2010 RESPA, FHA, and Property Appraisal Presentation

On February 8th I provided an industry update to a group of real estate professionals.  The subject of the presentation was focused on providing realtors with the essential information they should be aware of when working with buyers and sellers who are using mortgage financing.  Here are the slides for your learning pleasure:

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Tighter underwriting guidelines effective today

Mortgage Industry bellwether Fannie Mae announced this morning that it has successfully implemented the latest version of it’s automated underwriting engine known as “Desktop Underwriter”.  Fannie Mae is the largest purchaser and “securitizer” of mortgages in the United States.  The new guidelines featured in this version of the software will make it more difficult for many loan applicants to qualify for mortgage financing.  The changes will impact mortgage applications starting today.

Here are the highlights:

* Update to Credit Risk Assessment: Fannie Mae has made adjustments to it’s credit assessment with the intent of managing, “default risk in this market and to provide reasonable, prudent, and sustainable homeownership options to borrowers.”  In other words, Fannie Mae is raising the bar on borrowers with marginal credit histories.  These applicant’s are going to have a tougher time getting approved for financing.

* Reduction in maximum debt-to-income ratios (DTI): DTI ratios measure a loan applicant’s proposed housing payment plus all other monthly debt obligations divided by their monthly gross income.  Up until today loans with DTI’s as high as 56.9% were regularly approved.  As of today most applicant’s will only get approved if their DTI is 45% or less.  With compensating factors (i.e. large down payment, stellar credit, lot’s of reserves) an applicant may go as high as 50%.

On the surface this update seems completely reasonable.  However, keep in mind that most households have cash-flow coming in that cannot be included as income on their loan application.  Therefore, an applicant’s qualifying income, which is the denominator in the DTI equation, is often a very conservative interpretation of their actual monthly cash-flow.  This will have an especially large impact on self-employed persons (sorry realtors).

* Tighter guidelines for applicants with foreclosures & BK’s: For applicants with foreclosures on their credit report they will not be eligible for Fannie Mae financing for the first 5 years from completion date (they may be elgible for FHA financing sooner).  After 5 years they need to have a minimum of 10% down payment, a credit score of 680 or higher, and will not be permitted to do a cash-out refinance.  Keep in mind that in most cases the foreclosure falls off the applicant’s credit report after 7 years.

Applicant’s with a Chapter 13 BK on their credit report that was discharged within in the past 24 months, dismissed within the previous 48 months or a non-Chapter 13 BK (i.e. Chapter 7) that was filed, discharged, or dismissed within the previous 48 months will not be approved for a new mortgage.  The previous guidelines had timelines fo 24-36 months.

*Duplex maximum loan-to values (LTV’s) decreased: Under previous guidelines many loan applicant’s could get up to 95% financing for owner-occupied duplexes.  When the mortgage was to be used for investment property purchase of a duplex the maximum LTV was 85%.

Under the update the maximum LTV is 80% for owner-occupied purchases and 75% for investment property purchases.  Interest-only loans are no longer available for investment property.

Tri-County recorders

The expiration of the $8,000 first-time homebuyer credit is only 52 days from today.  For those who qualify for the $8,000 credit they must close on their transaction no later than November 30th.  And although there has been much speculation about an extension of the credit; to date nothing has been passed by Congress and their is growing skepticism that anything will get done before health care reform is enacted (which means it may not get extended).

That said, we are expecting that Monday, November 30th will be a busy day at the county recording offices because many homebuyers will wait to the last minute to close.  The excess demand for recordings at that time is amplified by the fact that Thursday, November 26th is Thanksgiving day so all of the recording offices are closed.  The problem of course is that the county recording offices may not be staffed to handle the additional capacity and if a transaction doesn’t actually record until the following day it may mean that the buyer does not receive their $8,000 credit.

We would encourage homebuyers to close a week or so before the expiration of the credit so long as time permits but realize this may not be feasible.  That said, we have been pro-active in learning how the tri-counties are going to be responding to the expected additional demand.  Here is what we found out:

Multnomah County: Will be open for the full day on Friday, November 27th (day following Thanksgiving)/ may add staff if needed/ is not allowing vacations to employees on November 30th/ currently planning on closing at 5PM

Washington County: Will be open for the full day on Friday, November 27th (day following Thanksgiving)/ planning on adding staff to help out/ is not allowing vacations to employees on November 30th/ will close at 5PM but staff will stay as late as needed in order to record all documents in that day

Clackamas County: Will only open for a 5-hour shift on Friday, November 27th (day following Thanksgiving)/ not currently planning on adding staff/ has not made any policies regarding vacations to employees on November 30th/ will close at 5PM as normally scheduled

Clearly Clackamas County recordings are the most at risk.  Plan ahead!

Extension of the first-time homebuyer credit?

There is no question that the popular first-time homebuyer credit has had a positive impact on the housing market.  Currently my team is working on 11 purchase transactions and 7 of them are first-time homebuyers.  How many of these people would not be buying if it weren’t for the $8,000 incentive?

