Federal COVID-19 CARES Act Eviction and Foreclosure Moratorium Extended Another Two Months
HUD Secretary Ben Carson announced yesterday that federal housing agencies have extended the CARES Act eviction and foreclosure moratoriums through August 31 for tenants and homeowners with Fannie Mae, FHA, VA, USDA-insured single-family mortgages. The current moratorium was set to expire on June 30. “While the economic recovery is already underway, many American families still need more time and assistance to regain their financial footing,” said HUD Secretary Ben Carson. “Our foreclosure and eviction extension means that these families will not have to worry about losing their home as they work to recover from the financial impacts of COVID-19.”
The CARES Act eviction moratorium applies to approximately 28% of all rental properties in the United States. It prohibits the eviction of tenants residing in any single-family or multifamily property financed by federally backed mortgages (Fannie Mae, Freddie, FHA, VA, USDA loans) and renters living in federally assisted housing (Section 8).
Overlap With Massachusetts Eviction Moratorium Act
For Massachusetts rental property owners, the state already has a statewide eviction and foreclosure moratorium in place until August 19, 2020 which covers virtually every residential rental eviction situation. The Massachusetts Moratorium does not have any distinctions between federal insured or non-insured mortgages; rather, it covers the type of eviction, i.e, “non-essential” vs. “essential” evictions. Gov. Baker may extend the state Moratorium for unlimited 90 day increments. The general consensus in the rental housing community is that Baker will extend the Moratorium through the end of 2020. However, led by yours truly, two landlords have filed a legal challenge to the Moratorium with the Supreme Judicial Court, which is pending. If the Massachusetts Eviction Moratorium is struck down, the CARES Act Moratorium will still be in place, at least through Aug. 31. That could be extended as well, however.
There are several databases and search websites to see if your rental property has a federally backed mortgage subject to the CARES Act —
Look up if Fannie Mae or Freddie Mac own mortgages on these sites:
The CARES Act provides foreclosure protections for borrowers with property secured by federally backed mortgage loans. Borrowers who affirm they are experiencing a COVID-19 related hardship can request a forbearance from their loan servicer of up to 180 days, which can be extended for an additional period of up to 180 days. Except with respect to a vacant or abandoned property, servicers may not initiate a foreclosure, move for judgment, or order a sale, or execute a foreclosure-related eviction or foreclosure sale until August 30, 2020.
COVID-19 Impacts: Eviction Moratorium Proposals, Tenant Payment Issues, Housing Court Delays, Stay at Home Order, and Move-In Delays
I’ve written two posts here and here about the Coronavirus (COVID-19) Global Pandemic, both focused primarily on impacts to real estate transactions and closings. Along with my colleague and fellow landlord-tenant attorney, Jordana Greenman, Esq., we want to now discuss the impact on rental housing, evictions and landlord-tenant relationships.
The number of reported cases are exploding and events are changing daily, even hourly. I first wrote about the Coronavirus (COVID-19) global pandemic on March 10, about two weeks ago. As of that writing (data as of March 9), there were 729 reported cases in the US, with 27 deaths. As of today March 27, Johns Hopkins is reporting that the United States has surpassed China with over 86,000 confirmed cases and over 1,300 deaths. With the well publicized testing delays, the real number of cases is likely far higher. Unfortunately, Massachusetts has not been spared, with over 2,400 reported cases, including over 140 Boston city hospital workers.
Gov. Baker has ordered the shutdown of all schools and day-cares through May 6, closed down restaurants and bars, and banned gatherings over 25 people. Last week, all Trial Courthouses were shut down for two full days. They have re-opened, but not to the public and with very limited availability for hearing cases (other than true emergencies). On Monday March 23, Gov. Baker issued a “stay at home” advisory, essentially closing down all “non-essential” businesses.
Of course, the big problem for the rental housing industry is the economy has gone into the tank. Experts predict that unemployment will rise to Great Depression levels. The stock market has lost some 30% of its value. When people have lost their jobs and lost their savings, they can’t pay the mortgage or the rent.
Legislation for Eviction Moratorium
In Boston, Mayor Marty Walsh has announced a voluntary eviction moratorium agreement with the city’s largest landlords including Trinity Financial, Winn Residential and the Community Builders, which manage hundreds of apartments in Boston. On Beacon Hill, legislators have filed a bill calling for a state-wide moratorium on evictions during the pendency of the COVID-19 State of Emergency. At the federal level, HUD has suspended all evictions for FHA insured single family residences. It’s unclear whether this also applies to HUD Section 8 rental subsidy participants. Lastly, Attorney General Maura Healy just implemented new regulations prohibiting consumer debt collection activities for a 90 day period, however, landlord-tenant payments are excluded from the regulation.
The problem with these legislative efforts, of course, is that there needs to be a corresponding moratorium on the payment of mortgages, real estate taxes and property expenses for rental property owners, otherwise small landlords will shoulder an enormous amount of the financial burden during this crisis. “If renters don’t have money to pay rent, landlords don’t have money, either,” Doug Quattrochi, executive director of the group MassLandlords told the Boston Globe recently. “That’s money that pays plumbers and electricians and mortgage bills. If they’re a senior on a fixed income, it might be how they buy food.”
Gov. Charlie Baker indicated during his last press conference that he was not at a point where he would impose such a moratorium. Thus, as of now, a moratorium on rental payments in Massachusetts is unlikely, but of course, that could change, and such change would disproportionately affect the small landlords.
Housing Court COVID-19 Response
Practically speaking however, there exists a de facto moratorium on evictions because the statewide Housing Court has deferred hearing eviction cases through April 21. Under two new Standing Orders, all Housing Courts are closed to the public through at least until April 6, 2020, and are hearing only emergency matters. All evictions (summary process) are impacted by the order, and are currently on hold until April 21, 2020. A party may seek to advance their case upon a showing of “good cause,” but my feeling is that those will be quite rare. “Emergency matters” include the following circumstances: applications for injunctive relief, temporary restraining orders where a complaint involves a lockout, condemnation, no heat, no water, and/or no utilities; conduct and or conditions endangering the health safety and welfare of residential occupants and others; stay of levy on an execution; or where access is required to address an emergency (e.g., burst water pipe, gas fumes, etc.).
We want to highlight the likely scenario that once this crisis (hopefully) ends, the Housing Court will be swamped with cases in Spring/Summer 2020. On average, the Boston Housing Court itself receives hundreds of new eviction cases weekly. The COVID-19 postponement is sure to result in a huge backlog of eviction cases for many months to come and even more crowding in the courthouses.
Legal Guidance: Advice to landlords dealing with tenants who cannot pay rent — You have to take a wait and see approach. Legally, you are still allowed to issue a 14 day notice to quit for non-payment of rent. You are also allowed to file an eviction complaint in the Housing Court. But you will likely not get in front of a judge until sometime in May, and possibly longer. So, it’s a good idea to go ahead and have an attorney send out the notice to quit and get the summary process complaint filed, and then you’ll have to wait in line and see what happens. We do not yet know the order in which cases will be scheduled or if those filed during this time will be given priority.
Stay At Home Order: Impact on Rental Agent Activities
Gov. Baker’s Stay at Home guidance/order appears to apply to real estate and rental agent activities. They are not specifically mentioned as one of the enumerated “essential” businesses, and their activities do involve much inter-personal contact in the ordinary course of business. Boston Mayor Marty Walsh has issued a formal letter advising rental agents not to hold showings of occupied rental units. He also issued guidance that any prospective tenants who are sick should not be allowed to view a unit in person, and added that open houses should not be used to market properties that are for rent or for sale. Anecdotally, I’m hearing that some (but not all) rental agencies are shutting down operations and many are simply working remotely.
