Mortgage Slang 101 – Mortgage Insurance, Brett Reichel, Brettreichel.com


Mortgage insurance is viewed nearly universally as a bad thing, but in reality, it’s a tool to be used that is very good for home buyers, the housing market and the economy in general.

Why do many complain about mortgage insurance?  Because it’s expensive, and sometimes difficult to get rid of when it’s no longer necassary.  If that’s the case, why do I say it’s good for buyers and the economy?  Because it’s a tool that allows people to buy a home with less than twenty percent down.

Mortgage insurance insures the lender against the risk of the buyers default on the loan.  It does NOT insure the buyers life, like many people think.

The single biggest hurdle for home buyers is accumulating an adequate down payment.  Lenders want buyers to put twenty percent down for two reasons.  First, a buyer with a large down payment is less likely to quit making their payments.  Second, if a buyer does default, the more the buyer put down usually means more equity in the house when the lender forecloses, which means the lender loses less money.

But, if a buyer wants to buy a $200,000 and has to put up a twenty percent down, that will equal a $40,000 down payment!  Hard to save up, for most buyers.  BUT, with the use of mortgage insurance, that buyer might be able to put as little as $6,000 down!  A lot easier to save.

So, mortgage insurance can be a very benficial tool.

With that being said, don’t let your lender shoehorn you into only considering monthly mortgage insurance.  There are other options such as single premium mortgage insurance, or “split” mortgage insurance.  These programs can be more expensive up front, but sometimes much less expensive over time.  They don’t work for everyone, but they certainly should be looked into.

 

Brett Reichel
Brettreichel.com

FHA Sets New Premium Structure for 15- and 30-Year Loans to Boost Capital Reserves , by Nationalmortgageprofessional.com


Logo of the Federal Housing Administration.

Image via Wikipedia

As part of ongoing efforts to strengthen the Federal Housing Administration’s (FHA) capital reserves, FHA Commissioner David H. Stevens has announced a new premium structure for FHA-insured mortgage loans increasing its annual mortgage insurance premium (MIP) by a quarter of a percentage point (0.25) on all 30- and 15-year loans. The upfront MIP will remain unchanged at one percent. This premium change was detailed in President Obama’s fiscal year 2012 budget and will impact new loans insured by FHA on or after April 18, 2011.

“After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market,” said Stevens. “This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.”

The proposed change was announced last week as part of the Obama Administration’s report to Congress, which outlined the Administration’s plan to reform the nation’s housing finance system. The Administration’s housing finance plan also recommended that Congress allow the present increase in FHA conforming loan limits to expire as scheduled on Oct. 1, 2011.

This premium change enables FHA to increase revenues at a time that is critical to the ongoing stability of its Mutual Mortgage Insurance (MMI) fund, which had capital reserves of approximately $3.6 billion at the end of FY 2010. The change is estimated to contribute nearly $3 billion annually to the Fund, based on current volume projections. It is vital that HUD take action to ensure that FHA will continue to serve its dual mission of providing affordable homeownership options to underserved American families and first-time homebuyers while helping to stabilize the housing market during these tough times.

On average, new FHA borrowers will pay approximately $30 more per month. This marginal increase is affordable for almost all homebuyers who would qualify for a new loan. Existing and HECM loans insured by FHA are not impacted by the pricing change.

FHA will continue to play an important role in the nation’s mortgage market in 2011. President Obama’s FY 2012 budget projects the FHA will insure $218 billion in mortgage borrowing in 2012. These guarantees will support new home purchases and re-financed mortgages that significantly reduce borrower payments.

Conventional Wisdom: 6 Things You Need to Know About Private Monthly MI, by Cecilia Farley MGIC


Recently, the Federal Housing Administration (FHA) made a change to its premium pricing structure: lowering the upfront premium amount from 2.25% to 1% and raising its monthly premium from .50% to .85% for 30-year loans with 5% or more down and from .55% to .90% for 30-year loans with less than 5% down. This change has made some people anxious and others just don’t care. What does this change mean to today’s homebuyers? Is this a good change or not?