Data out this morning from the S & P Case Shiller home price index showed that home prices rose modestly in 18 of the top 20 housing markets in the US.  Surely the tax incentives and low interest rates have helped to stabilize the housing market.

Since the first-time homebuyer credit has been such a catalyst in the housing market many people are concerned about what will happen after 12/1/2009 when the program is set to expire.

This morning I came across this article which is reporting that there is currently a bill in front of the House Ways & Means Committee in Washington D.C. which would extend the credit into 2010.

I’m not sure of the political feasibility of such a bill. especially since budget deficits are a growing concern amongst Americans (click this link to see the US national debt clock).

What do you think?  Do you think we should extend the program?  Or, should we let the free market takes its course?

FHA Amendatory Clause / Real Estate Certification

Depending on the estimate, FHA loans currently make up approximately 25% of total mortgage originations. Recent experience has led me to realize that although most real estate professionals know what they’re doing, there are still many who need a little coaching on the main disclosure; the FHA Amendatory Clause/ Real Estate Certification.

Download the One-Page FHA Disclosures Amendatory Clause / Real Estate Certification >>

Here are three essential things professionals and consumers need to know:

  • This disclosure MUST be signed by the homebuyer(s), homeseller(s), and real estate professionals (both selling and listing agent) involved in the transaction.
  • What also needs to be filled out? At the top of the form the homebuyer(s), homeseller(s), property address, and date of agreement should be filled in. In addition, the blank space following the “$” symbol in the Amendatory Clause section should be filled with the original purchase price of the offer.
  • The signatures on the FHA Amendatory Clause MUST be dated on the SAME DATE THAT THE RESPECTIVE PARTY ORIGINALLY SIGNED THE EARNEST MONEY AGREEMENT. The signature and dates for the Real Estate Certification are not date sensitive.


If John & Jody Homebuyer write an offer with their real estate agent Shelly Sellalot to purchase a home on September 1st, then John & Jody must sign and date the Amendatory Clause on September 1st.

If the sellers, Jay & Judy Homeseller, along with their listing agent Bob Bigbucks, respond to the offer on September 2nd, then Jay & Judy must sign the Amendatory Clause on September 2nd irregardless of their response (unless they simply reject the offer all together). 

With regard to the Real Estate Certification John, Jody, Shelly, Jay, Judy, and Bob all need to sign this section but the date is not critical.

What are the parties signing? In so many words the Amendatory Clause gives the homebuyer(s) permission to back out of the transaction and receive their earnest money back if the property does not appraise for the amount they are buying the house for. 

The Real Estate Certification states that the entirety of the sales agreement is disclosed in the earnest money agreement and accompanying addendums which are ALL provided to the lender.

New mortgage rules could delay closings

Beginning July 30, 2009 all mortgage applications must comply with the Mortgage Disclosure Improvement Act (MDIA) which was passed into law as a part of the Housing and Economic Recovery Act of 2008.

The objective of MDIA is to protect consumers & improve the consistency of the Truth-in-Lending disclosures (TIL) that applicants get from lenders at the outset of a new loan application.

However, there are provisions embedded within this law that real estate professionals & consumers should be aware of because they may end up delaying scheduled closings if the lender is not adhering to the requirements.

Here are the highlights of this new law along with a brief explanation of the potential impacts and recommended solutions so that they don’t impact your transactions:

1) Cannot order appraisal until TIL has been signed: Under the new law lenders must receive back a signed initial TIL before they can order an appraisal.

Potential Impacts:  Even if the lender sends the initial TIL within the required 3-day time frame, they may not be able to proceed with the processing of the loan if the applicant does not return the signed disclosure promptly. This coupled with the impact of the HVCC appraisal rules create an even longer turn time for receiving appraisals back.  Furthermore, this requirement will prevent applicants from switching lenders once they’ve begun the process of applying for a mortgage because if the applicant tries to switch lenders the clock restarts.

Recommended solution: If the applicant meets with the lender at the outset of the application in a face-to-face meeting and signs the initial TIL then the lender may order the appraisal immediately.

2) 7-Day Waiting Period Before Closing: Under the new rule, the loan cannot close earlier than the 7th business day after the initial TIL is delivered or placed in the mail to the borrowers.

Potential Impacts: This prohibits from lenders conducting “quick closes”.  Currently, in some instances a mortgage broker may transfer a loan application from one lender to another at the last minute to achieve a better interest rate for the applicant OR because the new lender has an underwriting flexibility that the applicant needs in order to be approved for the loan.  Anymore, the applicant will have to wait at least 7 business days from the moment that the new lender sends out their initial TIL to close on their loan.

Recommended solution: It is now even more important that borrowers work with true mortgage professionals who are knowledgeable and thorough so that any potential “red flags” are identified and resolved at the outset of the application.  Otherwise, the mortgage is almost certain to be delayed.

