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Finance options gentry june 2014

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  • **INSTRUCTORS MAY HIDE OR DELETE THIS SLIDE FOR 18, 17, OR 16-HOUR NATIONAL COURSES **
  • **INSTRUCTORS MAY HIDE OR DELETE THIS SLIDE FOR 18, 17, OR 16-HOUR NATIONAL COURSES **
  • **INSTRUCTORS MAY HIDE OR DELETE THIS SLIDE FOR 18, 17, OR 16-HOUR NATIONAL COURSES **
  • **INSTRUCTORS MAY HIDE OR DELETE THIS SLIDE FOR 18, 17, OR 16-HOUR NATIONAL COURSES **
  • **INSTRUCTORS MAY HIDE OR DELETE THIS SLIDE FOR 18, 17, OR 16-HOUR NATIONAL COURSES **
  • **INSTRUCTORS MAY HIDE OR DELETE THIS SLIDE FOR 18, 17, OR 16-HOUR NATIONAL COURSES **
  • **INSTRUCTORS MAY HIDE OR DELETE THIS SLIDE FOR 18, 17, OR 16-HOUR NATIONAL COURSES **
  • Refer students to textbook - Page 19
  • Refer students to textbook - Pages 20 - 21
  • Refer students to textbook - Pages 21 - 22
  • Refer students to textbook - Pages 21 - 22
  • Refer students to textbook - Pages 21 - 22
  • Refer students to textbook - Page 29
  • Refer students to textbook - Page 29-30
  • Refer students to textbook - Pages 29 - 30
  • Refer students to textbook - Page 30
  • Refer students to textbook - Page 31
  • Transcript

    • 1. Quick Intro • Instructor at the Arizona School of Real Estate and Business for 5 years • Mortgage professional for 17+ years • Former Big4 auditor • ASU Grad (4th Generation) • Husband and Father AZ SAFE - Laws for Mortgage Loan Originators
    • 2. What is “The New Era”? • What is going on in the market right now? • What are you seeing?
    • 3. What is “The New Era”? Phoenix home-price increases stall as sales fall Catherine Reagor, The Republic | azcentral.com 4:32 p.m. MST June 11, 2014 •Metro Phoenix home sales prices flattened out in April, one of the prime months for the area's housing market. And the forecast isn't upbeat for price increases during the rest of 2014. •Metro Phoenix home-sales prices were flat in April, one of the region's prime sales months. And the forecast isn't upbeat for price increases during the rest of 2014. •The median sales price of a Valley house was $205,000 in April, according to the latest report from the W.P. Carey School of Business at Arizona State University. That compares with $204,900 in March and $205,000 in December. •"The market has completed its rebound from the artificially low prices that prevailed between 2009 and 2011, and further significant increases are unlikely without some growth in demand," said Mike Orr, director of the Center for Real Estate Theory and Practice at W. P. Carey. •Fewer sales are the reason behind the price stagnation. The number of home sales was down 16 percent in April compared with April 2013. But the supply of houses for sale is up. The number of houses on the market as of May 1 was 73 percent higher than on the same date later year. •Orr said the number of listings could fall if demand and prices don't pick up because potential sellers might opt to stay out of the market, waiting for a better time to make a profit on their house. •He said investors continue to lose interest in Phoenix's housing market, instead buying in other parts of the country where there are more foreclosures and lower home prices.. About 16 percent of all sales in April were investor-driven, down from a peak of 40 percent in July 2012. That's adding to the slowing of sales and adding to the downward pressure on prices. •Median-sales prices have been flat in 2014 but still are showing increases compared with last year. •http://www.azcentral.com/story/money/real-estate/2014/06/11/phoenix-home-price-increases-stall/10344933/
    • 4. What is “The New Era”?