Well, that depends. For borrowers with lower credit scores, an FHA loan may continue to be the best option. For borrowers with higher credit scores, private mortgage insurers offer cheaper alternatives.

Even FHA commissioner David Stevens said, in an article that appeared in the National Mortgage News on September 27, 2010, “We have actually made GSE loans with private mortgage insurance a better option for some homebuyers.”

Private mortgage insurance (MI) has become a better option because private mortgage insurance companies have made changes, too. In response to the housing and economic downturn many private companies, including mortgage insurers tightened, however,  as the economy began to recover most have spent the majority of 2010, opening up markets and normalizing guidelines and some have altered their pricing . The result is private MI options that are competitive with FHA, especially for borrowers of credit scores of 720 or higher.

 

Here are 6 things you need to know about the Monthly MI premium plan offered by private MI insurers:

 

  1. No upfront premium: While all MI companies offer premium plans that allow for an upfront premium, the most popular premium structure by far in the industry is the Monthly MI plan where no upfront payment is needed. Borrowers choosing an FHA loan must either pay an additional 1% at closing or finance the amount into their loan.
  2. Lower loan amount: Most FHA borrowers choose to finance that upfront premium into the loan and spread it over the life of the loan, increasing their debt. With a private MI Monthly premium, there is no upfront premium and no need to increase the loan amount.

  3. Greater equity: Because there was no upfront premium to finance into the loan with a private MI Monthly premium, the borrower is put in a better equity position right from the start.

 

  1. Lower or comparable monthly payment: Here is where homebuyers and real estate professionals should rely on a professional loan originator, because several variables will come into play, especially the borrowers’ credit scores.

    For instance, at MGIC, the leading private mortgage insurance company, a borrower with a 720 credit score and 5% downpayment will pay a monthly premium rate of .67%, compared to FHA’s premium rate of .85% for a borrower with the same score and downpayment. But remember that FHA also charges a 1% upfront premium!  So it’s important to “do the math” to see which option is actually better for the borrower. In many cases, going the private MI route results in a lower monthly payment, compared to FHA.

 

  1. Lower total MI cost: Because there is no upfront premium and often a lower monthly premium, the amount paid for mortgage insurance can be dramatically less with private MI compared to FHA. For example, on a $150,000 loan where the borrower put 5% down and had a credit score above 720, the borrower will pay more than $2,500 more in MI costs over 3 years with FHA compared to MGIC’s Monthly MI.
  2. Cancellation: Fannie Mae and Freddie Mac have more flexible rules for cancellation than FHA, meaning a homebuyer using private MI may be able to cancel the monthly MI payment sooner than with FHA, saving even more money over the life of the loan.

It’s obvious that checking out all the options can really pay off for savvy lenders and homebuyers. To find out which is the better option, all the MI companies provide calculators that allow originators to compare FHA and private MI premium plans. (MGIC’s calculator is located at: www.mgic.com/calculator)

Cecilia Farley – MGIC
Account Manager
Cell (503) 869-5732
cecilia_farley@mgic.com

.

 

MGIC (www.mgic.com), the principal subsidiary of MGIC Investment Corporation, is the founder and leader of the private mortgage insurance industry, serving more than 3,300 lenders with locations across the country and Puerto Rico.

Nearly 40 Percent of Purchase Mortgages in 2010 FHA Loans,


FHA loans were used to close 38 percent of all home purchase mortgages, including 60 percent of all African-American and Hispanic home purchases, during the nine-month period ending in June 2010.

The FHA’s single-family insurance program also accounted for nine percent of all refinanceloans during that time period.

And recently originated loans actually boosted the FHA’s capital resources by $1.5 billion since last year to $33.3 billion, their highest level ever.

Unfortunately, loans originated prior to 2009 continue to be the downfall of the FHA, namely so-called “seller-financed down payment assistance loans,” which have already chalked $6.6 billion in losses.

