Buying a Home? Why the FHA Loan is No Longer the Low Down Payment Loan of Choice

This the second article in a series discussing the ins and outs of the best mortgage loan products available for home buyers. Last week, the USDA Rural Housing Loan was featured.

The FHA loan was once a very popular and useful loan for helping first time home buyers achieve their dreams of home ownership. “Was” is the key word though because this loan is no longer the loan of choice for most home buyers.

First let me explain why the FHA loan has become the dinosaur of mortgage loans, and then I will explain what is the new best loan with a low down payment that can be obtained anywhere, regardless of whether it is in the City limits or not (see last week’s article about USDA loans).

Due to substantial losses taken during the economic recession and housing crisis, the FHA (Federal Housing Administration) had to increase its revenues to keep operating and attempt to avoid a taxpayer bailout. FHA makes its money by insuring loans which in turn allows mortgage lenders to grant loans over 80% loan to value. In short, the FHA (backed by the U.S. Government) stands behind the loan, allowing lenders to loan home buyers up to 96.5% of the cost of the house. Without this guaranty, lenders will not loan more than 80% of the cost of a home, eliminating many potential home owners from being able to buy. After all, how many buyers have an extra $40,000 to put down on that $200,000 house?

For its most popular loan, the 3.50% down 30 year fixed rate mortgage, FHA now charges 1.75% up-front Mortgage Insurance (MI) and an additional 1.35% annual MI based on the outstanding loan balance. This annual MI expense used to drop off after the loan reached around 78% loan to value and home owners could request its removal after only 5 years.

However now, FHA borrowers must pay this MI for the full 30 years of their loans even when the loan to value is less than 50%, even when it is less than 10%. On a $200,000 house the cost of the up-front MI would be $3,377.50 and the beginning monthly MI cost is $215.46 or $2,585 in just the first year.

The FHA loan was designed with a noble cause in mind: to make home ownership more affordable. Yet now when compared side by side against the USDA Rural Housing Loan and the Conventional Loan with 3% Down, FHA is the most expensive loan option available.

There are a few scenarios where it does make sense to get an FHA loan:

If the buyer has had a bankruptcy and/or foreclosure within the past 7 years. Conventional financing requires a 7 year period to have passed, but FHA’s waiting period is only 3 years. I recently closed a loan where FHA granted an exception and allowed the loan to be made less than 3 years from the foreclosure date (but greater than two years) due to extenuating circumstances.

Manufactured Home Loans. The only mortgage loan product I have available for a manufactured home is an FHA Loan Product. This is a lower cost loan than other financing for manufactured homes through finance companies.

Refinancing? FHA offers some higher cash out refinance options than conventional loans and also FHA has a Streamline refinance where the home owner can get the benefit of a lower rate without having to have an appraisal completed on the house. This is very useful for those who home value is under water.

If you cannot qualify for a USDA Rural Housing loan due to income or property location eligibility reasons and want a low down payment loan, the Conventional Loan with 3% down is a better and lower cost option than the FHA loan. I’ll feature this product in my next post.

You are welcome to email specific questions to me at mtarleton@englending.com, call me at 850-866-2963, and also visit my website at www.bankofengland.us.

Mike Tarleton
Sr. Mortgage Loan Officer
Bank of England
850-866-2963 (Cell)
706-888-0980 (Cell / Text)

NMLS: 264821

Centennial Bank Takeover of Coastal Community Bank Official

Many of you remember the emergence of Coastal Community Bank a few years back, during the real estate boom that swept through the Panama City Beach area like a hurricane. Property values sky-rocketed and prosperity moved over the area like melted chocolate over a fresh red apple. People were doing great, and banks were cropping up all over the place. Not all of them would make it, even some of the ones that had been around for decades ended up faltering. Coastal Community was one of them, but they seem to have been acquired by a good suit.

Continue reading “Centennial Bank Takeover of Coastal Community Bank Official” →

Hot Dog Story – Do What You Do and Change for No One

Okay, I know there is so much talk about all the awful things that people see happening in our world. Lucky for me I DO NOT buy into that. There will always be challenges and struggles and while this one seems to be very daunting I have learned that those that find the bright spots and DO NOT operate out of fear end up on the top and better yet they enjoy getting there.