Legal Guidance: showing rental properties live in person is a violation of the Stay At Home Order, and incongruent with the public health policy behind it. Rental agents should instead use virtual showing technology, FaceTime and Zoom to replicate in person showings. Moreover, holding in person showings could lead to someone getting infected with COVID-19, then a big lawsuit against the rental agent. We don’t want to see that either.
Move-in Delays
Many tenants are scheduled to move in the coming months and, while moving companies have been deemed “essential” under the Stay at Home Order, many people may feel safer staying in place than moving to an unknown locations. Landlords and tenants should be encouraged to work together in the event of delays.
We have created a COVID-19 Lease Rider addressing the issue of move-in delays during this crisis. While it may be tempting for a landlord to keep a prepaid first month’s rent, last month’s rent and security deposit in the event a tenant either cannot move or feels unsafe doing so, this may open landlords up to liability and legal claims are sure to ensue. We encourage the parties to work together and be flexible.
For current occupancies, landlords should remind their tenants to keep the apartments clean and sanitary. Most importantly, during tenant turnovers, landlords should hire a sanitization company (e.g., Service Master) to clean and disinfect units prior to a new occupancy.
Conclusion
Our collective appreciation goes out to the many health care and public service employees working to help combat this epidemic. The Massachusetts’s official COVID-19 website contains the most up-to-date information. We are also available to consult regarding your current or pending landlord-tenant needs.
Widespread Racial Disparities In Criminal Justice System Justifies New Policy
Last week the Obama administration released new controversial Fair Housing guidelines telling the nation’s landlords that it may be discriminatory for them to refuse to rent to those with criminal records. The U.S. Department of Housing and Urban Development (HUD) says refusing to rent based on a criminal record is a form of racial discrimination, due to racial imbalances in the U.S. justice system, despite the fact that criminal history is not a protected class under the federal Fair Housing Act.
“The Fair Housing Act prohibits both intentional housing discrimination and housing practices that have an unjustified discriminatory effect because of race, national origin, or other protected characteristics,” say HUD’s newly-released guidelines. “Because of widespread racial and ethnic disparities in the U.S. criminal justice system, criminal history-based restrictions on access to housing are likely disproportionately to burden African-Americans and Hispanics. While the Act does not prohibit housing providers from appropriately considering criminal history information when making housing decisions, arbitrary and overbroad criminal history-related bans are likely to lack a legally sufficient justification.” About 25 percent of Americans have some kind of criminal record, which can range from felony convictions to arrests that never led to charges.
HUD says that landlords may be allowed to bar those with criminal records, but they will have to prove that such a policy is necessary for protecting the safety of other tenants, and designed to avoid illegal discrimination. The new guidance recommends that landlords consider factors such as the severity of the criminal history and how long ago it occurred.
Practice Pointer: Blanket prohibitions denying applicants with criminal histories will get landlords into major trouble under the new HUD policy.
Evaluating whether the criminal history policy or practice has a discriminatory effect
Evaluating whether the challenged policy or practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest
Evaluating whether there is a less discriminatory alternative
Policy Places Burden On Small Landlords
I’m all for giving people a second chance at life, but the major problem with this policy is that it puts the onus and burden on the small landlord to do the criminal history check and then figure out how severe the offense is and what the underlying circumstances are. Also the policy does not advise a landlord exactly how old a crime is to be considered “too old.”
In Massachusetts, a CORI (Criminal Offender Record Information) report contains only the basic of information of the offense such as the date of arrest/conviction, disposition, court and sentence, if any. There is nothing in the CORI report showing the underlying facts of the crime and it does not include police reports. Thus, for a charge of open and lewd conduct, a landlord does not know whether this is a serious offense or just a college kid urinating in an alley. Under the new HUD policy, landlords now have the burden of playing criminal investigator and assessing whether a crime is not truly serious.
Also, please remember that under the so-called Mrs. Murphy exemption, the federal Fair Housing Act does not apply to owner-occupied rental properties of up to 4 units.
What Now?
So how are landlords going to navigate this new policy? Well, first I would expect that risk-adverse landlords will cut down or stop requesting criminal history information all together. Of course, this puts landlords in a dilemma because they retain a legal duty to keep residents safe, and if they rent out to a known sexual offender, for example, who attacks another resident, they can be sued for millions.
For those who still ask for criminal record information, they will have to offer an applicant the opportunity to explain the circumstances of their arrest/conviction before making a final decision. As with all rental application decisions, it’s best to make the decision rest on financial considerations such as credit, income, and employment.
If you need guidance navigating this new policy, feel free to contact me at [email protected].
Court Halts Eviction For Distressed Homeowner, Validity of Foreclosure In Question (Wells Fargo v. Cook, Mass. Appeals Court May 19, 2015)
In response to the foreclosure crisis, HUD enacted regulations requiring lenders to provide distressed borrowers with a meaningful opportunity to settle their FHA-insured mortgages and obtain a loan modification during a face-to-face interview. In an effort to accommodate the hundreds of Wells Fargo clients facing foreclosure in Massachusetts, the San Francisco based lender held a mass “homeowner’s workshop” at Gillette Stadium in August 2008.
Three months behind on their Mattapan mortgage, Nancy Cook and her daughter showed up to the stadium with a little over $10,000 in cash, in anticipation of signing a repayment plan. After waiting in a long line, Cook received a ticket and sat down with a bank representative. Despite HUD guidelines requiring that loan representative have actual authority to settle accounts and enter repayment plans, the Wells Fargo representative said that he was unable to accept any payments at the event. The counseling session lasted only 15 minutes, but the reprepresentative promised that Ms. Cook would receive a loan modification package in the mail.
Ms. Cook did receive a Special Forbearance Agreement in the mail, which she accepted, and made the first three payments under the agreement. When she went to make the fourth payment, Wells Fargo rejected it, claiming that Cook owed it $2000 more than the scheduled payment. Wells Fargo then issued a default notice, accelerated Cook’s debt, and foreclosed her home.
Several years after completing the foreclosure sale, Wells Fargo brought an eviction case against Cook and her daughter, who at this time were represented by lawyers from Harvard University Legal Aid. (The reason for the long delay is unclear). Boston Housing Court judge Marylou Muirhead ruled against Cook, clearing the way for her eviction.
On appeal, Appeals Court Justice Scott Kafker halted Cook’s eviction, ruling that the Housing Court judge should reconsider whether the Gillette Stadium mass counseling event complied with HUD guidelines. Justice Kafker noted that a reoccurring theme of the HUD rules is to provide personalized consideration for each homeowner. That apparently was not done, said the justice, or at least there is a dispute as to whether the mass Gillette Stadium event could satisfy that guideline.
Of particularly interest to the real estate conveyancing community, the Court held that if the lower court ultimately rules that the counseling session was insufficient, the lender could be found in noncompliance with the mortgage terms and foreclosure power of sale, and its foreclosure could be deemed defective and invalid. A court holding to this effect could potentially invalidate completed foreclosures of FHA insured mortgages over whether the lenders complied with the face-to-face meeting requirements of the HUD guidelines. Ensuring a lender’s compliance with HUD rules is not typically part of a title examiner’s scope of examination. Lenders would need to provide an affidavit certifying that all pre-foreclosure counseling requirements were complied with. Accordingly, this is yet another reason why obtaining an owner’s title insurance policy is a prudent choice for all buyers of foreclosed properties.
Say the word “QM” (short for Qualified Mortgage) to any mortgage banker these days, and watch their reaction. If they were smiling, they will stop. Better yet, lock the doors to prevent them from jumping off the nearest bridge.
“QM” refers to the new Qualified Mortgage rules passed by the Consumer Financial Protection Bureau under the Dodd-Frank Act which went into effect on January 10, 2014. The Dodd–Frank Wall Street Reform and Consumer Protection Act was passed as a response to the late-2000s recession, and has brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression.