They’re ultimately expected to cost the FHA $13.6 billion, which is why they were eventually banned.

In fact, without these loans, the FHA’s capital ratio would have remained above the congressionally mandated two percent threshold.

Now the FHA’s capital ratio is around .50 percent, and is expected to near two percent in 2014 and finally exceed the statutory requirement in 2015.

Recent Changes Should Save the FHA

That’s due in part to recent changes made at the FHA, including the introduction of a minimum credit score (500) and higher insurance premiums.

Over the past year, the FHA insured $319 billion in single-family mortgages for 1.75 million households, including 882,000 first-time homebuyers.

Additionally, it helped 450,000 borrowers avoid foreclosure through loss mitigation actions, and provided refinance loans to 556,000 borrowers, savings households an average of $140 a month on mortgage payments.

An FHA loan allows borrowers to put down as little as 3.5 percent to obtain financing, making it a popular choice for prospective homeowners these days.

FHA Lending Volume Since 2000

fha volume

 

Fha Loan Limits Get More Flexible, Thetruthaboutmortgage.com


Logo of the Federal Housing Administration.

Image via Wikipedia

A FHA loan requirement that the sum of all liens not exceed the maximum geographical loan limit has been eliminated, according to a Mortgagee Letter from HUD.

Previously, the sum of all liens (first and second mortgages) could not exceed the geographical maximum mortgage limit for both purchase and refinance transactions.

In other words, even if the first mortgage was below the maximum loan limit, an associated second mortgage could push it beyond the limit and disqualify the loan from FHA financing.

For example, in Los Angeles county the maximum loan amount for a FHA loan is $729,750, meaning a loan of that size wouldn’t qualify for FHA financing if it had a second mortgage behind it.

Going forward, only the FHA-insured first lien is subject to this maximum loan limit.

However, FHA still requires that the combined loan amount of the FHA-insured first mortgage and any subordinate lien(s) not exceed the applicable FHA loan-to-value (LTV) ratio, which is generally 96.5 percent.

The FHA has made a number of changes recently to improve its balance sheet, including the introduction of a minimum credit score requirement and higher mortgage insurance premiums.

FHA loans accounted for a staggering 37 percent of all first mortgages in 2009, up from 26 percent in 2008 and just seven percent in 2007.

After Foreclosure, a Focus on Title Insurance, Ron Lieber, Nytimes.com


When home buyers and people refinancing their mortgages first see the itemized estimate for all the closing costs and fees, the largest number is often for title insurance.

This moment is often profoundly irritating, mysterious and rushed — just like so much of the home-buying process. Lenders require buyers to have title insurance, but buyers are often not sure who picked the insurance company. And the buyers are so exhausted by the gauntlet they’ve already run that they’re not interested in spending any time learning more about the policies and shopping around for a better one.

Besides, does anyone actually know people who have had to collect on title insurance? It ultimately feels like a tax — an extortionate one at that — and not a protective measure.

But all of the sudden, the importance of title insurance is becoming crystal-clear. In recent weeks, big lenders likeGMAC Mortgage, JPMorgan Chase and Bank of Americahave halted many or all of their foreclosure proceedings in the wake of allegations of sloppiness, shortcuts or worse. And a potential nightmare situation has emerged that has spooked not only homeowners but lawyers, title insurance companies and their investors.

What would happen if scores of people who had lost their homes to foreclosure somehow persuaded a judge to overturn the proceedings? Could they somehow win back the rights to their homes, free and clear of any mortgage? But they may not be able to simply move back into their home at that point. Banks, after all, have turned around and sold some of those foreclosed homes to nice young families reaching out for a bit of the American dream. Would they simply be put out on the street? And then what?

The answer to that last question may depend on whether those new homeowners have title insurance, because people who buy a home without a mortgage can choose to go without a policy.