    • 5. What is “The New Era”? • Ever-changing guidelines
    • 6. Finance Options • Conventional Loans • Government Loans • CFPB and QM • Down Payment Assistance • Niche Loan Programs
    • 7. Mortgage Principles and Practices 4th Edition (02/21/2012) Chapter 6: Conventional Financing Conventional Loans • Usually made by bank or institutional lender • Not insured or guaranteed by a government agency • Conforming –Written to guidelines set by government- sponsored entities • Freddie Mac • Fannie Mae –May be sold in secondary market
    • 8. Mortgage Principles and Practices 4th Edition (02/21/2012) Chapter 6: Conventional Financing Conforming Loans • Meet Fannie Mae/Freddie Mac standards • May be sold on secondary market • Qualifying standards – 28% housing expense ratio – 36% debt-to-income ratio • Borrower must qualify under both ratios • Borrower should have at least: – 5% own funds for down payment – 2 months of reserves on deposit
    • 9. Mortgage Principles and Practices 4th Edition (02/21/2012) Chapter 6: Conventional Financing Conventional Programs • Classified by percentage of down payment • Loan-to-value: Amount borrowed compared to property value – Lesser of sales price or appraised value • Higher LTV = lower down payment = more risk • Standard 80% conventional loan requires 20% down
    • 10. Mortgage Principles and Practices 4th Edition (02/21/2012) Chapter 6: Conventional Financing Higher LTV Loans • 90%, 95%, loan-to-value • Possible because of private mortgage insurance (PMI) and secondary financing • More stringent qualifying standards/may not be available • May have higher interest rates, fees, etc. • 90% LTV – At least 5% of down payment from personal cash reserves • 95% LTV – Requires owner-occupancy – Entire down payment from personal cash reserves
    • 11. Mortgage Principles and Practices 4th Edition (02/21/2012) Chapter 6: Conventional Financing Private Mortgage Insurance (PMI) • Offered by private companies to insure lender against borrower default • Allowed lenders to make loans above 80% LTV • Required on loans with less than 20% down • PMI premiums: – Fee at closing w/ renewal premium – One-time PMI premium – Lender paid mortgage insurance (LPMI)
    • 12. Mortgage Principles and Practices 4th Edition (02/21/2012) Chapter 6: Conventional Financing PMI: Cancellation • Mortgage insurance fulfills purpose when risk of borrower default reduced • Homeowners Protection Act (HPA) – Applies to single family, owner-occupied homes – PMI automatically cancelled at 78% LTV if borrower not delinquent – Borrower may request cancellation at 80% LTV if borrower shows timely repayment for 12 months • When cancelled, monthly payment reduced by premium amount • Does not apply to upfront / one-time PMI premium
    • 13. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs Federal Housing Administration • FHA insures mortgage loans made by approved lenders • No have income limits • Eligibility: – U.S. citizen – Permanent resident – Non-permanent resident with qualifying work visa • Sets maximum mortgage amount • FHA part of Department of Housing and Urban Development (HUD) • Oversight through HUD’s Office of Housing
    • 14. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Underwriting Standards • Underwriters consider 4 C’s: – Credit history of the borrower – Capacity to repay the loan – Cash assets available – Collateral • Must pay off any outstanding court-ordered judgments • Cannot be in default on any federal loan – Confirmed through Credit Alert Verification Reporting System (CAIVRS) database • Must have sufficient income to service all debt • Qualifying ratios somewhat more liberal
    • 15. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Payment to Effective Income • Relationship of borrower’s total monthly housing expense to income, expressed as percentage – More commonly referred to as the housing expense ratio • Total mortgage payment (PITI) may not exceed 31% of gross stable monthly income $3,200 Stable monthly income x .31 Housing expense ratio $ 992 Maximum monthly housing expense
    • 16. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Debt-to-Income • Relationship of borrower’s total monthly debt obligations to income, expressed as a percentage – Includes housing and other long-term debts that will not be cancelled • Back end ratio given primary consideration by TOTAL Scorecard • Borrower’s total expenses cannot exceed 43% of monthly income
    • 17. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Compensating Factors • If applicant exceeds either 31/43 ratio, lender must document factors that mitigate risk: – Housing expense ratio – Down payment – Accumulated savings – Previous credit history – Compensation/income not reflected in effective income – Minimal housing expense increase – Substantial cash reserves – Substantial non-taxable income – Potential for increased earnings – Primary wage-earner relocation