Seeking to prevent the sub-prime meltdown earlier in the decade, the new QM rules — through stricter underwriting guidelines and debt-income ratios — require lenders to ensure that the borrower has the ability to repay the loan today and into the future. In exchange, lenders will be protected from borrower lawsuits.
According to a recent ComplianceEase study, 20% of today’s mortgages would not meet the new qualified mortgage standards and would be rejected. According to most loan officers who I’ve spoken to, the general consensus is that the QM Rules will make for even stricter underwriting, more loan application rejections, especially for the self-employed, and even higher interest rates for certain loans.
Debt to Income Caps
For a loan to be considered a qualifying mortgage, the borrower’s debt-to-income ratio can be no more than 43%. This means that if a borrower has $4,500 in gross monthly income, his total debt payments including his new mortgage cannot exceed $1,935 per month. Previously, some lenders had been willing to go up to 45%.
Fee And Term Caps
Lenders will be less able to make creative loans, as well. Loans that meet the QM rule can be no longer than 30 years in length. They also cannot have closing costs and fees that exceed a cap of 3% of the loan’s balance.
Self-Employed
Self-employed borrowers will also take a hit under the QM rules. In addition to two years of personal and business tax returns — the typical requirement and now the official standard — self-employed borrowers should also be prepared to produce a profit-and-loss statement and a balance sheet. A declining income trend will require explanation, because lenders need to establish the stability and continuity of the income source. Although capital losses and net-operating-loss carry-overs cited on a tax return could previously be added back to the income, their re-inclusion under the new rules will make the loan a nonqualified mortgage. The problem for self-employed people, as always, is that they want to minimize their tax liability, but some of the ways they do so impact their ability to borrow.
Less Availability Of Higher Risk Loan Products
The QM rules will also have a negative effect on the availability of non-QM loans with higher debt to income ratios, stated income loans for self-employed, and over 30 year term loans. Non-QM loans will be subject to significant legal risk under the Ability to Repay (ATR) rule and the liability for violations is draconian, according to Jack Hartings, President and CEO of The Peoples Bankat a House hearing panel. Mr. Hartings also noted that non-compliance with QM rules could also serve as a defense to foreclosure if the loan is deemed not to be a QM loan and small community banks do not have the legal resources to manage this degree of risk. Thus these banks, he said, will not continue to make some of the loans they have made in the past such as low dollar amount loans, balloon payment mortgages, and higher priced mortgage loans.
Loan officers, I would love to hear your thoughts about the new QM rules. Realtors, were you even aware of these rules coming down the pipeline which may affect your buyers?
CFPB Issues Long Awaited “Know Before You Owe” Mortgage Disclosures, Replacing Truth in Lending, Good Faith Estimate, and HUD-1 Settlement Statement
As part of a continuing overhaul of the home mortgage market, the Consumer Financial Protection Bureau today issued a final rule to bolster fairness and clarity in residential lending, including requiring a new good faith estimate of costs for homebuyers, Truth in Lending disclosure and a new HUD-1 Settlement Statement.
The new Loan Estimate will replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). The new Closing Disclosure will replace the current HUD-1 Settlement Statement. The new forms are embedded below.
Initial Impressions, Did The CFPB Finally Get It Right?
Overall, I would say that the forms are a major improvement over the existing disclosures, especially the Truth in Lending disclosure. I always joke that the Truth in Lending disclosure should be called “Confusion in Lending” (which usually gives the borrower a chuckle) as it’s nearly impossible to explain even for a trained attorney and sophisticated borrower. That may be rectified now with the new forms — although I still may employ the joke!
The new HUD-1 Closing Disclosure is a longer and more involved form, but it basically just reorganizes all of the information now contained in the current 3 page HUD-1 Settlement Statement, and it appears to be easier to read and explain at the closing table.
The CFPB says that the new forms will replace the existing forms, resulting in a decrease in pages to review — which is a minor miracle in and of itself. A common complaint from borrowers is the sheer number of forms and disclosures signed at the closing, so this is welcome news.
3 Business Day Rule May Be Problematic
As Bernie Winne of the Massachusetts Firefighters Credit Union testified at the announcement hearing today in Boston, the new requirement that the Closing Disclosure (new HUD-1) be provided to the borrower within 3 business days of the closing may pose a problem in some transactions and will certainly result in a major adjustment in current practices. There are often last minute changes in closing figures, seller credits, holdbacks, payoffs, etc., which result in last minute changes. Hopefully, the CFPB will realize this in the upcoming implementation period and relax the rules in certain circumstances. There has already been significant chatter on Twitter and the blogosphere about this new requirement.
Another encouraging note was CFPB Director Cordray’s comments today about the agency pushing for more electronic closings. Fannie Mae has done squat to push e-closings, so hopefully CFPB will take the lead in this important area!
Loan Estimate Disclosure
The new Loan Estimate will combine the disclosures currently provided in the Good Faith Estimate and the initial Truth in Lending statement.
Lenders must provide the Loan Estimate 3 business days after an application is submitted by a consumer, excluding days that the lender is not open (e.g., Saturdays). However, it is not clear based from materials available thus far when a consumer has submitted sufficient information to constitute an “application.”
The Loan Estimate will conveniently provide for the monthly principal and interest payment, projected payments over the term of the loan, estimated taxes and insurance (escrows), estimated closing costs, and cash to close.
It will provide for a Rate Lock deadline.
The Annual Percentage Rate (APR) appears on page 3, despite requests by consumer advocates that it appear in a prominent location on the first page. In addition, it appears that the Bureau did not adopt the proposal to revise the APR calculation to include more items in the finance charge and thereby potentially increase the number of loans that would fail the Qualified Mortgage’s points-and-fees test or would be treated as “high cost” or “higher priced.”
Closing Disclosure
The Closing Disclosure will combine the disclosures currently provided in the HUD-1 settlement statement and any revised Truth in Lending statement. It is now a 5 page document compared to the current 3 page document.
Critically, the Closing Disclosure must be provided at least 3 business days before the closing. Lenders and closing attorneys will have to adapt to this new requirement as currently we usually get the final HUD approved by the lender 24-48 hours before the closing.
Page 1 of the Closing Disclosure carries over much of the Truth in Lending information previously found in the TIL form.
Page 2 and 3 replicate the existing HUD-1 Settlement Statement (pages 1 and 2) outlining the fees and closing costs, adjustments, and commissions charged to the buyer and seller. It also contained a more extensive section on Cash to Close which will be helpful to explain.
Page 4 contains a nice easy-to-read section on the escrow account which is often challenging to explain to borrowers.
The last page is similar to the current page 3 of the HUD-1, providing a quick summary of the loan terms, interest rate, total payments and APR.
A long awaited regulatory and compliance announcement may be coming to Boston next week.
The Consumer Financial Protection Bureau has announced that on November 20, 2013, it will hold a field hearing in Boston on the “Know Before You Owe: Mortgages” rules. Industry experts predict that CFPB will announce its long-awaited new Truth In Lending (TILA)-RESPA integrated disclosures final rule and forms.
The new rules and disclosures will result in another dramatic change in the Truth in Lending, Good Faith Estimate and HUD-1 Settlement Statement used by lenders and attorneys in residential purchase and refinance transactions. A new “Loan Estimate” would replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). A new Closing Disclosure would replace the current HUD-1 Settlement Statement. Our prior post on the new closing disclosures can be found here.
The event will feature remarks by CFPB Director Cordray and testimony from consumer groups, industry representatives, and members of the public. The event will be held at the Back Bay Grand, Back Bay Events Center, 180 Berkeley Street, Boston, MA 02116. If I’m lucky enough to get an invite, I will be there and will report back on what happens.