Title insurance covers you in case people turn up months or years after you buy your home saying that they, in fact, are the rightful owners of the house or the land, or at least had a stake in the transaction. (The insurance may cover you in other instances as well, relating to easements and other matters, but we’ll leave those aside for now.)

The insurance companies or their agents begin any transaction by running a title search, sifting through government filings related to the property. They do this before you buy a home or refinance your mortgage to help sort out any problems ahead of time and to reduce the risk of your filing a claim later.

But sometimes they miss things, and new issues can arise later.

For instance, the person doing the title search may not notice that a home equity loan is still outstanding or that a contracting firm filed a lien against the owner years ago. That could create problems for you later, when you try to sell the home.

Then there are the psychodramas that can ensue. The previous owner’s long-lost heirs or a previously unknown love child could show up, saying that they never agreed to the sale of the property. Or perhaps there was fraud against a seller who was elderly or had a mental disability, or forgery of an estranged spouse’s signature. It’s rare, but it happens, and when it does, your title insurance company is supposed to provide legal counsel or settle with whomever is making a claim.

Title insurance companies would like you believe that they are the good guys standing behind you. After all, you are the customer who owns the policy.

In fact, many of the title insurance companies are more concerned about the real estate agents, lawyers and lenders who can steer business their way. The title insurance companies are well aware that most people do not shop around for title insurance, even though it’s possible to do so — say through a Web site like entitledirect.com.

While the title insurers are not supposed to kick back money directly to companies or brokers that send business their way, various government investigations over the years have turned up all sorts of cozy dealings that make you shake your head in disgust.

But since you have to buy the insurance if you need a mortgage, there is not much you can do except hold your nose.

That’s what John Kovalick did in January when he bought a foreclosed house in Deltona, Fla., for $102,000 from Deutsche Bank. But in recent weeks, he’s seen the headlines about other banks halting foreclosures and wondered whether something might have gone wrong with the foreclosure on his new house. A spokesman for Deutsche Bank declined comment.

Mr. Kovalick is not the only one pondering what could go wrong. While the banks were pressing the pause button on many foreclosures, some title insurers were growing concerned as well.

On Oct. 1, Old Republic National Title Insurance Company released a notice forbidding any agents or employees to issue new policies on homes that had been recently foreclosed by GMAC Mortgage or Chase.

Clearly, the title insurer was also worried about a situation in which untold numbers of former homeowners have their foreclosures overturned. At that point, those individuals might claim the right to take back their old homes, but they’d also be responsible for, say, a $400,000 loan on a home that is worth half that.

So what would happen next? The banks that foreclosed might start the process over again. At that point, lawyers for the people who had been foreclosed upon might take the next logical step and try to show that the banks never had the documents to prove ownership of the mortgage in the first place. The banks might settle at that point, writing checks to everyone who had gone through a disputed foreclosure in exchange for each of them giving up the title.

But if banks did not settle, or the evicted homeowners refused to settle and fought on and won, they might end up owning their homes once again and not owing the bank either.

Or banks might agree to slice a big chunk off the remaining balance in exchange for a release from any liability for the errors it made.

At that point — and again, this is what Old Republic and investors in other title insurers fear — those homeowners might actually want to move back in. But some foreclosed homes were sold by the banks to others who now live there. And those new residents would have big, fat title insurance claims if their predecessors ever turned up at their doorsteps, proclaimed them trespassers and told them to leave.

“All of these Joe Schmos who did everything legally would then be in the middle of it, too,” said Mr. Kovalick, who manages an auto repair shop and is now hoping not to be one of those Schmos.

“Now, you’d have two total disasters,” he said. “How would you like to be the judge to get that first case?”

While homeowners like Mr. Kovalick may have title insurance, it generally covers them only for the purchase price of the home. When you buy a home out of foreclosure, however, it often needs a lot of work. “If I bought it at $200,000 and it’s a steal but I had to gut it and sink $100,000 more in, my recovery is limited if there is a problem,” said Matthew Weidner, a lawyer in St. Petersburg, Fla.