    • 18. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Property Eligibility • Eligible one- to four-family dwellings include: – Detached or semi-detached dwellings – Row houses – Multiplex dwellings – Individual condominium units (if approved) – Some manufactured housing • Independent utilities and other facilities must include: – A continuing supply of safe, potable water – Sanitary facilities and a safe method of sewage disposal – Heating adequate for health and comfort – Domestic hot water – Electricity for lighting and equipment
    • 19. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Property Conditions • Lender requires repairs necessary to: – Protect health and safety of occupants – Protect security of the property – Correct physical deficiencies or conditions affecting structural integrity
    • 20. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Property Occupancy • Must establish bona fide occupancy as principal residence within 60 days of signing mortgage • Must live in the house for at least one year • Generally may have only one FHA loan at a time • Non-occupying co-borrower limits LTV to 75% unless: – Family member – Someone with documented evidence of long- term relationship separate from loan
    • 21. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Maximum Mortgage Amount • HUD limits the maximum loan amount by community (county, zip code, or metropolitan statistical area) • Loan amounts reviewed every 3 years • Maricopa County limit is currently $271,050 • Different limits for 2-, 3-, and 4-family • Higher limits in some areas • Current schedule of maximum limits available here: https://entp.hud.gov/idapp/html/hicostlook.cfm
    • 22. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Minimum Required Investment • 3.5% minimum required investment of sales price or appraised value, whichever is less – 10% minimum required investment for credit score less than 580 • Closing costs may not apply to 3.5% • Entire minimum investment may be non-repayable gift from relative, employer or labor union, charitable organization, close friend with clearly documented interest – Gifts may NOT come from interested third party • Requires signed gift letter stating no repayment required
    • 23. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Secondary Financing • Government or approved nonprofit second lien permitted – Total loan cannot borrower ability to pay • Individual/company second lien permitted with prior approval if: – Secondary financing disclosed at application – Minimum cash investment is not financed – CLTV does not exceed FHA mortgage limits, – Borrower can make payments on both – Any periodic payments are level and monthly – No balloon for first 10 years – No prepayment penalty
    • 24. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Seller/3rd Party Contributions • Seller and/or third party limit 6% of sales price or appraised value, whichever is less – Permanent and temporary interest rate buydowns • Borrower must qualify at note rate for temporary – Mortgage interest for fixed rate – Mortgage payment protection insurance or UFMIP • Contributions above limit are considered inducements – Must be subtracted from sales price before applying LTV • Pending: HUD indicated intention to reduce allowable seller contributions to 3%
    • 25. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Assumption and Prepayment • Loans prior to 12/15/1989 assumable with small fee – No alienation (due on sale) clause – Original borrower liable unless FHA agrees • To assume loans endorsed on or after 12/15/1989: – FHA creditworthiness review – Fee • Assumption without approval may accelerate debt • No prepayment penalties allowed – Lender may collect remainder of month’s interest if not paid on the first of any month
    • 26. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Mortgage Insurance Premium • Required for all FHA loans • Upfront (UFMIP) – On or after 4/9/2012 = 1.75% loan amount • Monthly MIP based on LTV and type of loan – 30-year loan 1.30% if LTV <= 95% / 1.35% if LTV > 95% • May be paid in cash at closing – Borrower, seller or third party (within limits) • More commonly financed into loan up to 100% LTV http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/comp/premiums/sfpcalc
    • 27. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: Mortgage Insurance Premium http://www.forbes.com/sites/markgreene/2014/05/08/hud-commissioner-wrong-about-fha- mortgage-insurance/
    • 28. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs FHA: 203(b) Loans Loan Program Description Conditions Section 203(b) Home Mortgage Insurance •Basic owner- occupied loan for one- to four-family dwelling •Any term up to 30 years, fixed •3.5% down •Maximum 1% origination fee •Requires UFMIP (1.75% as of 4/9/12) and monthly MIP up to 1.25% of loan balance •Max. loan amounts $271,050 to $729,750 (location)