Please go to this link and read this incredible hot dog story that just might convince you to just keep on doing those things that you know work. I have always loved this story and it is quite relevant today. Do not give in to the negative small minded thinking and talking that we hear so much of. Most of us have more than we need and plenty that we could be sharing with others.

I am so grateful to all of you that have made my life so bright and always filled with promise. I decided a long time ago to align myself with people that were looking for the possibilities rather than the problems. I have been writing gratitude list since I was 10 years of age and it has never failed that my life is so filled with more goodness than not.

Thanks to all of you and go read that story and share it with others…. lets the spread the good stuff. I believe the world needs a shot of happy stuff and I am just the girl to deliver it.

Remember my get even list, it is really long…. “The only people we need to get even with are those that have helped us”

with overflowing gratitude,

Karen Key Smith

Adjustable Rate Mortgages Are Our Friends

Yes, I know what you’re probably saying already. Where has this guy been? Living under a rock somewhere? Hasn’t he heard the nightmare stories about sub-prime mortgages, option ARMS and “liar loans” and how all of these ultra-risky vehicles got us into the mess we’re in right now? Indeed, the media has placed much of the blame for the collapse of home prices and the ongoing foreclosure crisis on the loose credit and lax credit standards for the proliferation of these exotic mortgage products that now make up much of the toxic debt on banks’ balance sheets. Yet, somehow, the plain old adjustable rate mortgage that has been around for decades has been painted with the same brush as the other mortgage products and unfairly so. Let me explain why ARMs are still around, always will be around, and why they may be the best friends we have right now.

The complete evaporation of a secondary mortgage market for condominiums and their twin the condo-tels, has forced banks to develop new vehicles for financing these properties. This is where the in-house loans, or portfolio loans as we call them, come in to play. These loans accept the risk associated with condos as collateral in a market that has seen condo prices plunge in recent years and ignore other factors that Fannie Mae and Freddie Mac, along with all the mortgage insurance companies, deem derogatory. But banks can’t loan money on these properties forever when they have no market to sell the loans. Eventually, they would have no money left to lend and would simply have a fat portfolio of nothing but condo loans and no capital. Corus Bank, the owner of Laketowne Wharf, is a great example of this scenario. That is why banks, like the bank I work for, turn to ARMs – they provide interest rate protection to the bank while offering the consumer a quantifiable risk scenario where they can weigh the pros and cons and make an informed decision.

I have been a little perplexed lately when potential borrowers call to inquire about financing for a fantastic deal they are getting on a condo. When I explain I have two options, a 3/1 ARM at 6.00% or a 5/1 ARM at 6.75% there is often an immediate rejection of anything that isn’t a fixed rate and an inferred suspicion that I am some sort of snake oil salesman. Never mind there are no other options out there. What about the fact these ARMs have initial fixed periods at very attractive rates? What about the fact that there are no pre-payment penalties, (we want them to pay it off) very low fees, and annual and lifetime rate caps of 2% and 6% respectively? Do they even give me the opportunity to explain that the ARMs are tied to the 1 year Treasury yield which is one of the most stable indexes to be found having averaged 4.38% over the past twenty years? Do I have a glimmer of hope that they will listen to me explain how ARMs work and that if these ARMs were to adjust today they would actually go down? Nope. If it’s an ARM it’s snake oil and will lead them to financial ruin. Yet for those who don’t associate every ARM loan with housing horror stories and who weigh the pros and cons are using my ARM loans to scoop us fabulous deals on beachfront condominiums and stand to make substantial returns on their measured risk proposition. Did I say risk? Of course there is risk with an ARM. Rates could sky rocket in a worst-case scenario but given that the U.S. will probably keep short-term rates low for a very long time, the risk is acceptable.

