This Week’s Highlights:
- Adverse Market Fees & The Ever-Evolving World of Mortgages
- Gray Areas in Mortgage Lending
- Future Forecast for Home Prices: Numbers Behind the Emotions
Adverse Market Fees & The Ever-Evolving World of Mortgages
Last year on Wednesday, August 12th, 2020, the Federal Housing Finance Agency (FHFA) issued a press release stating that Fannie and Freddie had asked for permission to charge a new fee and that this permission was granted. In turn, a new 50-point basis market fee would be charged for refinances on loans starting September 1st, 2020 (20 calendar days after the announcement).
After the reveal of this announcement, the mortgage world started an uproar. When you’re a borrower and you close on your loan, it can take another two weeks for your loan to receive a blessing from Fannie Mae or Freddie Mac. Twelve calendar days after lenders, lawmakers, and mortgage groups blasted the timing of this, the FHFA delayed the implementation of this adverse market fee until December 1st.
And since then, loan amounts greater than $125,000 that is refinanced (and not using the home ready or home possible special exclusion), have been paying Fannie Freddie and the FHFA an extra 50 basis point fee.
What this means is that on a $300,000 loan, that’s an extra $1,500 in fees, and there are two ways Accunet can handle this. First, the fee can be absorbed into the rate by raising it, thus increasing the value of the mortgage later on, with Accunet covering that cost. The other option consists of the borrower paying those fees out of pocket to hold onto the same rate (provided the rate was given before the implementation of the adverse market fee).
That said, most borrowers, either knowingly or absentmindedly, simply raise the rate by an eighth or a quarter to absorb this fee.
Fast forward to June 23rd of this year.
The Supreme Court rules that the FHFA director serves at the pleasure of the president, and the president doesn’t need a cause to remove the director from their post. In a matter of minutes after the ruling, director Mark Calabria was fired.
Then on July 16th, the FHFA announced that the adverse market fee would be eliminated, beginning on August 1st. Now that the FHFA has a director who has the same goals as the White House, they’re all rowing in the same direction. The press release that followed stated that these actions further the FHFA’s priority of supporting affordable housing while also protecting the safety and soundness of enterprises.
The move is welcomed, but its removal might not be as wonderful as some expect. Keep in mind that the 50 basis point fee equates to about 10 basis points and a higher mortgage rate for borrowers. Perhaps more meaningful is how this move is indicative of the change in leadership at the FHFA.
Gray Areas in Mortgage Lending
Accunet has recently been working with first-time home shoppers and it’s been a difficult process to determine whether or not they can be declared as “rock solid” for their pre-approval.
First off, their qualifying credit score is 635 only 15 points higher than the minimum required score. This means that they’re right on the cusp of getting their approval with limited credit experience to open trade lines and medical collections.
They’re also putting 3% down, which is absolutely all that you need as a first-time homebuyer but doesn’t leave them with a lot of wiggle room. The aspect that stood out though is that both of these borrowers are employed by the same family member, and one of the borrowers received a raise equal to a 100% raise within the last year. The other borrower also received a substantial raise, essentially from $12 an hour to $20 an hour.
Unfortunately, being self-employed brings with it a nearly outrageous level of legal scrutiny from the mortgage world when looking for a new home. This situation can sometimes fall into a category of what lenders call an underwriter discretion, which essentially says that while the numbers line up, the story behind them doesn’t.
Situations like this are also labeled as “risk layering,” meaning that one or two little red flags would have been fine, but with two people self-employed and a credit score just above the minimum required, there are more red flags than most lenders would be comfortable with.
The kicker in all of this is that with the increase in income, this couple still barely qualifies. While they’re ultimately likely going to be approved and be able to buy a house, most lenders would not be comfortable declaring that they are “rock solid.”
Furthermore, a potential buyer can’t figure all of this out alone, standing in the living room of the home they just fell in love with. A pre-approval given through your online bank won’t include the necessary follow-up questions, and as soon as lenders start to unravel the rest of this with underwriting, it could derail the whole process.
At Accunet, we must be honest with borrowers (and always are) when we are not comfortable approving them for Rock-Solid Pre-Approval because we want to make sure they’re happy with not only their home but their financial future down the line.
Future Forecast for Home Prices: Numbers Behind the Emotions
All too often we see articles online debating when the market will crash or clickbait headlines designed to feed the frustration of home shoppers. A lot of times people call into our office with articles like these in mind and use acronyms like WEDA or FHA, but it’s very rare that these acronyms and articles actually mean what they think.
Potential buyers need to understand that home values are still tied to gravity and are tethered to a formula of income plus leverage. In other words, how much money do you make and how much will a lender allow you to leverage that into what you borrow?
If you wanted to dedicate all of your budget to your payments and the leverage remained the same with no other debts, this ceiling for a $359,000 house would be $600,000 (when using median income).
That said, the value could be higher if a buyer has more income. The other part of this formula is leverage. Right now, the maximum leverage, or what we call debt to income ratio, is about 50% (49.99%).
As an example, let’s pretend that Fannie and Freddie decreased the leverage from 49% to 39%. This would put a maximum budget at about $2,700 for a household with an income of about $84,000. With no other debts, you could still qualify to buy a $359,000 home, all while swinging the payments up to $480. Between income and leverage, there is room to run on home values for home buyers.
These are just some of the countless ways the mortgage landscape is constantly changing. At Accunet Mortgage, we dedicate ourselves to staying on top of the latest developments to ensure our clients have the best options and are completely satisfied throughout the buying process and beyond.
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