I’ve been glued to CNN in recent days, watching incredulously as those buffoons in Washington grind our government to a halt. I though for sure that a midnight deal would have been struck, but I woke up this morning with the dreaded news that the government has indeed shutdown. I’ve been trying to get a handle all morning on how this is going to affect the Massachusetts and national real estate market, and here’s what I have so far. (Updated 10/1/13 at 4:30pm below).
Tax Transcripts/SSN Verification Delays
Virtually all federally back mortgage lenders request copies of borrower’s tax transcripts through the IRS and social security numbers through the SSA. According to my friend Rick Moore, loan officer at Lendmark Loans in Framingham, and media reports, the shutdown will apparently either stop or hinder the federal agencies’ ability to issue those verifications, resulting in mortgage approval delays across the board. I know that lenders were furiously ordering tax transcripts and SSN verifications last week, in preparation for the shutdown. If your loan is in the middle of underwriting, speak to your loan officer now. You may be facing a delay in getting a clear loan commitment and a resulting delay in your closing date.
Federal Housing Administration (FHA)
The shutdown’s impact on FHA loans appears to be not as bad as originally thought. HUD’s Contingency Plan states that FHA will endorse new loans in the Single Family Mortgage Loan Program, but it will not make new commitments in the Multi-family Program during the shutdown. FHA will maintain operational activities including paying claims and collecting premiums. Management & Marketing (M&M) Contractors managing the REO portfolio can continue to operate. You can expect some delays with FHA processing.
VA Loan Guaranty Program
Lenders will continue to process and guaranty mortgages through the Loan Guaranty program in the event of a government shutdown. However, borrowers should expect some delays during the shutdown.
Flood Insurance
The Federal Emergency Management Agency (FEMA) confirmed that the National Flood Insurance Program (NFIP) will not be impacted by a government shutdown, since NFIP is funded by premiums and not tax dollars. Changes to the flood insurance program scheduled to take effect on Oct. 1 will be implemented as scheduled.
USDA Loans
For USDA loan programs, essential personnel working during a shutdown do not include field office staff who typically issue conditional commitments, loan note guarantees, and modification approvals. Thus, lenders will not receive approvals during the shutdown. If the lender has already received a conditional commitment from the Rural Development office, then the lender may proceed to close those loans during the shutdown. A conditional commitment, which is good for 90 days, is given to a lender once a USDA Underwriter approves the loan. If a commitment was already issued, the funds were already set aside and the lender may close the loan at its leisure. If Rural Development has not issued a conditional commitment, the lender must wait until funding legislation is enacted before closing a loan.
It is important to note that the traditional definition of “rural” for qualifying communities for assistance will be continued in effect during the shutdown. We expect that language to continue the current definition will be included in whatever funding measure is eventually enacted.
Government Sponsored Enterprises
Fannie Mae and Freddie Mac will continue operating normally, as will their regulator, the Federal Housing Finance Agency, since they are not reliant on appropriated funds.
Treasury
The Making Home Affordable program, including HAMP and HAFA, will not be affected as the program is funded through the Emergency Economic Stabilization Act which is mandatory spending not discretionary.
Updated (Oct. 1 at 4:30pm). Memo from national mortgage lender:
“There has been no progress today toward a resolution to the government shutdown. Fortunately, the initial impact of the shutdown on mortgage originations has been small. The biggest concerns are obtaining transcripts from the IRS and social security verifications from the SSA. Certain Government produced economic reports will not be available. The Construction spending report due out this morning was not issued. The Non-Farm Payrolls report due on Friday may be affected. The impact on the mortgage market of this lack of data is difficult to anticipate.
At this time, Fannie, Freddie, and Ginnie say they will continue to operate as normal. VA says that they, too, will have no disruptions in services. FHA, however, expects delays due to reduced staffing. Origination companies, correspondent banks, and warehouse lenders may react differently as they access the risks associated with an extended shutdown.”
The new Consumer Financial Protection Bureau has just issued what it deems “one of its most important rules to date.” It’s called the Ability To Repay Rule. The rule will ensure that a borrower should be able to afford their mortgage payment. Sounds like common sense, right? Yes and no, according to the agency. The CFPB is trying to prevent the subprime and predatory lending crisis of several years ago by requiring that lenders jump through several strict underwriting hoops for “fail-free” loans.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” CFPB Director Richard Cordray said in a statement. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”
The Qualified Mortgage (QM). The key feature of the new rule is the establishment of a “qualified mortgage” — with no risky loan features – such as interest-only payments or balloon payments – and with fees that add up to no more than 3% of the loan amount. In addition, these loans must go to borrowers whose debt does not exceed 43% of their income. These loans would carry extra legal protection for lenders under a two-tiered system that appears to create a compromise between the housing industry and consumer advocates.
End of No-Doc Loans. In the past, lenders could get away with offering low- or no-doc loans (they required few financial documents, if any, from the borrower and then could sell off the risky loans to investors). With the new rule, lenders must do a proper financial background. That means sizing up borrowers’ employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations.
Risky borrowers will have a harder time securing a loan. The lender must prove the borrower has “sufficient assets” to pay back the loan eventually. According to the CFPB, that’s determined by calculating debt-to-income ratio of no more than 43%.
Bye-bye to teaser rates. Lenders love to roll out juicy low introductory rates on mortgages to lure borrowers in, but under the new rule, they must calculate a borrower’s ability to repay his loan based on the true mortgage rate –– including both the principal and the interest over the long-term life of the loan.
The rule does not go into effect until January 1, 2014. This new rule has the potential of really shaking up the mortgage industry. We will be tracking future developments. We appreciate comments from mortgage professionals below.
I always look forward to recapping the year that was, and bringing out the crystal ball to predict the year ahead. This year, like years prior, was an active year for Massachusetts real estate law, with several important court rulings, legislative developments, and emerging legal trends. The year 2013 is expected to be just as busy.
Eaton v. Fannie Mae and Fannie Mae v. Hendricks Foreclosure Rulings
Another year, another pair of huge foreclosure rulings by the Massachusetts Supreme Judicial Court. On June 22, 2012, in Eaton v. Federal Nat’l Mortgage Ass’n, the SJC held that lenders must establish they hold both the promissory note and the mortgage in order to lawfully foreclose. This posed major problem for the vast majority of conventional mortgages which lenders securitized and sold off on the secondary mortgage market, thereby splitting the note and mortgage among various securitized trusts and mortgage servicers. Responding to pleas from the real estate bar, the SJC declined to apply its ruling retroactively, thereby averting the Apocalyptic scenario where thousands of foreclosure titles would have been called into question. My prior post on the Eaton ruling can be read here.
The FNMA v. Hendrickscase had the potential to change Massachusetts foreclosure practice, but the SJC rejected the challenge. The court upheld the validity of the long-standing Massachusetts statutory form foreclosure affidavit which provided that the foreclosing lender has complied with the foreclosure laws,rejecting the borrower’s claim that the affidavit was essentially robo-signed.
New Medical Marijuana Law Has Landlords, Municipalities Smoking Mad
Burned up Massachusetts landlords and anti-pot local pols are still fuming with concern over the state’s newly passed but hazy medicinal marijuana law. The law — rolling out Jan. 1 — mandates the opening of at least 35 medicinal marijuana dispensaries, and grants users the right to grow a two-month supply of marijuana at home if they cannot get to a dispensary because they are too sick or too broke. The new law also potentially opens landlords up to federal prosecution for violating the federal controlled substances laws. Many towns and cities are contemplating banning dispensaries or passing zoning by-laws regulating their locations. My prior post on the new marijuana law can be read here.
Apartment Rental Occupancy Limits
In 2013, the SJC will consider the Worcester College Hillcase which will significantly impact landlords renting apartments to students and in other multi-family situations. The question is whether renting to 4 or more unrelated persons in one apartment unit requires a special “lodging house” license which would, in most cases, make it cost-prohibitive to rent to more than 3 unrelated persons. (Lodging houses require a built-in fire sprinkler system, for example). The SJC will hear oral arguments in the case on January 7, 2013.