    • 29. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA-Guaranteed Loans • Guaranteed by federal government through the Veterans Benefits Administration – Part of the Department of Veterans Affairs • Help meet housing needs of eligible veterans • Owner-occupied single family • 1- to 4-unit multifamily if vet occupies one unit as principal residence • Rarely loans money directly • Approved lenders and Automatic Endorsers • Lender’s Handbook: www.homeloans.va.gov
    • 30. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Eligibility • Based on continuous active service –Spouses of vets who died on active duty or MIA/POW may be eligiblewww.homeloans.va.gov/elig2.htm • Certificate of Eligibility (COE) issued by VA with proof of service: –DD-214 discharge papers –NGB Form 22/23 –Statement of service
    • 31. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Entitlement/Maximum Loan • Guaranty limited to 25% lesser of purchase price or established reasonable value • Entitlement documented in COE • Vets may generally purchase home up to 4 times entitlement with no down payment • Annual loan limit set by county – Most counties $417,000 in 2010 – www.homeloans.va.gov/loan_limits.htm • If entitlement insufficient or limit exceeded: – Eligibility + down payment + equity must = 25%
    • 32. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Restoring Entitlement • Eligibility may be restored and used for another VA loan if: –Property is sold and loan paid in full –Eligible veteran assumes outstanding balance and substitutes his/her entitlement • Must meet occupancy, income, and credit requirements
    • 33. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Qualifying Standards • Must be satisfactory credit risk with means to repay loan • If legally married, spouse income may also be considered – Non-married co-borrower not allowed unless also an eligible vet occupying as principal residence • Housing expense ratio (front end) not considered • Debt-to-income ratio should not exceed 41% – Tax-free income may be grossed up to calculate
    • 34. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Residual Income • Income remaining after subtracting taxes, housing expenses, recurring debts • Ensures adequate cash flow for family support • Uses net effective income, not gross • Considers size of veteran’s family • Requirements determine regionally based on loan amount
    • 35. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Variable Funding Fee • No upfront or monthly mortgage insurance premiums • Must pay one-time non-refundable variable funding fee at closing – Waived for disabled veterans and some surviving spouses – May be financed (added to loan amount) or paid in cash
    • 36. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Seller Concessions • Anything of value added to transaction that seller does not customarily pay, for example: – Funding fee – Prepaid property tax/insurance – Permanent buydowns – Payoff of other credit balances • Closing costs/points typically paid by seller are not considered concession • Seller concessions over 4% reasonable value are unacceptable
    • 37. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Secondary Financing • Simultaneous secondary financing permitted • Cannot be in substantially worse position than if entire amount guaranteed by VA • 2nd loan must be subordinated • No cash-back • Must qualify for 2nd mortgage as recurring monthly obligation • Interest rate on 2nd mortgage may not exceed industry standards • 2nd mortgage should not restrict ability to sell any more than VA 1st mortgage
    • 38. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Assumption and Prepayment • Loans closed on/after 3/1/1988 require VA / lender approval for assumption – Vet is released of liability in event of default – Eligibility may be restored if: • Assumer is an eligible veteran • Assumption has been approved • Assumer agrees to substitute entitlement and occupy as principal residence • Prepayment penalties are prohibited – May be allowed for secondary financing
    • 39. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs VA: Purchase Loans Program Description Conditions Purchase Loans •100% financing for 1- to 4-family •Loan terms negotiated •Repayment plans: –Fixed –Traditional ARM –Hybrid ARM –Graduated payment –Growing equity •Owner occupy as primary residence •25% guaranty –Entitlement –Down payment –Equity •Non-refundable funding fee •Lender flat 1% fee
    • 40. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs Comparing FHA and VA Loans FHA VA Borrower eligibility Any qualified borrower Eligible veteran only (COE and DD-214 or equivalent) Property units Owner-occupant only 1-4 Yes within 60 days 1-4 Yes within 60 days Maximum loan (cannot exceed appraisal) Cannot exceed maximum for geographic location No limits
