Home Sellers Push Buyer Incentives as Tax Credit Expiration Erodes Loan Demand

By: • Wed, May 12 2010, 10:57 AM

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending May 7, 2010.

Michael Fratantoni, MBA's Vice President of Research and Economics says:

"The recent plunge in rates on US Treasury securities, due to a flight to quality as investors worldwide sought shelter from the Greek debt crisis, benefited US mortgage borrowers last week. Rates on 30-year mortgages dropped to their lowest level since mid-March. As a result, refinance applications for conventional loans jumped, hitting their highest level in six weeks....In contrast, purchase applications fell almost 10 percent in the first week following the expiration of the homebuyer tax credit, as the tax credit likely pulled some sales into April that would otherwise have occurred in May or later."

The Mortgage Banker's application survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a look into consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payments which can result in increased disposable income and therefore more money to spend in the economy or pay down other debts like credit cards and car loans. A rising trend of purchase applications indicates an increase in home buying interest, a positive for the housing industry and the economy as a whole.

From the Release...

The Market Composite Index, a measure of mortgage loan application volume, increased 3.9 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 3.4 percent compared with the previous week. The four week moving average for the seasonally adjusted Market Index is up 4.4 percent.

The Refinance Index increased 14.8 percent from the previous week. The four week moving average is up 4.4 percent for the Refinance Index. The refinance share of mortgage activity increased to 57.7 percent of total applications from 51.9 percent the previous week.

The seasonally adjusted Purchase Index decreased 9.5 percent from one week earlier. The unadjusted Purchase Index decreased 8.9 percent compared with the previous week and was 0.6 percent lower than the same week one year ago. The four week moving average is up 4.5 percent for the seasonally adjusted Purchase Index.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.96 percent from 5.02 percent, with points decreasing to 0.91 from 0.92 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate also decreased from last week.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.32 percent from 4.34 percent, with points increasing to 0.81 from 0.80 (including the origination fee) for 80 percent LTV loans. The effective rate also decreased from last week.

The average contract interest rate for one-year ARMs decreased to 6.86 percent from 7.03 percent, with points increasing to 0.35 from 0.28 (including the origination fee) for 80 percent LTV loans. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 6.3 percent of total applications from the previous week.

The homebuyer tax credit has expired and the housing industry is scrambling to refocus its marketing efforts on the core fundamentals of sustainable homeownership.

From a CNBC story titled: "Homebuyer Tax Credit Ends, But Other Incentives Emerge"

"The expiring credit—which gives first-time homebuyers and some current homeowners a tax credit of up to $8,000 if they sign a contract by midnight tonight and close the sale by June 30—has been widely viewed as helping boost home sales in recent months. For that reason, some real estate firms are pushing home sellers to offer incentives of their own, usually by agreeing to refund some of the purchase price to the buyer. Some developers are offering similar refunds to buyers of new homes or condos."

AND...

"One of the larger companies pushing the new incentives is Coldwell Banker, a subsidiary of the global real estate giant Realogy. It is asking sellers to participate in a program that will give buyers 3 percent off the agreed-to sale price, up to a maximum of $8,000. The program will run from May 1 through July 31."

While I do not see any RESPA or Reg Z violations yet, these "incentives" are misleading.

If the refund strategy is attempted before closing, it would be viewed by an underwriter as a reason to reduce the sales price by the size of the "refund"....which negates the refund, lowers the value of the home and increases the loan to value ratio (which could affect loan pricing). If the refund is done post-closing and the HUD is amended, the loan would be a prime "buyback" candidate as appraisals are under a great deal of scrutiny by regulators, specifically over-inflated valuations. If the refund is done post-closing and the HUD is not amended...that is when we can start talking about illegalities.

The Coldwell Banker program that "gives buyers 3 percent off the agreed-to sale price, up to a maximum of $8,000" is smoke and mirrors (not in a fraudulent way). This is nothing more than good 'ol seller concessions. Fannie Mae calls them "Interested Party Contributions".

NOTE: The article is written as "3 percent off the agreed-to sale price". That should have read "3 percent OF the agreed-to sales price"...if it was not a typo, this tactic is not seller concessions, it is a refund. See comments about refunds

From the Fannie Mae Seller Guide:

Interested party contributions (IPCs) are costs that are normally the responsibility of the property purchaser that are paid directly or indirectly by someone else who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property. Fannie Mae does not permit IPCs to be used to make the borrower’s down payment, meet financial reserve requirements, or meet minimum borrower contribution requirements.

IPCs are either financing concessions or sales concessions. Fannie Mae considers the following to be IPCs:

funds that are paid directly from the interested party to the borrower;
funds that flow from an interested party through a third-party organization, including nonprofit entities, to the borrower;
funds that flow to the transaction on the borrower’s behalf from an interested party, including a third-party organization or nonprofit agency; and
funds that are donated to a third party, which then provides the money to pay some or all of the closing costs for a specific transaction.

Plain and Simple: seller concessions are very common in this housing environment, every buyer should request this "incentive". While the borrower is required to have "skin in the game" (3.5% for FHA), these IPC are intended to help cover a portion of the borrowers closing costs or buydown their interest rate. Nothing illegal about that...unless the concessions are coming from a builder and are offset by higher costs elsewhere in the transaction.

The removal of government funded homebuyer incentives is forcing loan originators, realtors, and builders to produce new promotion strategies and modernize long-standing advertising approaches. Given the ever-evolving regulatory regime and super sensitive risk retention environment, the rush to innovate new trade tactics will likely lead to more and more violations and loan repurchase requests. Be very careful and always ensure you are within compliance.