Foreclosure Prevention Act Passed
On August 3, 2012, Governor Deval Patrick signed the Foreclosure Prevention Act. The new law requires that lenders offer loan modifications on certain mortgage loans before foreclosing. Unfortunately, the law did not fix the problem with existing title defects resulting from the U.S. Bank v. Ibanez case in 2010. (Sen. Moore’s office plans to re-introduce Senate Bill 830 in 2013). My prior post on the new law can be read here.
SJC To Consider Realtor’s Liability for Erroneous MLS Info
Sometime in 2013, the SJC will issue a very important opinion in the controversial DeWolfe v. Hingham Centre Ltd. disclosure case where a Realtor was held liable for failing to verify the zoning of a listing on the Multiple Listing Service. The Court will also consider whether the exculpatory clause found in the Greater Boston Real Estate Board’s standard form purchase and sale agreement legally prohibits a buyer’s misrepresentation claim against the real estate agent. The Massachusetts Association of Realtors and the Greater Boston Real Estate Board have filed friend of the court briefs urging the SJC to limit Realtors’ disclosure obligations in the case. My prior post on the case can be read here.
Good Faith Estimate, TIL, and HUD-1 Settlement Statement To Change Dramatically
In the second major overhaul of closing disclosures in three years, the Consumer Financial Protection Bureau will be rolling out in 2013 a new “Lending Estimate” and “Closing Estimate” which will replace the current Good Faith Estimate, Truth in Lending Disclosure, and HUD-1 Settlement Statement. The changes are part of the Dodd-Frank Act, and has the lending and title insurance industries scrambling to figure out who should be ultimately responsible for the accuracy of closing fees and other logistics in delivering these new disclosures. My prior posts on the topic can be read here.
Fiscal Cliff Anxiety Syndrome
The Year In Review would not be complete without mention of the dreaded Fiscal Cliff. As of this writing, President Obama and the House (which even rejected its own Speaker Boehner’s last proposal) have been unable to work out a deal to resolve the more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after Jan. 1, 2013. If there is no deal, and the country goes over the fiscal cliff, the consensus is that it will have quite a negative effect on the economy and the real estate market in particular.
Upcoming Event! On January 8, 2013, we are sponsoring a breakfast seminar with veteran real estate journalist Scott Van Voorhis, who will offer his predictions on 2013. Please email me to sign up. The Facebook Event invitation is here. The venue is Avita in Needham, 880 Greendale Ave., Needham, MA.
Richard D. Vetstein is an experienced Massachusetts real estate attorney who hopes the White House and Congress can get their acts together and pass a compromise bill to avoid the Fiscal Cliff.
Mandatory 3 Business Day Waiting Period Will Delay Closings
Action Needed: Comment On Proposed Rule
While our attention has been diverted from more important issues such as Hurricane Sandy and the election, please be advised that November 6, 2012is the last day for lenders, settlement agents, Realtors and the public to comment on the controversial new combined Truth and Lending/HUD-1 Disclosure rules proposed by the new Consumer Financial Protection Bureau (CFPB). For those who don’t know, the CFPB has proposed a major overhaul to closing disclosures, combining the Truth In Lending and the HUD-1 Settlement Statement into a single 5 page disclosure form.
Of paramount concern to the real estate community is the proposed Three Business Day Rule, which would require that lenders provide the final Closing Disclosure (the new HUD-1) at least 3 business days prior to the closing. The major problem with this rule is that if there are changes in settlement and closing figures between the time of disclosure and the closing, the consumer must be provided a new form, and the closing must be delayed for at least 3 business days. ((There is an exception for adjustments between buyer and seller, such as a repair credit and for items under $100.))
In today’s lending environment, last minute changes to settlement numbers are common, and given the crush of underwriting tasks, final closing figures are typically provided 24-48 hours prior to the closing, or even the day of closing. Moreover, there are often delays getting information from outside sources — real estate tax information from municipalities, insurance information from independent agents, final water/sewer readings, oil bills and 6d condo fees from Realtors, and payoffs from sellers — all of which are out of the control of the lender and the closing attorney.
If there are last minute changes to settlement numbers, the proposed rule will delay closings for at least 3 business days, which could be catastrophic. This will have an unintended ripple effect on both the borrower and other parties, especially where the borrower is doing a “sell-buy” on the same day.
The CFPB is out of touch with the real estate industry on this rule. Indeed, at a recent symposium on the new rules, the CFPB’s new general counsel was reported as being very surprised that last-minute changes in settlement figures were relatively common. Delaying closings for 3 business days through delays of no fault of the lender or settlement agent hurts all the parties to the transaction. The rule is regulatory overkill.
Tell the CFPB that the 3 Business Day Rule is a bad idea, and give anecdotal stories about how delays in closings will affect your business. And please share this post with fellow lenders, mortgage bankers, closing attorneys and Realtors.
All Politics Aside, It’s Time To Bring Housing & Real Estate Back To the Forefront
In the most tweeted, Facebook-ed and instant polled Presidential Campaign ever, there is one topic which has been met with surprisingly deafening silence: the U.S. Housing and Real Estate Market. During last week’s debate, we heard a lot about tax plans and cuts, energy, health care and jobs, but nothing on the real estate market. Nothing…This year’s presidential candidates have mostly avoided discussing an industry that’s largely responsible for the last five years of economic pain. But why?
For sure, the subject of housing remains an extremely sensitive one. President Obama might prefer that the real estate market, whose imbalances sparked the financial crisis, to remain a ghost issue because of a lackluster record at combating the foreclosure epidemic. He is also blamed for not doing enough on the loan modification front with the dismal HAMP and HARP programs. Mitt Romney, meanwhile, might like to steer clear of the topic because a hard stance on housing could alienate voters whom he needs to win. I’m not here to debate one particular side or candidate, but rather to simply pose the question of why no talk on real estate?
Obama Falls Short of Expectations?
“Obama’s major housing initiatives have fallen short of expectations, and so Obama doesn’t have big victories to point to,” said Jed Kolko, chief economist for listing service Trulia. “The housing market is still struggling in many parts of the country, so this is not a problem that’s been solved.” The administration’s flagship relief program, the Home Affordable Modification Program (HAMP), has helped 1 million homeowners obtain lower interest rates, principal reductions, more time to pay their mortgages or any combination of the three. But that pales in comparison to the 3 to 4 million homeowners whom the program was supposed to help. Meanwhile, the Home Affordable Refinance Program (HARP), designed to help 5 million homeowners refinance their mortgages into lower interest rates, has benefited only about 1.5 million homeowners.
Romney Gun-Shy On Housing?
Romney’s housing platform includes the potential elimination of Fannie Mae and Freddie Mac, and that prospect may be just too scary and radical to everyday voters and homeowners who have relied on the government giants to stabilized the formerly free-falling real estate market. “To stake out what you think Fannie and Freddie’s future is is to alienate somebody,” commented Mark Calabria, director of financial regulation studies at the Cato Institute. “Realtors and home builders tend to be politically active — and Republicans,” noted Mr. Calabria. Indeed, Romney’s free-market stance on housing, if articulated bluntly, could unsettle many distressed homeowners as well. He has said that he believes that the housing market should naturally “hit bottom,” and has harshly criticized Obama’s relief programs.
Let’s Get The Housing Dialogue Going!
Over the past several months, I’ve enjoyed healthy (and even civil) political discussion on the issues on my Facebook feed. (Please join in!). The real estate market and housing alwayscomes up, whether it’s in the context of folks not able to refinance their underwater mortgages, the loss of their equity, or the impact of unemployment on the general real estate sector. Granted, the real estate market has made significant gains since the bottom fell out in 2008, but folks are still hurting out there and it’s really been the Fed and its low interest rates which have largely kept the market from imploding. So, we shouldbe talking about all the issues. And that means federally assisted refinancing for underwater mortgages, Fed policy on interest rates, and the future of the GSE’s. Oh and by the way, where did all that foreclosure crisis settlement money go? I have yet to hear about anyone who has received any assistance from that fund.