    • 41. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs Comparing FHA and VA Loans FHA VA Borrower qualifying standards •Housing expense ratio: 31% •Total debt-to- income: 43% •Residual income guidelines •Total debt-to- income: 41% Lender protection Insured to full extent of losses from default Maximum guaranty amount = 25% loan limit/county Maximum interest rate Negotiated with lender Negotiated with lender
    • 42. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs Comparing FHA and VA Loans FHA VA Minimum required investment/down payment? •3.5% if FICO 580 or above •10% if FICO 500- 579 None unless loan amount is greater than 4 times COE entitlement Fee/insurance premium required UFMIP 1.75%; monthly MIP up to 1.25% of annual average loan balance Variable funding fee 1.25% to 3.30% (unless disabled); no insurance premium required
    • 43. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs Comparing FHA and VA Loans FHA VA Fee financed? Yes (UFMIP) Yes Closing costs financed? No No Seller contribution limit? Yes, 6 points (proposed reduction to 3) Discount points: No limit (if reasonable) Seller concession: 4 points
    • 44. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs Comparing FHA and VA Loans FHA VA Secondary financing? Yes, except minimum down Payment Yes Assumable loan? Not without FHA creditworthiness Check Not without VA/ lender approval Prepayment penalty? No No
    • 45. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs USDA: Rural Development • U.S. Department of Agriculture Rural Development Housing and Community Facilities Programs (HCFP) • Grants and loans to rural communities for essential services • Assist with single family and multifamily – Housing – Site preparation – Rental assistance – Water and waste – Repair and rehabilitation • Low-income homebuyers in rural communities – Small towns up to 20,000 – Temporarily eligible in response to conditions, natural disaster
    • 46. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs USDA: Section 502 Loans • Guarantees loans made by approved private lenders • Makes direct loans if no local lender is available • May be used to: – Purchase existing home – Construct new home – Renovate or repair existing home – Relocate existing home – Purchase and prepare site • Eligible house must be modest and not exceed the applicable area loan limit • Applicants must meet area median income (AMI) income requirements • 100% LTV with no mortgage insurance
    • 47. USDA: Section 502 Loans Effective October 1, 2012, USDA mortgage insurance rates are: • For purchases, 2.00% upfront fee paid at closing, based on the loan size. • For refinances, 2.00% upfront fee paid at closing, based on the loan size. • For all loans, 0.40% annual fee, based on the remaining principal balance. Note that the annual fee is for the life of the loan. It does not end with the loan-to-value reaches a certain point as with an FHA loan. Mortgage Principles and Practices 4th Edition (08/14/2012) Chapter 7: Introduction to Government Agency Loan Programs
    • 48. QM Introduction • After the mortgage meltdown in 2007, Congress passed and implemented laws and regulations to protect participants in all financial markets, including the mortgage industry • These regulations and legislation affected participants from the largest GSE or mortgage institution to the MLO who works for a small broker shop • This module provides updates and information on the legislation and regulations recently implemented SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13
    • 49. Overview of Dodd-Frank Act • In 2007, homeowners faced the drastic consequences of slowing economy • Congress held hearings concerning the mortgage meltdown, focusing on:  the lack of a lenders’ consideration of a borrower’s ability to repay  prepayment penalties, hybrid adjustable rate mortgages  loans that required little or no documentation of income or assets (or both) as it contributed to the number of foreclosures taking place • The House of Representatives passed the Mortgage Reform and Anti-Predatory Lending Act in 2007 and 2009, which never became law • A new Congress, seated in January of 2009, set out for financial reform • The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd- Frank Act), which established the Consumer Bureau • Two Titles or parts pertain to the mortgage industry:  Title X provides for the Consumer Financial Protection Bureau which has enforcement and rule-making authority for regulations of the mortgage industry  Title XIV is the Mortgage Reform and Anti-Predatory Lending Act and is concerned with RESPA, TILA and CFPB as well as the mortgage industry’s guidelines on enforcing a borrower’s ability to repay their mortgage loan SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13