No one wants you to take an ARM more than the bank someone once told me. Over the years I have found this to be more or less true from a banker’s perspective. So why have I, personally, taken out several ARM loans over the years? It is because that while an ARM provides some safety for the banks, it also provides opportunities to borrowers. Lower rates equate to qualifying for more loan. If I anticipate a rise in property values or an increase in my income, why not look at an ARM? But most significantly, when it is the only mortgage option available and there perhaps once in a lifetime opportunities on beach-front real estate, do ARMs not beg some consideration? ARMs are like bridges, they get us over an obstacle though we may not know what we’ll find on the other side. One borrower said to me recently when we were discussing the end of that bridge on a 5/1 ARM he was applying for, he poignantly stated, “If things aren’t better than this in five years then God help us all.” This lead me to reflect that the bank portfolio ARMs may not be a panacea but they do offer buyers, Realtors and bankers alike, a bridge to better times ahead.

For this and more, visit my blog at www.activerain.com/blogs/hpalmer

With over fifteen years of mortgage and real estate experience, Hunter Palmer has the knowledge and expertise to help home buyers and Realtors navigate the ever changing real estate finance landscape.

Laketown Wharf – Corus Bank "Unlikely to Survive '09"

The future of Laketown Wharf in Panama City Beach is again dealt a blow of uncertainly as the owning bank, Corus shows increasing signs of weakening. Friday, they reported a quarterly loss of $260.7 million and stated that more than a third of their “$4.1 billion in outstanding loans were nonperforming.” On the bright side, Mike Dulberg, Corus’s CFO reported that they have $758 million in capital and $4 billion in liquid assetts and the vast majority of its $7.6 billion in consumer deposits is federally insured.

In the article, Daniel Cardenas, senior vice president at Chicago brokerage Howe Barnes Hoefer & Arnett Inc., was quoted:

“The company is in dire straits. Barring a surprise injection of private capital and/or a dramatic rebound in condo values, Corus appears unlikely to survive 2009.”

The article was published in the Wall Street Jounal Commercial section in limited “subscriber only” format, but I found it elsewhere, in full:

Condo King Corus Weights Its Options

Few Borrowers Benefiting from latest "Refi Boom"

I can remember back sixteen years ago when thirty-year mortgage rates fell below 7% sparking a flood of refinances. I also remember 2003 when rates dipped again and another “refi boom” ensued. So with thirty year mortgage rates now at their lowest levels in history, why are we not seeing the kind of refi hysteria we have seen in past? Ironically, the cheap mortgage money of the past that helped drive up homeownership rates and property values has left us between a rock and a hard place. Despite historically low rates, much tighter underwriting guidelines coupled with the crash in home values leaves few borrowers in a position to refinance.

The Mortgage Bankers Association reported on Wednesday that the national average interest rate for thirty-year, fixed-rate mortgages stood at 4.89% at the end of last week, down from 5.07% a week earlier and down from 6.50% in October. Much, if not all, of the decline in interest rates can be credited to the Federal Reserve’s program of buying up to $500 billion in mortgage-backed securities from Fannie Mae and Freddie Mac which started on January 5th. This has narrowed the risk premiums associated with mortgage yields leading to the unprecedented drop in long-term rates.

However, according to Doug Duncan, chief economist for Fannie Mae, only a third of outstanding mortgage debt is eligible for refinancing. “Nearly 70% don’t make the cut,” he said ” because their credit isn’t good enough or they owe more than the current values of their homes.” Another set of homeowners locked out of the refinance opportunity are “jumbo” loan holders whose loan amounts exceed the Fannie Mae and Freddie Mac maximum. Rates on “jumbo” loans have failed to follow the downward trend of conforming loan rates and have stayed stubbornly around the 7% mark.

Mortgage lenders are reporting that while refinance activity is up, only 50% of applicants end up closing due to credit or appraisal issues. In Florida, where home values have fallen sharply, only 25% of refinance applicants make it to the closing table. While Fannie Mae is looking into the possibility of allowing borrowers to refinance up to 120% of the current property value to help more “upside down” borrowers refinance, there is still no viable program in place. So while refinance “booms” of the past allowed a majority of homewowners to benefit from lower rates and monthly payments, along with the relatively cheap access to their home’s equity through cash-out, the only ones benefiting this time around seem to be those who need it least.

