant it has largely failed to take hold. But efforts to replace Fannie Mae and Freddie Mac are likely to — at the very least — make such home loans more expensive. Depending on what approach Congress and the Obama administration take, the ultimate plan could eliminate such types of loans entirely. While that prospect likely still disturbs many banks and lawmakers, some in the industry say it is time to reevaluate the benefits of the 30-year fixed loan. “There is a lot of skepticism about whether it is quite the gold standard as some hold it up to be,” said Bert Ely, an independent consultant based in Alexandria, Va. “Fannie and Freddie did a very effective job of convincing Americans that a 30-year fixed rate loan was the thing to get. But one of the things that is happening very slowly is some rethinking whether a 30-year fixed rate is the best thing to get.” The 30-year fixed-rate has evolved into the traditional home loan in the United States, although it has proven far less popular in other countries. Its advent mostly owes to implicit or explicit government backing, because banks generally are unwilling to hold such long-term maturities which are funded by short-term deposits. But fixed rate loans with such long terms require some kind of securitization vehicle to buy them. If Fannie and Freddie are eliminated and the government’s role reduced, it’s not clear if any fully private market player would be willing to take up that mantle. Source: National Mortgage News

The trend of paying credit cards before home loans became more pronounced in the 2010 fourth quarter. TransUnion reports that among consumers with a home loan and at least one credit card, 7.24 percent were 30 days late on the loan payment but current on credit cards, compared to 4.3 percent in early 2008. By contrast, 3.03 percent of consumers were at least 30 days late on credit cards but current on their home loan during the fourth quarter, compared to 4.1 percent three years ago. Source: St. Louis Dispatch

New, higher premiums on Federal Housing Administration-backed loans are meant to protect the government-backed program from the growing risk of losing money from loan defaults. But it will also make FHA loans more expensive, a key issue for homebuilders, where as many as 60% of new-home buyers use these types of loans to make their purchase. In a report released by Credit Suisse, the tougher and costlier FHA-insured loans will hurt affordability and reduce the buyer pool—especially among first-time buyers—when the higher premiums arrive. Beginning April 18, the FHA will increase premiums 25 basis points to 115 basis point for loans with loan-to-values above 95%. In addition, higher downpayment requirements would likely be damaging to builders that have focused on the low-end market, where buyers struggle to reach the 3.5% minimum, wrote lead analyst Daniel Oppenheim—though he noted that “from a policy perspective, it is tough to argue against raising downpayment requirements from current levels.” This shift will impact builders with the greatest exposure to FHA-backed buyers—including KB Home, Richmond American Homes and Ryland, where 62% to 72% of their customers bought homes with FHA mortgages in 2010. Credit Suisse projects the FHA will increase the minimum downpayment to 5%, an increase of $3,000 on a $200,000 home. In addition, the report projects that the FHA will likely over time increase monthly premiums further, to 155 basis points, and reduce loan limits. Source: National Mortgage News

The discussion over whether private MI should be included in the definition of a qualified residential mortgage, and therefore exempt from Dodd-Frank risk retention requirements, continues to keep insurers in the dark about their future. The PMI Group Inc., a private mortgage insurer, stepped forward asking for more discussion after regulators proposed guidelines saying lenders and securitizers will be exempt from a rule requiring them to retain a 5% stake on loans that meet QRM standards, which is essentially home loans with 20% down payments. The presence of insurance as some type of alternative to a 20% downpayment is not included in the current proposal.”While we are disappointed that the regulators chose a very narrow and restrictive definition of QRM, we are encouraged that they are seeking comment on an alternative QRM definition that would involve a 10 percent down payment and more reliance on private MI,” said David Katkov, PMI’s executive vice president and chief business officer. “Additionally, we believe that prudentially underwritten loans with less than a 10 percent down payment and private MI should also be included in the definition.” Source: HousingWire

The House passed a bill March 30 to kill a signature Obama administration program that helps homeowners stay in their homes but has faced criticism as ineffective. The House voted 252 to 170 to stop any new funding for the Home Affordable Modification Program (HAMP). Eleven Democrats joined Republicans to defund the program. The program taps the federal bailout that saved the big banks, providing incentives to servicers to modify home loans for borrowers behind on their payments. “To many struggling Americans seeking permanent relief, HAMP offered little more than false hope. More homeowners have been kicked out of the program than have received permanent relief,” Rep. Darrell Issa, the California Republican who chairs the House Oversight Committee, said in a statement. The bill’s path in the Senate is uncertain. President Obama has vowed to veto it. Already, House Republicans have passed three other smaller programs designed to help families and neighborhoods dealing with foreclosure. What makes the HAMP program different is the widespread criticism it has received, from both Republicans and Democrats, for being ineffective. “It would put an end to the poster child for failed federal foreclosure programs,” said Rep. Judy Biggert, an Illinois Republican. On Tuesday, 50 House Democrats wrote Treasury Secretary Tim Geithner a letter, urging him to reform the program, saying “HAMP must change to meet its potential.” Source: CNN/Money

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