    • 50. Mortgage Loan Market History: The Last Decade (1 of 3) • The mortgage market is the largest market for consumer financial products and services in the United States • $9.9 trillion dollars of mortgage loans are outstanding • During the past ten years, mortgage markets went through cycles of expansion and contraction fueled by securitization of mortgages and sophisticated derivative products • Many financial institutions contributed to the mortgage-related housing market collapse in 2008, which caused the most severe recession since the Great Depression • Expansion results from interest rates declined over 20% in a 3-year period & housing prices increasing over 150% from 1997 to 2006 • Growth in mortgage loan markets came from subprime and Alt-A programs, which made financing available to borrowers with no regard for proper income and asset documentation SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13
    • 51. Mortgage Loan Market History: The Last Decade (2 of 3) • Lenders made loans to unqualified borrowers which resulted in borrowers over-reaching to meet their mortgage payments  In 2003, nearly $400 billion of these loans in the marketplace.  Three years later, that increased 250% to $1 trillion dollars! • When housing prices began to decline in 2005:  Refinancing became difficult and delinquency rates increased  An increasing number of sub-prime and Alt-A borrowers were unwilling or unable to meet their mortgage payments  Delinquency rates, noting 60 day+ delinquent mortgage payments, doubled from prior to 2006 (1.1%) to 2008 (2.3%)  Serious delinquency (90 days past due or in foreclosure) for the subprime and Alt-A products began a steep increase from approximately 10% in 2006 to 40% in 2010! SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13
    • 52. Mortgage Loan Market History: The Last Decade (3 of 3) • The impact of these delinquencies was severe on creditors and private investors who purchase loans through securitized vehicles • Securitization was pioneered by government sponsored enterprises (GSE’s), including FNMA and FHLMC • In early 2000, Private financial institutions were created complex mortgage-related investment vehicles through securities and derivatives until everything ground to a halt in 2007 in the face of the rising delinquencies on subprime and Alt-A loans. Then, in 2011:  Approximately $1.28 trillion in mortgage loans were originated  Approximately 93% of home purchases were financed with a mortgage credit transaction  Total loan volume was 6.3 million new first lien mortgages; of these, 65% were refinance transactions and 35% were purchase money loans. Historically, the percentages were split evenly SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13
    • 53. Ability to Repay and Qualified Mortgage Rule Updates • The Consumer Financial Protection Bureau (Bureau) will issue a final rule, effective January 10, 2014, to implement laws requiring mortgage lenders to consider consumers’ ability to repay loans before extending credit • The rule excludes open-end credit & timeshare plans, reverse mortgages and certain temporary loans • In 2008, the Federal Reserve Board (Board) adopted a rule under the Truth in Lending Act which prohibits creditors from making “higher-price mortgage loans” without assessing consumers’ ability to repay the loans • Under the Board’s rule, effective since October 2009, a creditor is presumed to have complied with the ability-to-repay requirement if they follow certain specified underwriting practices • In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required that for residential mortgages, creditors must make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13
    • 54. Ability-to-Repay Determinations (1 of 2) The final rule describes certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. Creditors must consider eight underwriting factors: 1. Current or reasonably expected income or assets 2. Current employment status 3. Monthly payment on the covered transaction 4. Monthly payment on any simultaneous loan 5. Monthly payment for mortgage-related obligations 6. Current debt obligations, alimony, and child support 7. Monthly debt-to-income ratio or residual income 8. Credit history Creditors must use reliable third-party records to verify the information they use to evaluate underwriting factors, including the consumer’s loan-related obligations, simultaneous loans and recurring living expenses of which the creditor was aware SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13
    • 55. Ability-to-Repay Determinations (2 of 2) • Final rule provides that consumers indicate a subprime qualified mortgage violation by showing that the loan was originated at a time when the consumer’s income and debt obligations left insufficient residual income and assets to meet living expenses, thus it was not a Qualified Mortgage • Two assumptions are made in application for Ability to Repay provision:  The loan will be repaid in substantially the same monthly payment throughout the term of the loan  In the case of an adjustable rate mortgage, the qualifying rate is based on the higher of the fully indexed rate or the initial start rate • Other calculation rules are in place for loans with balloon payments, interest-only payments, or negative amortization SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13 The Ability to Repay provision is aimed at tightening the lax underwriting that is believed to have fueled the housing bubble. Regulations are put in place to protect consumers from mortgages they cannot afford by requiring lenders to verify income and assets of the borrower with an independent source