Indeed, this possibility has occurred to Mr. Kovalick, who has plans to put an addition on his home and is asking how he could extract that investment if someone ever turned up on his doorstep and asked him to leave. “What do I do, take the paint off the walls and the custom blinds off the windows?”

Chances are, it will not come to that. After all, title insurers could settle with the previous residents, allowing them to walk away with a big check to restart their lives elsewhere.

Still, for anyone considering buying a bargain home out of foreclosure anytime soon, consider asking your title insurer if any special riders are available that can cover appreciation on your home in the event of a total loss.

That said, if you can possibly help it, stay away from foreclosed homes until the scene shakes out a little bit.

Some people will undoubtedly make a fortune investing in these properties in the next few months. But if your down payment represents most of what you have in the world, it’s hard to justify betting it all on a situation like this one.

 

 

IRS Offers Tax Break for Homeowners With Defective Drywall, Joaquin Sapien, Propublica.org


The federal government has made a modest step toward offering some financial relief to homeowners dealing with contaminated drywall. The Internal Revenue Serviceannounced Thursday that it will allow homeowners to write off expenditures they have or will incur trying to fix their homes.

The Consumer Product Safety Commission has recommended (PDF) that homeowners remove all the drywall, along with the electrical, gas and fire safety systems — essentially gutting the homes. The drywall, most of it imported from China, emits high amounts of hydrogen sulfide, which can corrode wiring and other electronic appliances, causing refrigerators and air conditioners to fail. Homeowners also have complained that the drywall triggers respiratory problems, nosebleeds and severe headaches.

According to the new IRS policy, homeowners can treat the amount they paid for these repairs as a “casualty loss in the year of payment.” Casualty losses are typically reserved for repairs homeowners have made after a natural disaster or sudden event.

The policy includes some important caveats. For example, if a homeowner has filed a claim with an insurance company, the homeowner can write off only 75 percent of the amount the insurance didn’t cover. Homeowners also must itemize their federal tax returns. Deductions will be granted only for amounts that exceed 10 percent of the taxpayer’s adjusted gross income for the year the claim is filed and for amounts that exceed $500.

Taxpayers who have already filed tax returns for the year in which they paid to fix their houses have three years to amend their returns and claim the deduction.

Most insurance companies are not reimbursing homeowners for drywall problems. In fact, some homeowners say their insurers canceled their policies after they filed a claim.

The tax deduction helps only those homeowners who can afford to repair their homes, which can be very expensive. Ridding a house of its drywall and wiring, as the product safety commission recommends, can cost $100,000 or more.

Three U.S. senators — Bill Nelson, D-Fla. and Virginia Senators Mark Warner and Jim Webb — along with Virginia Congressman Glenn Nye first began asking the IRS to offer such a deduction in June 2009, and have written additional joint letters since then. Webb also filed amendments to two separate bills that would have required the IRS to offer the casualty loss deduction — but the amendments weren’t included in the final legislation.

“This is welcome and long overdue news,” Nelson said. “This tax relief is just another important step to help drywall victims piece their lives back together.”

On Wednesday, the day before the IRS made its announcement, Warner called Commissioner Doug Shulman and urged him again to take action, Warner’s spokesman said.

“This is a key step forward in our efforts to provide some measure of relief to homeowners who have been struggling financially due to contaminated drywall issues,” Warner said in a statement after the IRS announcement. “Our office continues to work individually with Virginia families, including intervention with their mortgage lenders, and we will continue to look for ways we might be helpful to these families.”

Webb said the IRS action was “an important step forward for thousands of American families whose homes have been contaminated with Chinese drywall.”

“I have heard directly from my constituents about the emotional, physical, and financial hardship they continue to face as they struggle to maintain payments on houses that have been rendered uninhabitable, while also paying for a place to live and often dealing with corresponding health issues,” Webb said in a statement. “I will continue working to ensure that those affected receive the necessary federal attention.”