Borrowers who have been in their homes for a number of years and have substantial equity along with excellent credit are taking advantage of the lowest rates in history while those struggling in “upside down” mortgages are stuck with their higher rates. A silver lining would be if the rates stay low enough for long enough, borrowers may begin to choose to move up rather than sit tight in their homes. It will be that slow increase in demand that, ultimately, will stabilize home prices and spread the opportunity of lower rates to more homeowners.

Stimulating More Than the Economy

Over the coming weeks and months I will be explaining or trying to explain some of the complexities that exist in our current economy. First off let me explain to you that in no way am I trying to claim that I am an economic expert, but I do have access to privileged economic data, economic experts and I have an understanding of complex economic issues and concerns. That being said feel free to ask any questions in the comment section and I will try to answer them to the best of my ability. I will start by addressing issues that I hear in my everyday life from concerned people.

Are we heading towards a depression? The answer is maybe. The experts estimate that the national unemployment rate should peak at about 10 – 11%. The depression of the 1930’s had unemployment rates near 25%. Currently unemployment is just above 7% with a record layoff of more than 500,000 people just last month. 5% unemployment is considered full employment in the U.S. economy and if the unemployment rate hits 10% or more and stays there for more than a year then there will be a depression discussion. There is no standard definition of a depression and we cannot compare this crisis to the Great Depression because there are major differences in this economy when compared to the economy of the 30’s (no U.S. Securities and Exchange Commission, etc.). The bright side is that the Great Depression was marked with high unemployment for many years and this financial crisis should clear up in a year or so.

How or will we recover from this crisis? This is the worst financial crisis since the Great Depression, but we will absolutely recover. Our economy is cyclical and goes through regular cycles of peaks and valleys. Quietly the U.S. dollar has steadily risen back to normal levels and foreign investors are investing in U.S. Treasury securities in a major way. No matter how bad our economic condition, U.S. Treasury securities are the most sought out investment instrument in the world. The Federal Reserve is also purchasing U.S. Treasury securities to infuse cash into the system. This infusion of cash will hopefully help ease the credit crunch (a lack of lending and loans from lending institutions). The easing of the credit crunch will hopefully help to stabilize financial institutions and help increase consumer confidence. And when consumers start buying again then slowly jobs will be created. Employment numbers are the last thing to be hurt from a recession and the last thing to recover from one.

Recessions are vicious cycles. Consumer confidence lowers and consumer spending decreases. Business profits shrink and these businesses have to lay off employees. These layoffs help to reduce consumer confidence even more and business profits decrease even more. This creates more layoffs and you can see how this cycle can spiral out of control.

Do not freak out when on January 30 you hear a report that gross domestic product (measures our nation’s income) has had the worst decline in one quarter in the history of the U.S. It will be the worst ever but the bright side is that the “worst quarter in history” is over and the first quarter of 2009 will be a little better.

Community Banks Lending Despite Credit Crunch

As regional and national banks eagerly rush to accept government bailout loans in the face of frozen credit markets, local community banks are quickly becoming the go-to source for mortgage loans in Florida. Despite tighter underwriting guidelines from Freddie Mac and Fannie Mae and a secondary mortgage market with little appetite for Florida real estate, local community banks are still stepping in with loans designed to accommodate the local real estate market. These local banks have studied the specific needs of our local market and are offering loans tailored to the unique needs of Bay and surrounding counties.

One example is Panama City Beach. On the beach, the vast majority of properties listed for sale are condominiums which sprouted up all along the coast in the boom years of the first half of the decade. The flurry of condo development was due, in part, to the easy flow of credit and lax underwriting and property standards so prevalent at the time. Now, as investors paint all of Florida with the same broad brush, Beach condos are left with the same stigma as South Florida and labeled as “condo-tels” – a name coined by Fannie Mae and Freddie Mac to describe a hybrid between a condo and a hotel with resort-like facilities and daily rental desks. Though Fannie and Freddie didn’t seem to draw a distinction between condos and condo-tels in the past, they certainly do now. Financing for these properties has all but evaporated leaving many prospective second-home buyers with no options. Enter the community bank.

