Are Fixed-Rate Mortgages the Best Loan?

The think-tank Center for American Progress is questioning the premise that a 30-year, fixed-rate mortgage is the best option for homebuyers.

The reason mortgage-backed securities looked so attractive to banks is that they solved the problem of a mismatch between low rates on mortgages and higher rates for deposits. Banks worried about getting stuck earning low rates on a mortgage for 30 years while having to pay higher rates on bank accounts to attract depositors. Their answer: unload their mortgages to investors and let them worry about the profitability of the loans. Those investors hedged their bets by purchasing interest-rate swaps and other derivatives. Now, even Fannie Mae and Freddie Mac are having a hard time getting a handle on what those hedges are worth.

In other parts of the world, variable rates are the norm. While borrowers face the risk of rates going up, lenders at least can ensure the rates they pay to depositors don't outstrip what they receive in mortgage products. Homeownership rates in Canada and the European Union, where variable rate mortgages are the norm, are about what they are in the U.S.

And in any case, there are ways for borrowers to mitigate their interest-rate risk. They can take out loans with fixed initial period, for example. For homeowners who typically hold their homes for seven years, a five-year fixed rate provides considerable security.

If the country persists in choosing fixed-rate mortgages, some observers say, lenders might consider the Danish model where mortgages are financed through the bond market rather than a separate securities market. That's a system that has worked well for two centuries.

Source: The Wall Street Journal, James R. Hagerty (12/14/2009)

HUD Considers Tightening FHA Requirements

U.S. Housing and Urban Development Secretary Shaun Donovan on Wednesday asked Congress for authority to raise borrower premiums and down payments in order to bring the Federal Housing Administration’s reserves above the mandated 2 percent minimum.

The agency plans to reduce the maximum permissible seller concessions from 6 percent to 3 percent. The minimum borrower FICO score will be raised above the current 500, although the final number has not yet been determined. It also will likely increase the down payment to 5 percent, but that number hasn’t been decided either.

Donovan also wants lenders to take responsibility for losses associated with loans not underwritten to FHA standards and to be accountable for origination quality and compliance.

Critics said tightening up FHA could slow the housing recovery.

"What would cripple the housing market is the FHA changes its down payment requirement," said Rodney Anderson, a broker with Supreme Lending in Plano, Texas, the top individual originator of FHA loans in the country.

Source: Reuters News, Lucia Mutikani (12/02/2009)

Government Announces Short Sales Guidelines

The U.S. Treasury Department announced new guidelines this week designed to make short sales go more smoothly.
To qualify under these new guidelines:

• The property must be the home owner’s principal residence.

• The home owner must be delinquent on the mortgage or close to defaulting.

• The loan must have been made before Jan. 1, 2009, and be for less than 729,750.

• The borrowers’ total monthly mortgage payment must exceed 31 percent of their before-tax income.

Under the plan, borrowers will receive $1,500 from the government for selling homes for less than the amount of their mortgages. Mortgage-servicing companies will get $1,000 for each completed short sale. Second-mortgage holders can receive up to $3,000 of the sales proceeds in exchange for releasing their liens. Investors who hold the first mortgage can collect up to $1,000 from the government for allowing the payments.

Borrowers who complete a short sale under the program must be "fully released" from future liability for the debt, according to the guidelines.

Source: Associated Press, J.W. Elphinstone (11/01/2009) and The Wall Street Journal, Ruth Simon (11/01/2009)

How to Get the Best REO Deal

REO and short-sale properties can be money pits when offers take forever to close and vacant properties are trashed.

Here are some suggestions for expediting the deals:

* The best short-sale deals are those where the bank has pre-approved the sale price. The property may still take a long time to close, but not as long as it would otherwise.
* Buyers of a short-sale should be prepared for multiple offers. If the short-sale property is an attractive one, the lender will continue to market the property even after signing a sales contract. And if it gets a better offer, it may sell the property without giving the original buyers a chance to negotiate.
* Seek out houses protected by the Cash for Keys program, which gives short-sale and foreclosed owners money to prevent them from trashing the place on the way out.
* Inspections are important. If a home has been vacant, get the property re-inspected prior to closing.
* Buyers shouldn't focus on price alone. Homes that are in poor neighborhoods, have serious maintenance issues, or have terrible floor plans aren’t bargains despite the price.


Source: Inman News, Bernice Ross (11/30/2009)