Well, if Obama and Romney aren’t going to talk housing and real estate, we can do it here on this blog. Feel free to post your comments, diatribes or soapbox speeches in the comment section below. You can use the Facebook comments too. Keep the debate civil please!
Condo Sales May Get Slight Boost, But Financing Rules RemainTight
Responding to lender, condominium association and consumer outcry that the existing FHA condominium lending guidelines are too strict, the Federal Home Administration (FHA) on September 13, 2012 announced a round of changes which will hopefully make it easier for borrowers to qualify for FHA condo loans. The full FHA announcement can be found here.
While some of the changes are a step in the right direction, I think overall they are a mixed bag, as FHA left some of the most onerous provisions intact. I’m skeptical that these new changes will have a major impact on condominium sales, but of course, any loosening of the strict requirements is a good thing.
Condo Fee Delinquency Rule Increased to 60 Days Overdue
FHA is softening its stance on delinquent monthly condo fees and home owner association (HOA) dues. FHA is now allowing up to 15% of a project’s units to be 60-days delinquent on condo fees, up from just 30 days delinquent under the prior rule. This change acknowledges the depressed economy which has caused many condo unit owners to have trouble paying their condo fees. This is definitely a good change.
Expanded Investor Purchasing Allowed
Under the new rules, investors can come in and buy more units in a project than they could previously. They can now buy up to 50% of the project units, up from just 10% before, but with an important caveat: the developer must convey at least 50% of the units to individual owners or be under contract as owner-occupied.
Owner Occupancy Limits and Total FHA Financing Percentage Unchanged
The biggest disappointment of the new rules is that the main impediment to FHA condo financing remains unchanged, and that’s the 50% rule. Before any new buyer can obtain FHA financing, 50% of a project’s units be sold to third party buyers. This is what I’ve called the Catch-22. FHA provides the most first time home financing, so how can a developer expect to sell out his project if he cannot offer initial FHA financing? Doesn’t make any sense. I agree with the National Association of Realtors and the Community Association Institute on this one. Get rid of the 50% rule or decrease it to 25% or less.
Another restriction that hasn’t changed is the number of units that can have an FHA-backed loan. Only half the units can have FHA financing, so a borrower can’t get FHA approval if his unit would put the number of FHA financed units over 50%. That limitation remains unchanged, and that’s a killer for a lot of projects.
Spot Approvals Remain Dead
Mortgage lenders used to love FHA “spot approvals” which could by-pass the involved standard FHA approval process in order to get individual unit financing. Problem was is that they love spot approvals way too much, and they got abused. Ah, a few bad apples ruin it for everyone. FHA did not resurrect spot approvals from the dead on this go-around. Maybe they will be back when the economy gets better.
More Commercial Space OK
Projects can also have more space devoted to non-residential commercial uses than before. You see this a now in Boston with Starbucks and a bank office on the ground floor of a new condominium building. Up to this point, only 25% of project space could be used for commercial purpose. Now 50% of the project can be commercial, although certain authority for approval is reserved for the local FHA office. This will benefit the newer mixed use projects in urban markets.
Fidelity Insurance Coverage Required
Important for all condominium professional management companies. If the condominium engages the services of a management company, the company must obtain its own fidelity coverage meeting the FHA association coverage requirements or the association’s policy must name the management company as an insured, or the association’s policy must include an endorsement stating that management company employees subject to the direction and control of the association are covered by the policy. This is a substantial change to the previous requirements that required management companies to obtain separate fidelity insurance for each condominium.
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Richard D. Vetstein, Esq. is an experienced Massachusetts condominium attorney who regularly advises condominium associations on FHA certification issues. Please contact Mr. Vetstein at [email protected].
Concise Disclosures Aimed At Reducing Borrower Confusion and Helping Comparison Shopping
As part of a continuing overhaul of the home mortgage market, the Consumer Financial Protection Bureau on Monday issued proposed rules to bolster fairness and clarity in residential lending, including requiring a new good-faith estimate of costs for homebuyers and a new closing settlement statement.
My understanding is that the new “loan estimate” would replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). The new closing disclosure would replace the current HUD-1 Settlement Statement. The new disclosures are open to industry and public comment for 120 days, after which they will be finalized and codified as law. For more details on the new disclosures, go to the CFPB site here.
Real Estate Crash Has Resulted In Many More Forms and Disclosures
These days buyers are leaving closing rooms with not only their keys but a mild case of carpal tunnel syndrome! The reason for sore forearms and wrists is the voluminous stack of closing documents which are now required to be signed and notarized at every Massachusetts real estate purchase or refinance closing.
One of my opening “break the ice” lines at closings is to suggest that the buyers start massaging their writing hands. Then I show them the 2 inch stack of documents they must review and sign, and they usually say, “Are you serious? We have to sign all that?” Yep, I reply. You can thank Fannie Mae and the real estate collapse for that! All the new rules and regulations passed in the last 5 years have resulted in, you guessed it, more forms. Do you think the Feds and state ever eliminate old or out-dated forms? Nope.
Let me quickly go over some of the more important — and less important — documents signed at a typical Massachusetts real estate closing.
The Closing Documents
HUD-1 Settlement Statement. This is arguably the most important form signed at closing. It breaks down all the closing costs, lender fees, taxes, insurance, escrows and more. We did a full post on the HUD-1 and all the closing costs you can expect to pay here. Under the newer RESPA rules, most closing costs must be within 10% tolerance of the Good Faith Estimate provided by the lender (which you will also re-sign at closing).
Promissory Note & Mortgage. These two documents form what I like to call the “mortgage contract.” The promissory note is the lending contract between borrower and lender and sets the interest rate and payment terms of the loan. It is not recorded at the registry of deeds. The Mortgage or Security Instrument is a long (20+ page) document and provides the legal collateral (your house) securing the loan from the lender. The Mortgage gets recorded in the county registry of deeds and is available to public view. Read a full explanation of the Note and Mortgage in this post.
Truth in Lending Disclosure (TIL). The Truth in Lending should really be called “Confusion In Lending,” as the federal government has come up with a confusing way to “explain” how your interest rate works. This is a complex form and we’ve written about it extensively in this post. Your closing lawyer will fully explain the TIL form to you at closing.
Loan Underwriting Documents. With increased audit risk on loan files, lenders today are requiring that borrowers sign “fresh” copies of almost all the documents they signed when they originally applied for the loan. This includes the loan application, IRS forms W-9 and 4506’s.
Fraud Prevention Documents. Again, with the massive mortgage fraud of the last decade, lenders are requiring many more forms to prevent fraud, forgeries, and straw-buyers. The closing attorney will also make a copy of borrowers’ driver’s licenses and other photo i.d. and submit the borrower’s names through the Patriot Act database. They include Occupancy Affidavit (confirming that borrowers will not rent out the mortgaged property), and the Signature Affidavit (confirming buyers are who they say they are or previously used a maiden name or nickname).
Escrow Documents. Unless lenders waive the requirement, borrowers must fund an escrow account at closing representing several months of real estate taxes and homeowner’s insurance. This provides a cushion in case borrowers default and the taxes and insurance are not paid.
Title Documents. For purchase transactions, Massachusetts requires that the closing attorney certify that a 50 year title examination has been performed. Buyers will counter-sign this certification of title, as well as several title insurance affidavits and documents which the seller is required to sign, to ensure that all known title problems have been disclosed and discovered. Of course, we always recommend that buyers obtain their own owner’s title insurance which will provide coverage for unknown title defects such as forgeries, boundary line issues, missing mortgage discharges, etc.