With deep roots all along the Florida Panhandle and in their respective markets, community banks understand our unique market and have a vested interest in its success. One such local community bank is Vision Bank. With a sincere belief in the viability of the Beach condo market, Vision Bank is lending its own money by developing portfolio products designed to provide affordable options for the local real estate market and the out of state second-home buyers so crucial to its resurgence. Vision Bank, while adhering to sound lending practices and diligent underwriting, is offering bank-held, fully amortizing mortgage products with no pre-payment penalties and no hidden fees designed specifically for the condo-tel market. Vision knows this market and knows that more condo sales will help stabilize prices and draw even more potential buyers back to the Beach and all of Bay County. That is the essence of a community bank – investing back in the community.

For this and more, visit my blog at www.activerain.com/blogs/hpalmer

Hunter Palmer

Fed Lowers a Half Point – I Have a Better Idea

The Federal Reserve’s Open market Committee announced Wednesday it was lowering the federal funds rate to 1%, it’s lowest level since 2004. Yet mortgage rates rose on the news and continue to rise today. Though, on the surface, this may seem contradictory it exposes a symptom of the larger financial crisis we face. Since seizing Fannie Mae and Freddie Mac and passing the bailout plan, the Federal government has committed hundreds of billions of dollars in an attempt to thaw frozen credit markets and get the economy back on track. Unfortunately, all of that money is essentially borrowed.

Now the Feds are forced to sell billions in government bonds to fund their various bailouts and bank rescues flooding the market with an oversupply and thus driving down bond prices and driving up rates. This has a ripple effect throughout the capital and debt markets and increases the cost of borrowing for Fannie and Freddie. The higher borrowing costs are reflected in higher mortgage rates for consumers.

The bigger problem facing the Federal Reserve is that higher mortgage rates will have the effect of further weakening demand in the housing market. This will further amplify what is at the heart of this whole mess – declining home prices. As mortgage rates rise and home prices decline further, the rate of foreclosure is sure to rise putting even greater strain on banks and credit markets as well as Fannie Mae and Freddie Mac as the value of their assets depreciate and their ability to raise capital becomes more tenuous. To stop this vicious cycle the Fed and the Treasury must find a way to halt, and eventually reverse, the decline in home prices rather than continuing to merely react to each emergency caused by it. So how could they do it?

There have been a lot of proposals floated in recent weeks that aim to shore up the housing market, stop home price decline and prevent foreclosure. Some of these sound bizarre but viewed in the context of this historic financial crisis I’m willing to entertain anything.

One suggestion has been for Fannie and Freddie as well as banks taking part in the government bailout to offer mortgagors the option of a sixty year amortization. This would dramatically lower payments while not reducing the principal owed and provide an incentive to lenders in the form of greater interest income. Others say to allow everyone to refinance to some set fixed rate such as 5.25% that would provide payment stability and offer most borrowers some relief in the form of lower payments.

Still others have called for an outright principal reduction to lower mortgage balances to a point where borrower’s are no longer upside down in their homes. All of these ideas may have some merit but, in my opinion still do not address the root of the problem. We must create demand in the housing market so home prices will stabilize. How might that be done?

With thirty year mortgage rates creeping upward towards 7% for many borrowers, it is time the Feds start using some of the bailout money to back a program that would allow for a dramatically lower interest rate for all home-buyers coupled with a federally backed mortgage insurance plan to allow for lower down payments and longer amortizations. The lower rate, say 5.00% fixed for 40 years, along with a required down payment of 5% offset by a federal mortgage insurance premium of .75% annually but paid monthly would surely bring reluctant buyers back into the market. The increased demand for housing would drive up prices thus creating a win-win for the government in that the value of the bank stocks they now own would rise along with the portfolios of Fannie Mae and Freddie Mac’s mortgage backed securities. Banks, not wanting to miss out, would begin lending again and the resulting competition would increase liquidity in the credit markets and benefit the economy as a whole and reduce the number of foreclosures.

This plan would not be a reward for bad behavior, would not punish homeowners who have paid their mortgages on time and could be easily implemented through the FHA, Fannie Mae and Freddie Mac. Yes, it would be expensive in the short-run. But given the impotent attempts by the Feds to stop this snowballing housing crisis by hoping banks will lend again by throwing more at them are obviously not working. We need a better idea.

For this and more, visit my blog at www.activerain.com/blogs/hpalmer

Hunter Palmer