    • 56. Features of Qualified Mortgages • No excess upfront points and fees • No toxic loan features • Cap on how much income can go toward debt • No-doc loans not eligible • Prepayment penalties prohibited Estimates range from 25% to more than 80% of the loans backed by the GSE’s or other government insurers (FHA, VA, and USDA) would meet the requirements of a qualified mortgage under the new rules SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13
    • 57. Additional Provisions of the Rule • The final rule provides for a second, temporary category of qualified mortgages that have more flexible underwriting requirements but must also satisfy the prerequisites and underwriting requirements and, therefore, be eligible to be purchased, guaranteed, or insured by either:  GSEs while they operate under Federal conservatorship/receivership  The U.S. Department of HUD, Department of Veterans Affairs, or Department of Agriculture or Rural Housing Service • This temporary provision phases out as various agencies issue their own qualified mortgage rules and if GSE conservatorship ends, or after 7 years • Another provision extends the record retention requirements to demonstrate compliance for lenders and creditors from two years to three • In addition to the foregoing ability-to-repay provisions, the Dodd-Frank Act established other new standards concerning a wide range of mortgage lending practices, including compensation of mortgage originators, Federal mortgage disclosures, and mortgage servicing SAFE Law – Federal Law SAFE Law – Federal Law & Regulations ● 03/04/13
    • 58. More QM Info • http://www.newsday.com/classifieds/real-estate/mortgage-lending-rules-revision- could-squeeze-working-class-home-buyers-1.6279591
    • 59. Down Payment Assistance http://www.arizonadownpaymentassistance.com/down-payment-programs/
    • 60. Private Money • Typically used for investment properties – “Hard Money Lenders” – Short term are typical – High rates are typical – Higher down payment is typical – A lot of flexibility based on the investor’s parameters AZ SAFE - Laws for Mortgage Loan Originators
    • 61. FHA Access DPA Second “.5% Down FHA Loan” AZ SAFE - Laws for Mortgage Loan Originators << About $71,200
    • 62. FHA “Back to Work” Program As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale [short sale], deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit have been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability to repay a mortgage. http://lenderama.com/2013/09/23/fha-makes-economic-event-an-extenuating- circumstance-and-its-about-time/
    • 63. “Boomerang Buyers” • FHA Loan Waiting Periods – FHA loan after foreclosure: The waiting period for getting an FHA loan after a foreclosure is 3 years after the foreclosure. – FHA loan after short sale: The waiting period for getting an FHA loan after a short sale can be as little as 2 years, but some lenders may make you wait longer depending on your overall credit profile. • VA Loan Waiting Periods – VA loan after foreclosure: The waiting period for a VA loan after a foreclosure is 2 years for most VA lenders. – VA loan after short sale: The waiting period for a VA loan can be as little as one month under the right circumstances. If you have not missed any mortgage payments prior to the final short sale and you have a 660 or higher credit score, there is a chance that you could get an automated underwriting approval and get a VA loan. Work with a loan officer who is a VA loan expert if you are in this situation. – If you have late payments prior to the short sale, expect most lenders to tell you that you are going to have to wait 2 years and have no late payments on any credit account in the last 12 months prior to applying for a VA loan. • USDA Loan Waiting Periods – USDA loan after foreclosure: As a standard rule, many lenders will tell you that you will need to wait 3 years after a foreclosure. – USDA loan after short sale: The waiting period for a USDA loan after a short sale can be as little as 2 months in the right situation. If you have had a short sale and the following conditions apply, then you could possibly get a USDA loan in as little as 2 months after your short sale: – Credit Score of 660 or higher – No late payments for the past 12 months – If you have recently sold your home and have no late payments, it is possible to qualify immediately – Obtain a GUS Approval (This is an automated underwriting approval for a USDA Home Loan).
    • 64. Credit Components http://www.creditcards.com/credit-card-news/help/5-parts-components-fico-credit-score-6000.php