Property Safety Disclosures. In Massachusetts, buyers and sellers will sign a smoke/carbon monoxide detector compliance agreement, lead paint disclosure, and UFFI (urea formaldehyde foam insulation) agreement. These ensure that the property has received proper certifications and will absolve the lender from liability for these safety issues.
Servicing, EOCA and Affiliated Business Disclosures. Chances are that your lender will assign the servicing rights to your mortgage to a larger servicer, like JP Morgan Chase or CitiMortgage. You will sign forms acknowledging this. You will be notified of the new mortgage holder usually within 30-60 days after closing. In the meantime, the closing attorney will give you a “first payment letter” instructing you where to send your first payment if you don’t hear from the new servicer. You will also sign forms under the federal and state discrimination in lenders laws and forms disclosing who the lender uses for closing services.
Well, those are most of the documents that buyers will sign at the closing. Sellers have a slew of their own documents to be signed at closing, and I’ll cover that in a future post. As I said, at your closing, massage your signature hand, grab a comfy pen, and sign your life away!
Final product will be a combination of both the final Truth in Lending (TIL) form and the HUD-1 Settlement Statement — a dramatic change from the existing forms.
For the second time in as many years, the federal government is substantially overhauling two of the most important disclosures given to mortgage borrowers, the Truth in Lending Disclosure and the HUD-1 Settlement Statement. The revisions are mandated by the Dodd-Frank Act. The new Consumer Financial Protection Bureau is in charge of re-designing and testing the new forms.
Most real estate industry professionals are unaware that these new changes are on the horizon. The new forms are expected to be implemented in 2013 after rule-making and industry comments are completed.
If you want to track the CFPB’s activity on these forms, I highly recommend the CFPB Monitor. The CFPB’s “Know Before You Owe” website also has updates and is pretty good for a government site.
Here is the new prototype HUD-1 Settlement Statement:
What do you think about the new forms? At first, glance it is easier to read, understand and explain to borrowers. We’ll keep track of this important issue.
by Brian Cavanaugh, Senior Mortgage Banker, RMS Mortgage and SmarterBorrowing.com
Overall, despite being a fairly light week in terms of economic releases and relate events, it is still relatively crucial for the mortgage market. We saw the yield on the benchmark 10-year Treasury Note spike higher Friday as a result of the stronger than expected employment data. Stocks rallied as a result of that data, extending the 2012 stock rally that has pushed the Dow up over 5% and the Nasdaq up 11% year-to-date. Both indexes are at their highest levels since May 2008 and December 2000 respectively. This has me believing we are due to see a pullback in stocks fairly soon. If/when this happens, we should see funds shift back into bonds for safety, leading to lower mortgage rates. Keep in mind that this is more or less just speculation, but I am expecting to move to a less conservative approach regarding short-term mortgage rates in the near future.
If I were considering financing/refinancing a home, I would….
LOCK if my closing was taking place within 7 days…
LOCK if my closing was taking place between 8 and 20 days…
FLOAT if my closing was taking place between 21 and 60 days…
FLOAT if my closing was taking place over 60 days from now…
This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed
There are only two pieces of monthly economic data scheduled for release this week. Neither of them is considered to be highly important, so we don’t have much to pin our hopes on or to be concerned with this week. There are two Treasury auctions on the calendar that may influence mortgage rates the middle part of the week and the second part of Fed Chairman Bernanke’s testimony to Congress, but no important economic data.
Nothing of concern is due tomorrow, so look for the stock markets and news from Europe- particularly Greece, to drive the markets tomorrow. Fed Chairman Bernanke will speak to the Senate Budget Committee at 10:00 AM Tuesday. I don’t expect him to say anything different than he said last week to the House Budget Committee, but the Q&A portion of his appearance could lead to something new. It is worth watching, but it will probably not lead to a noticeable change in the markets or mortgage rates.
Treasury Auctions Ahead
The two important Treasury auctions come Wednesday and Thursday when 10-year Notes and 30-year Bonds are sold. The 10-year sale is the more important one as it will give us a better indication of demand of mortgage-related securities. If the sales are met with a strong demand from investors, we should see the bond market move higher during afternoon trading the days of the auctions. But a lackluster interest from buyers, particularly international investors, would indicate a waning appetite for longer-term U.S. securities and lead to broader bond selling. The selling in bonds would likely result in upward afternoon revisions to mortgage rates.
Unemployment Numbers
With little monthly and no quarterly economic reports being posted, Thursday’s weekly release of unemployment figures may end up moving the markets and mortgage rates more than it traditionally does. The Labor Department is expected to announce that 370,000 new claims for unemployment benefits were filed last week, rising slightly from the previous week’s total. The higher the number of new claims for benefits, the better the news for the bond market and mortgage pricing as it would indicate weakness in the employment sector.
The first monthly report comes early Friday morning when December’s Goods and Services Trade Balance data will be posted. This report measures the U.S. trade deficit and can affect the value of the U.S. dollar versus other currencies, but it usually does not cause enough movement in bond prices to affect mortgage rates. It is expected to show a $48.2 billion trade deficit.
Consumer Sentiment
February’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment will be released late Friday morning. This index measures consumer willingness to spend and usually has a moderate impact on the financial markets. If it shows an increase in consumer confidence, the stock markets may move higher and bond prices could fall. It is currently expected to come in at 74.0, down from January’s final reading of 75.0. That would indicate consumers were less optimistic about their own financial situations than last month and are less likely to make large purchases in the near future. Since consumer spending makes up over two-thirds of the U.S. economy, this would be considered good news for bonds and mortgage pricing.
Are you a possible Massachusetts First Time Homebuyer?
Do you have a Real Estate client inquiring about current Mortgage Rates?
Do you have any Refinancing questions?
Should you be thinking about Refinancing out of your ARM (Adjustable Rate Mortgage)?
FHA loan programs offer low down payment mortgages which are often ideal for first time home buyers who lack cash for a 20% down payment but are otherwise strong borrowers. On June 30, 2011, FHA confirmed its commitment to financing condominiums with the issuance of revised lending guidelines (HUD Mortgagee Letter 11-22). The new FHA Condominium Project Approval and Processing Guide can be downloaded here.
“Today, we institute revised guidelines that preserve FHA’s role in the condo marketplace during these difficult times while making certain we manage risk in a responsible way,” said FHA’s Acting Commissioner Robert Ryan. “This guidance formalizes and expands the policies we put in place in 2009 and lays the groundwork for a more formal rulemaking process going forward.”
Highlights Of New Guidelines
1. Reserve Study Requirements:
New guidelines require reserve studies on all conversion (i.e., new) developments. Reserve Studies are valid for a period of 2 years.
2. Reserve Funding
Inaddition to a reserve study determination, a minimum of 10% of the operating budget must be set aside as a baseline in a reserve account. Funds to cover the total cost of any item in the Reserve Study or that will require replacement within 5 years must be deposited in HOA’s reserve account. The insurance deductible must also be included in the reserve fund.
3. Delinquent Condo Fees
On existing projects, the condominium cannot have more than a 15% delinquency rate on unpaid condo fees. This could be a problem for struggling condominiums. A waiver may be granted, however, with supporting documentation.
4. Pending Litigation
Litigation impacting the financing soundness of the condominium must be disclosed and explained to FHA. Again, this could be problematic if the condominium is involved in, for example, a lawsuit with the original developer over construction defects.
5. HO-6 Policies
Individual HO-6 insurance policies are required if the master condo insurance policy does not provide interior unit coverage (which most don’t).
6. Fidelity Bonds For Large Projects
Fidelity insurance to protect against employee dishonesty is required for projects over 20 units.
7. New Construction Pre-Sale
New Construction pre-sale requirements remain at 30%, although only for one year after the first closing. After the first year, it increases to 50% for the development.
