Primer on FHA 203k Loans; General Rate Trends
I want one of those jobs where people ask, "Do you actually get paid for doing this?" Most folks involved in lending or real estate rarely hear that, however, and in fact unfortunately those originating FHA & VA loans are seeing their production in many markets drop more than expected. It seems that we're seeing a "triple whammy" in that sector. Rates have gone up, which have impacted refinancing. But in addition to that, the lifetime MIP, which will help HUD and the capitalization of FHA, is hurting pricing and putting a dent in production. Lastly, many of the markets that lend themselves to FHA borrowers are seeing the all-cash phenomenon play itself out.
Remember 203(k) loans? They're back! Jim Bopp with Platinum Home Mortgage writes, "I do believe that more banks doing FHA loans (203(b)) should be thinking about and in fact embracing the FHA 203(k) program. I think one of the things that stop them is that they do not have the servicing expertise to handle these loans and may also not be aware that there are many excellent non-bank secondary market outlets for the product."
Indeed, although we saw some stability last week, there has been rapid increase in rates over that last 45 days and many refi shops are hurting for loans. Many are trying to reinvent themselves into a purchase shop and they are finding that many LOs don't have anything to talk about when they go into offices. But so many times people forget about selling the 203k and the HomeStyle renovation products which allow a convenient way for borrowers to make renovations, repairs or improvements to existing residential properties: a purchase loan that will allow that REO which may have been neglected over the years come back to life and improve value before they move into the home. Banks have started to offer "construction to perm" loans again which shows the economy and property values are improving and this is a great way for LOs to capture new business where few play today. Building your rolodex is the only way to survive the ups and downs in the crazy space we play in.
Lenders are turning to Standard and Streamlined 203(k) as refinance volume erodes. Many lenders have used the Streamlined 203(k) but there is a new push to have both products. Finding and working with good FHA consultants is the key. Experience and execution are the most critical elements in a good renovation program, and the consultant is one of the most important assets. While this product is higher maintenance than most, a dedicated group can make this a profitable endeavor with the right investor.
At the first of every month, FHA publishes a list of all the endorsements of 203(k) loans by lender and Field Office for the whole country. Through June 30, there have been 14, 562 Standard 203(k) and Streamlined 203(k) loans done nationally. While the annualized number is slightly lower than in the last couple of years, the slowdown in refinance volume should lead to an increase in 203(k)'s for the last quarter. You can find out more on the "Computerized Homes Underwriting Reporting System" (CHUMS) here.
Those who specialize in these types of loans believe that many mortgage banks do not want to sell these loans to some investors due to the high level of contact that takes place with the customers after the closing (the 3 to 6 month draw process that an investor takes over). But the truth is that banks should look into these products not only for much needed or desired loan volume and profits but they are excellent "community banking" and lending tools that help transform neighborhoods, raise real estate values in markets that need them and also have possible CRA Lending benefits to the bank by putting money back into communities that need it most. Contractors, suppliers, and municipalities all benefit by properties being improved and back on the tax rolls.
Jim's advice is, "When looking for those sources they should be careful to interview, screen and select their end investor by evaluating the length of time the investor has been actively involved in purchasing 203(k)'s in the Secondary Market, the overall experience of not only the sales and marketing support side but also and more importantly the loan review/audit, draw management and loan servicing personnel. Even non-bank lenders who have recently become GNMA Issuers should look to find investors that not only understand the 203(k) product and its underwriting guidelines but also ones that have the knowledge, experience, and operating systems in place to handle the additional investor accounting, IRS Reporting, and GNMA reporting that goes along with the servicing of these loans. In addition to these factors they should also look for investors that are flexible and provide choices for the bank in the level of loan structuring, pre-closing reviews, underwriting and draw management options that best suit the bank based on their level of staffing, expertise and desire to be involved with their customers.
"Last but not least, banks and non-banks should look to offer both the Standard/Full and Streamlined FHA 203(k) programs in order to ensure they are putting their customers into the very best loan program based not only on the borrower's ability to repay but also to make sure that any and all repairs that are either required or desired by the homeowners are included in the loan and address any and all HUD Minimum Property Requirements and/or local and state building codes. By offering both products banks will be giving their underwriters not only access to proceeds over the $35,000. Streamlined limits but also adding the benefit of the FHA 203(k) consultant and the expertise and safeguards they bring to the program to protect both the customer and the bank.
