2013: A year of widespread market improvements

Mortgage news of the early bust years was filled with drama, doom and gloom, but at last, in 2013, the news is getting better.  Delinquencies are down, rates are up and guidelines are getting tighter again as lenders and government agencies struggle to find a balance between customer safety and profitability.  There was a lot of good news for homeowners and would-be homeowners, too – our 2013 news round-up is full of good news for practically everybody.

Underwater mortgages are beginning to dry out

By late 2009, about 26 percent of all American home mortgages were underwater – that is, the homeowner owed more than their property was worth – according to numbers guru CoreLogic.  This year, we saw significant decreases in this number, largely due to gains in home prices.  At end end of the first quarter, 19.7 percent of homeowners were still underwater, but the end second quarter showed significant improvement with only 14.5 percent of homeowners with more loan than value.

CoreLogic generally releases third quarter numbers in January, but all signs point to the continued contraction of this important metric – this is great news for both home buyers and sellers across the country.  Home owners’ collective seven percent gain in home equity during the second quarter means that home buyers will have a better supply of ready-to-move-into homes to choose from now that home sellers are finally able to get out from under their boom-priced mortgages and get into different homes.

Credit reporting to distinguish foreclosures from short sales

It was treated like a footnote in the news, but this little gem didn’t escape our watchful eyes.  Back in August, Fannie Mae announced they would be changing their credit reporting to clearly distinguish between short sales and foreclosures on consumer credit reports.  It may not sound like much of an improvement, but foreclosures can prevent a consumer from buying a home for up to seven years, where short sales only hurt borrowers for up to three.

In the world of computerized underwriting, this subtle difference has been penalizing homeowners who worked with their banks in order to secure a solid buyer as harshly than those who simply walked away from their homes and sent their banks “jingle mail.”  Short sellers can sometime prove to their banks that they did the right thing, but it can require a lot of effort and a bank willing to manually underwrite loans.  This small change provides separate reporting codes for short sales and foreclosures, opening homeownership back up to short sellers who are ready to buy again.  After all, in the housing market, the more buyers, the healthier the climate.

Representative Mel Watt (D-N.C.) appointed Head of the Federal Housing Finance Agency

Nominated for the post in May, Representative Mel Watt of North Carolina was finally confirmed to the head of the Federal Housing Finance Agency (FHFA) in December after months of partisan bickering.  Representative Watt, a long-time champion of the middle class and opponent of predatory lending and other deceptive mortgage practices, is now charged with the big job of leading and regulating Fannie Mae and Freddie Mac.

His opponents say he lacks the experience to do the job, despite many years as a member of the House Financial Services Committee.  Others, including the Senate Banking Committee Chairman, Tim Johnson (D-S.D.), believe his appointment will provide more security to our still uncertain housing recovery.  Only time will tell how this change in leadership will affect the mortgage industry.

The Consumer Financial Protection Bureau in the news

The Consumer Financial Protection Bureau (CFPB) was born out of the smoldering remains of the real estate meltdown of the mid to late 2000s, as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  This independent agency is responsible for regulating customer protection when it comes to financial products and services, like mortgages, in the United States.  Since its inception, the CFPB has been making headlines, but in 2013, the agency made waves repeatedly with their Ability-to-Repay and Qualified Mortgage rules, which take effect January 10, 2014.

The Ability-to-Repay rule, in essence, requires that lenders ensure that all borrowers can repay their mortgages, which seems simple enough.  There are eight specific criteria that a lender must verify on each borrower, but all are items that mainstream lenders have always checked for typical borrowers like income, complete debt history, debt to income ratios and credit history.  The Qualified Mortgage rule allows for flexibility in lending to borrowers who may have less than ideal histories or incomplete documentation, provided the loan isn’t predatory in nature – limits on total points and fees, payments calculated on the highest expected payment during the first five years and terms not exceeding 30 years are just a few criteria these loans must meet in order to be considered “qualified” and therefore entitled to the same protection as a loan that meets all the Ability-to-Repay criteria.

Although this move generated lots of debate, the intent is to prevent the mortgage industry from once again creating a glut of exotic mortgage products that are destined to fail.  Limiting how widespread these special loans can get should help to protect us from another landslide of defaults as the mortgage and real estate industries continue to struggle back onto their feet.  Because of these new rules, federal agencies and borrowers’ right to litigate if lenders behave inappropriately will be extended to three years for any current loans and indefinitely in response to foreclosure.  To compliment this move, the CFPB has also released modified mortgage disclosure forms that are easier for customers to understand.

Big changes for troubled borrowers from FHA

Every few years there are big changes to the Federal Housing Administration’s loan programs that end up affecting only a handful of borrowers.  This year is no different – the temporary legislation allowing the FHA to extend up to $729,750 in high cost areas has expired, dropping the national standard FHA loan limit back to $625,500.  This change won’t affect many buyers, but another key change announced this summer may – FHA has decided to go easy on borrowers who have lost their homes or had payment problems due to economic hardship.

Borrowers who filed for bankruptcy or lost their homes during the recession won’t be automatically rejected for an FHA loan if at least a year has passed since their “economic event,” but the burden of proof remains on the borrower.  Not only must they complete housing counseling, to qualify for a new FHA loan the potential borrower must prove their economic situation has changed for the better.  Despite the hurdles, this move should bring new buyers back to the real estate market.

Fannie Mae eliminates 97 percent loans

An announcement in October sent home buyers scrambling to secure the last of Fannie Mae’s 97 percent loans because as of November 16, 2013, these loans would no longer be available.  Other changes, like dropping 40 year mortgages and interest-only loans and making qualifying for adjustable-rate mortgages much tougher, were included in the bad news.  For many borrowers, though, Fannie Mae’s still-available 95 percent loans will continue to make financial sense over similar FHA programs with lower down payments.

Along with these modifications to their loan programs for borrowers, both Fannie Mae and Freddie Mac announced a fee increase for lenders starting in March 2014.  The rate hike isn’t substantial, only about 1/10 of a percent, but should help private capital compete better against the lending giants while offsetting the loss of fees from now-discontinued loan products.

2013: Preparing for a new mortgage landscape

The top mortgage news of 2013 wasn’t earth-shattering, but much of what has happened has laid the groundwork for a change in the landscape of mortgage lending going forward.  Positive moves toward stronger protection for consumers, who rely on mortgage experts to explain the process for them, as well as new blood at the FHFA and a strengthening real estate market point to an end to the economic doldrums we’ve been experiencing.  A plan is coming together in the industry, and that plan should ensure a better future once the real estate market is back in full form.

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