8. Maximum Commercial Concentration
Remains at 25%, however, new guidance allows for possible waiver request up to 35% of the development.
9. 10% Investor Concentration
No longer includes sponsor unsold units or units required to be rented by State or Municipality, ie; rent stabilized/rent controlled.
Annual Percentage Rate (APR), Amount Financed, Finance Charge, and Total Payments…the Truth In Lending Disclosure Statement is one of the most challenging disclosure forms to explain to borrowers at a Massachusetts real estate closing. I like to call it the “Confusion In Lending” Statement because the form is what happens when the government attempts to recalculate your interest rate and closing costs in a way most human beings would not even consider.
To explain the Truth In Lending Disclosure, we’ll use a dummy form for a $500,000 purchase transaction with a $400,000 loan (20% down payment), a 30 year fixed rate loan at 5.00% at a cost of 1 point.
Annual Percentage Rate
The confusion begins. The Annual Percentage Rate, or APR, as you can see is not 5.00%, which is the contract interest rate for the loan. Why? Because the APR does not use the loan amount for its calculations but rather the “Amount Financed.”
Amount Financed
And the confusion continues. The Amount Financed is not the $400,000 loan amount, but is about $6,600 less than the loan amount. That is because the Amount Financed equals the loan amount ($400,000) less prepaid loan and closing fees and payments. Fees included in the amount financed are: points, lender fees such as underwriting, process, tax service, mortgage insurance, escrow company fees, prepaid interest to end of closing month, and Homeowners Association fees. All of these fees are added up and subtracted from the loan amount to reach the Amount Financed figure. Note that depending on when the loan closes in the month, and fees from third parties such as escrow companies the Amount Financed will vary and therefore so will APR.
How The APR Is Calculated
Now that we have the Amount Financed, we can calculate the APR. For a 30 year fixed loan such as this, the true loan amount is amortized for the loan period using the interest rate. In our example $400,000 amortized for 30 years at 5.00% has a payment of $2,147.29 per month paying principal and interest.
To calculate the APR, we use the same payment –$2147.29 every month for 30 years– to pay off an Amount Financed of $393,372.22 (loan amount less costs) to reach an APR of 5.141%. So the APR is higher than the interest rate because the Amount Financed is lower than the loan amount for the same monthly payment and term.
ARMs–Adjustable Rate Mortgages
If you are taking out an adjustable rate mortgage (ARM), you may as well just throw the Truth in Lending Disclosure out the window. The TIL is allowed to be based on the introductory interest rate through the entire life of the loan. Your adjustable rate mortgage, however, will reset its interest rate after 3, 5, 7, or 10 years depending on the type of product. There’s no way to predict where interest rates will be in the future, so the Truth in Lending Disclosure is inherently inaccurate for ARMs.
Explaining the Truth in Lending Disclosure is one of the many functions of a Massachusetts real estate closing attorney. In other states which aren’t required to use closing attorneys, they will not explain these complicated forms to you.
Since Nov. 3rd when the Federal Reserve Bank released details of QEII (Quantitative Easing II), we have seen a very rapid rise in mortgage rates. On a national basis, the Freddie Mac 30 year fixed rate has moved from 4.20% to 5.05% this week. The 10 year Treasury has risen above 3.70% and Inflation seems to be the word of this month.
Last year at this time the 10 year was at 3.73% and it hit 4.00% on April 5th. It then started a fairly rapid descent all spring and summer to its low of 2.38% on October 8th. There were several economic events that brought this about, but the question in every mortgage company’s and consumer’s mind is “Will history repeat itself this year”?
Wishful thinkers will say YES. Many think the stock market is overbought. The Mid-East and Egypt situation is still very unstable. Inflation remains low according to the FED. Unemployment is stubbornly high and the housing market is continues to be very sluggish. Until these issues are resolved, rates cannot rise too far or consumer demand will fall and economic growth will not be sustained.
HOWEVER, there are a few wrinkles that have nothing to do with Macroeconomics that will be in play in the coming months and years.
Changes In Loan Officer Compensation
As part of the Dodd-Frank Bill, loan officers’ compensation is about to undergo a dramatic change. Loan officers will no longer be paid based on certain loan characteristics such as interest rate. The intention is to have consumers with like profiles receive the same interest rate when quoted from one loan officer to another within the same company. One the surface this makes sense. In practice, the policy is very unfriendly to the consumer, limits consumer choice, and is uncompetitive for the marketplace. Loan officers already have a fiduciary responsibility to their clients to put them in the best loan for them, while compensation to the loan officer is not a major factor. This is a higher standard than the financial planning or brokerage environment which must merely come up with a suitable product, not the best product for their clients.
The anticipated effect of this change, coupled with the reduced volume of loan transactions due to rising rates, will further increase the profit pressures on lending institutions, thereby requiring them to make their loans more profitable. This may be done through reduction of expenses and overhead (read layoffs) or higher rates to the consumer, and will eventually lead to fewer choices to the consumer as companies go out of business. The large lending institutions will then be free to control the market even more so.
Fannie/Freddie (GSE) Reform
A bigger factor is the Fannie/Freddie GSE reform now being detailed by the Treasury. This plan, which may take affect over several years, will reduce/eliminate the government’s backing of the mortgage market, except perhaps through FHA, VA and USDA loans. When the government moves to a private secondary market, those investors are going to want a greater return on their investments and rates will almost certainly rise and may do so dramatically. Less than 10 years ago 7.25% was considered a great rate!
Current programs such as a 30 year fixed rate may vanish in favor of the adjustable rate mortgages which move with the interest rate market and would be more profitable for investors. Additionally, for those programs that are somewhat or fully guaranteed by the government, I would expect the fees associated with these programs to rise substantially.
The GSE reform options include reducing the Agency Jumbo Limit to $625,000, down from $729,000 in the highest cost areas. In Massachusetts those high cost areas are Martha’s Vineyard and Nantucket Islands off Cape Cod. The highest max loan amount in other counties is $523,750. Will this reduction of loan size have a big impact? I don’t think so. Current rates may be .250% to .500% higher with portfolio lenders that offer loans over these limits, but these jumbos have come way down in rate compared to the depths of the financial crisis. Most of the risk is relieved through very strict underwriting guidelines.
I have Portfolio lenders offering under 4% on ARM rates on loans to $1MM at 5 year interest only for the right borrower! While ARMs may not be the right product for everyone, they are for certain individuals and these folks are saving tremendous sums compared to where rates were just a couple of years ago.
A big concern for for future homeowners with GSE reform will be the minimum down payment requirements. There is talk that borrower’s may be required to put down 10 or 20% to qualify. Some major lenders have suggested 30%. Yeah, that’ll work…not. If that becomes the requirement you can kiss home ownership goodbye for the next generation or so, and rents will rise very rapidly.
I certainly recognize the need for GSE reform. Taxpayers have been getting killed by the losses from the mortgage giants, and the bleeding will not stop anytime soon. The plan as outlined by the Obama administration will gradually make changes to the GSEs over 5-7 years. But hopefully the market will understand what will be happening well in advance of the changes occuring.
Interest Rate Predictions For 2011 and Beyond
So what do I think? I think (unfortunately) rates will:
increase to 5.875%-6.125% for a 30 year fixed rate by the end of 2011;
increase to 6.50% by end of 2012; and
level out at closer to 7% by 2013.
By that time hopefully there will be a more clear path to GSE reform.
I want low rates. It’s good for my business, helps pay for my mortgage, and keeps the house heated.
All of this rate speculation, however, could be meaningless if Congress decides to finally act on the deficit. If they do, then rates could stay low for a very long period. One thing is for sure, my 3 kids are going to see a very different economic and housing landscape when they are ready to buy a home.
To see the the full report on Reforming America’s Housing Finance Market, click here .
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