"With all of the shadow inventory, foreclosure inventory (bank, tax, municipal etc...) and refi volume going away, many lenders typically have and will gravitate towards the FHA 203(k) product as it has always been countercyclical and is not as interest rate sensitive as other loan types. The programs can also be used to get people out of slightly underwater and minimal equity positions when they desire some home improvements. If rising rates slow down values again this will continue to be a viable source of loans (customers doing home improvements 'fix up, instead of moving up'.)" If you want to reach him, write to Jim at jbopp@ephmc.com. Thank you Jim!
The markets were relatively quiet yesterday, and Capital Markets folks hope that it carries through all week. Last week the focus was on the Fed. One question people have is, "What about all that interest income after QE 1-3?" While the Fed's balance sheet has mushroomed from $800 billion in 2008 to $3.3 trillion today, and still counting, these holdings bring in considerable amounts of interest. Because the Fed must return all residual earnings to the Treasury, in 2012 the Fed paid Uncle Sam $89 billion! In 2011, it was $77 billion.
Bernanke painstakingly clarified the relationship of tapering to data and to rates in his remarks last week. "I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course" and "The Committee has said it intends to maintain a high degree of monetary accommodation for a considerable time after the asset purchase program ends and the economic recovery strengthens." Following his testimony, many economists still believe large scale asset purchases would be reduced beginning at the September meeting and ending in March as they are projecting a faster decline in the unemployment rate than the Fed is.
Perhaps of more interest to lenders is uncertainty about whether Watt would extend the HARP cut-off date to pre-June 2010 originations from pre-June 2009 if he becomes director. Is the industry looking at another HARP?
Regarding the general trend in the economy, which should influence rates, Wells Fargo's economics group wrote of last week, "Most of the economic data pointed to a soft patch in economic growth in the second quarter. Retail sales ticked higher in June but less than many analysts expected, while consumer inflation rose more than expected for the month. Housing starts data also pointed toward a downshift in the pace of new construction and permitting activity, likely due to temporary factors. Given the data this week, we have downwardly revised our economic outlook. We now expect second quarter GDP growth to come in around 1.2 percent, with growth accelerating in the third and further quarters of this year.
Another disappointing piece of news this week came from the housing market. Housing starts in June fell 9.9 percent to an 836,000 unit pace. The pullback in the pace of starts was concentrated in the volatile multifamily component, which posted a 26.2 percent decline for the month. Building permits also fell for the month, declining 7.5 percent, with the multi-family component accounting for the decline. While the housing starts numbers were disappointing, there were likely some temporary factors related to the heavy rain in the South that impacted the pace of starts for the month. Taking a step back and looking at the big picture, housing starts are still up 10.4 percent from last year."
NAR told us yesterday that June's Existing Home Sales slipped (no inventory and lack of first time home buyers!), but that prices continue to move higher. Existing-home sales unexpectedly fell 1.2%, but still had the second-highest level of sales since November 2009, and are 15.2% higher from a year ago. The national median existing-home price was $214,200 in June, up 13.5% from June 2012, making for 16 consecutive months of year-over-year price increases. The median time on market for all homes was 37 days in June, down from 41 days in May, and is 47 percent faster than the 70 days on market in June 2012. Short sales were on the market for a median of 68 days, while foreclosures typically sold in 39 days and non-distressed homes took 35 days. Forty-seven percent of all homes sold in June were on the market for less than a month.
Rate-wise yesterday, the 10 year was flat and closed at a yield of 2.49%, and MBS prices barely budged although were helped by a very light mortgage origination volume (less than $1 billion). Mortgages have rallied over the last 11 trading sessions, and current coupon Fannie MBS prices are now better by 2.25 points versus the lows we saw on July 5. (During the same period the 10 year is better by 1.875 in price, moving down from its high of 2.71%.) This morning the 10-yr is at 2.52% and MBS prices are .125-.250 worse.