Wednesday, April 9, 2008


We are learning more about the new mortgage guidelines issued by U.S. Dept. of Housing and Urban Development (HUD), the agency that regulates housing and mortgage lending. The new guidelines will bring mortgage relief to hundreds of thousands of homeowners and buyers who cannot now find a reasonably priced loan during the ongoing credit crunch.

The Federal Housing Administration (FHA) will be allowed to purchase mortgages from banks and other lenders on properties up to 4 residential units with higher loan amounts in so-called high-price regions of the country, including 14 counties in California, for the rest of 2008.

HUD is also allowing “Jumbo-Conforming” mortgages with amounts to $729,750 for single residences to be purchased by Freddie Mac and Fannie Mae, two other Government Sponsored Enterprises (GSEs) that buy so-called conventional mortgages. ‘Freddie and Fannie’s’ mandate is to buy mortgages that meet stricter qualification criteria from banks and other lenders, and so have slightly lower interest rates than ‘jumbo’ mortgages.

The relief is needed because the credit squeeze was caused by rising loan defaults on jumbo loans that had very easy qualification criteria, such as not requiring any verification of income. This boosted jumbo mortgage rates more than 1 percent above conforming loan rates, restricting home sales in California’s high-priced regions that include Santa Barbara, Ventura and Los Angeles counties.

The new “jumbo-conforming” loans are designed to ease the jumbo credit crunch by allowing the AAA credit-rated Freddie Mac and Fannie Mae into the jumbo mortgage market. Maximum loan-to-value on the new jumbo-conforming loan products will be 90% for fixed rates and 80 percent for ARMs. One to four units are allowed on FHA loans, with Fannie/Freddie allowing only single residential units. Fannie/Freddie jumbo-conforming loans will also add 0.25 percent to the rate of normal conforming loans (those with the current $417,000 maximum loan) that Fannie/Freddie will also continue to buy.

We still offer ‘super jumbo’ stated income loans to $3 million, even with negatively-amortized teaser rates, to 80 percent loan-to-value (ltv). Credit standards are being tightened along with reduced loan-to-values for super-jumbo fixed rates with some programs only allowing a 75 percent maximum ltv.

A federal government working task force led my Treasury Secretary Paulson is also recommending that all states should implement strong nationwide licensing standards for mortgage brokers—already the case in California. Other recommendations designed to boost confidence in the mortgage industry are:

Federal and state regulators should strengthen and make consistent government
oversight of entities that originate and fund mortgages and otherwise interface
with customers in the mortgage origination process.

• The Federal Reserve should issue stronger consumer protection rules and mandate enhanced consumer protection disclosures, including disclosures that would make affordability over the life of the mortgage more transparent and that wouldfacilitate comparison of the terms with those of alternative products.

What borrowers must do before taking on an adjustable rate mortgage (ARM) is to seriously consider the risks of rising interest rates and be honest about what they can afford today and down the road.

"Everyone wants to treat all ARMS as a toxic product, but they're not," said Keith Gumbinger, vice president of HSH "ARMs have almost a 30-year history and there are times they can be very valuable ... in the proper application of the product."

By definition, ARMs have interest rates that change at set intervals, depending on the type of mortgage. The five-year ARM, often referred to as a 5-1, is among the most popular ARMs. Payments are fixed for the first five years of the mortgage, at a rate below the prevailing 30-year loan. At the start of the sixth year the interest rate is reset based on an index that varies from lender to lender; generally any movement is capped at 2 percentage points per adjustment and there are usually lifetime caps as well.

These types of mortgages are at the heart of much of the housing turmoil that is now rocking the U.S. economy. Many consumers who took out adjustable-rate mortgages at the turn of the century when interest rates were at historic lows saw their monthly payments surge, sometimes doubling, when their mortgages reset.

Thanks to the Federal Reserve's successive interest-rate decreases since September, Treasury-indexed adjustable-rate loans of 4.85% made in March 2003 are resetting at 4.41% for the next year. ARM borrowers are getting a valuable reprieve, which gives us reason to believe the credit crunch may be over sooner rather than later.

Copyright © 2008

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