3) APR Change Outside Tolerance/Corrected Disclosures: If the APR disclosed on the initial TIL later increases or decreases by more than .125%, a corrected TIL must be RECEIVED by the borrower no later than 3 business days before the date of the closing. If the corrected TIL is mailed the lender must allow 6 business days to pass for the borrower to review, before closing.

Potential Impacts: From the moment the initial application is taken to the closing table there can be variables that change which can also impact the APR (i.e. closing date, locked interest rate, percentage of down payment).  Should any of these variables change and the lender neglect to send out a new TIL, the transaction will be delayed by at least 3 business days for the new TIL to be reviewed by the applicant.

Recommended solution: Work with reputable lenders who are upfront, honest, and knowledgeable about the industryNow more than ever honest upfront disclosures will literally make the escrow process go smoother.

Click this link to watch a 7:00 minute movie summarizing the new rules.

HVCC gets Jack’d up

For professionals in the housing industry (mortgage, appraisal, & real estate) the new appraisal rules known as the Home Valuation Code of Conduct (HVCC) is a hot topic these days.  These rules which became effective May 1st were designed to improve the accuracy and integrity of appraisals.  However, as many professionals is the housing industry will testify there are many problems with the execution of these rules.  Syndicated columnist Jack Guttentag wrote a good summary of these problems which was featured in the Sunday Oregonian.

Jack Guttentag

Here are some talking points from the article:

*Jack’s definition of an appraisal: “Appraisals are informed judgments regarding the value of specific properties.” – I like this definition because it is a reminder that appraisals ARE subjective.

*Objective of HVCC: “The objective of the code was to insulate the appraisal process from influence by any of the parties with an interest in the outcome.”

*Problems with the rule: “The problem with this well-intentioned rule is that it was issued….squarely in the middle of the worst housing market since the 1930s….Many deals are not getting done because appraisals are coming in too low, and HVCC is seriously aggravating the problem.

*Why the bad appraisals?: “…more appraisals are being done by appraisers who are not familiar with the local market.

*Many appraisers under HVCC “are also paid less per appraisal than (before), which may induce them to invest less time.

*The article goes onto explain that under HVCC the turn around time on appraisals has increased by approximately one week which has put closing dates and buyer’s interest rate locks in jeopardy.

*HVCC prevents loan officers from keeping “clients informed about the status of an appraisal.

*HVCC also limits “access to to informal value opinions from the appraisers…Such opinions allowed them to abort house purchases and refinances that clearly would not fly because of inadequate property value.

*”HVCC has also pretty much eliminated the ability of a borrower to use the same appraisal with multiple loan providers.”  If a deal falls through with one lender “borrowers often have to pay for more than one appraisal.

Danish realtors change pricing model

While reading the Copenhagen Post on Monday morning I came across this article which explains how Danish real estate agents are changing their pricing models to reflect the current state of the market.

Like the US housing market Denmark has also entered a period of slower sales.  As a result, some real estate professionals are abandoning the traditional model of commission-only compensation where they are paid only when the home sells.  Instead, they are implementing a fee structure where they pass along marketing expenses to home-owners while the home is on the market.

Kind of interesting.

RESPA presentation

I am providing a presentation to a group of real estate professionals about upcoming changes to RESPA rules.  Here are the presentation slides.

New RESPA rules enacted

HUD made a huge announcement today regarding new RESPA rules surrounding the Good Faith Estimate and HUD-1 final settlement statement.  I am amazed that this rule has not gotten more attention in the real estate community.

I blogged about these proposed changes back on November 2nd and pointed out the pro’s and con’s of the changes.  Now that the rule has been finalized here are a few thoughts I’d like to share:

*The new GFE is now 3 pages and is standardized.  This means that every lender, mortgage broker, or bank will offer consumers the same GFE format.  This should prevent lenders from “hiding” fees/ changes.  Here is a link to view the new 3 page GFE.

*The one issue I have with this new GFE is that there is no section where a consumer can view their estimated cash to close.  This appears to be a huge oversight on the part of HUD.

*There is no section for the loan originator to include the company name or lender.

*There is no section on the 3 page GFE where a borrower’s total principal, interest, taxes, and insurance payment is shown (PITI) together.

*There are plenty of positive aspects of the new GFE including the requirement to offer consumers other options with higher closing costs and lower interest rates as well as lower closing costs and higher interest rates.  This is a very important concept and one that often gets over looked by loan originators.

*Fortunately, the final rule did away with any sort of escrow officer script reading which would have made signings painful.

*Here is a link the new HUD-1 settlement statement.  There are some confusing aspects of this new document as well.

*These new procedures will have a 12-month transition period.  Lenders may start using the new GFE’s on January 1, 2009.  They will be required to no later than January 1, 2010.

I am in the process of putting together a class for real estate professionals which I plan to offer for continuing education (assuming the principal broker will approve the content).  Please shoot me an email if you’d like to attend.