PRODUCTS and PRICING

Transcription

1 PRODUCTS and PRICING Rick Herrick, CMP President, MBBA-NH Cell:

2 TYPES OF MORTGAGE LOANS As of January 10, 2014 all residential mortgages must meet the definition of being QM (Qualified Mortgage) or non - QM Government loans insured or guaranteed by the federal government FHA, VA, Rural Development Conventional loans insured by private mortgage insurance companies, A/K/A PMI - conforming or non-conforming Portfolio conventional loans held on a lender s own books known as their portfolio 2

3 As part of the implementation of the Financial Reform Act of 2008, legislation known as QM (Qualified Mortgage), ATR (Ability to Repay Rules) and other regulations aimed at improving the quality of mortgage loans went into effect January 10 th Stricter qualifying ratio of 43% overall (firm) - Qualifying income subject to higher scrutiny - Residual income formula used, as well as standard ratio analysis in some cases - Source of income used in qualifying must be stable and likely to continue at the same amount or greater - Limitation on amount of closing costs known as 3% Rule 3

4 GOVERNMENT LOANS The FHA, or Federal Housing Administration, provides mortgage insurance on loans made by FHA-approved lenders. FHA insures these loans on single family and multi-family homes in the United States and its territories. It is the largest insurer of residential mortgages in the world, insuring tens of millions of properties since 1934 when it was created. 4

5 GOVERNMENT LOANS - FHA Benefits of an FHA Loan, borrowers that use them are able to take advantage of benefits and protections unavailable with most traditional mortgage loans. Loans through the FHA are insured by the agency, so lenders are more lenient. Here are a few benefits you can enjoy with an FHA loan: Easier to Qualify - FHA makes loans available with lower requirements Competitive Interest Rates - FHA loans usually offer lower interest rates Lower Fees - In addition to lower interest rates, you can also enjoy lower costs on other fees like closing costs, mortgage insurance and others. Bankruptcy / Foreclosure - As long as you meet other requirements that satisfy the FHA, such as re-establishment of good credit, solid payment history, etc., you can still qualify. No Credit - The FHA usually requires two lines of credit for qualifying applicants. If you don't have a sufficient credit history, you can try to qualify through a substitute form. 5

6 GOVERNMENT LOANS - FHA Credit History and Score Requirements For those interested in applying for an FHA loan, applicants are now required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is currently at around 3.5 percent. Credit Scores According to the FHA, the following credit score information applies: Credit scores at or above 580: eligible for maximum financing Credit scores between 500 & 579: limited to a maximum LTV of 90%. Credit scores less than 500: not eligible for FHA insured financing. When it comes to credit, the above data is the FHA minimum. The FHA cannot force lenders to issue credit at these minimums your lender may have higher credit requirements. Many financial institutions look for a baseline credit score of 620 or better. Having little or no credit history is not necessarily a barrier to an FHA home loan. Use non traditional credit qualifying issues if your credit history is minimal. 6

7 GOVERNMENT LOANS - FHA Debt-to-Income Ratio The FHA requires borrowers to have stable, dependable income that is verifiable by the lender. Borrowers generally must have a debt to income ratio including the proposed mortgage payment of no greater than 43% which means the amount of total monthly debt cannot consume more than 43% of the borrower s total monthly income. Also, the amount of a proposed mortgage payment alone that includes principal, interest, taxes and insurance cannot be more than 31% of the borrower s monthly income. It s important to note that FHA requirements may be more forgiving than those of an individual Lender. FHA loan rules do provide exceptions for borrowers who may exceed these limits when there are compensating factors. 7

8 GOVERNMENT LOANS - FHA Down Payments and FHA Mortgage Insurance All FHA home loans require a down payment. Those eligible for maximum financing must provide at least 3.5% of the price of the home as a down payment. Those who qualify for a LTV of 90% will need a 10% down payment or higher, depending on the terms of the loan agreement. For most FHA home loans, the borrower must pay: An Up Front Mortgage Insurance Premium or UFMIP An annual insurance premium, collected in monthly installments. The FHA official site states the monthly premium varies by the type of FHA home loan. (New purchase home loans may have different requirements than refinancing loans, etc.) The premium is based on the outstanding principal balance. 8

9 GOVERNMENT LOANS - FHA FHA Loan Limits The FHA does not set a single, maximum loan amount for FHA insured home loans. The amount of your FHA home loan depends on a combination of factors including the local market in your county or zip code, the appraised value of the property, and the amount you may qualify to borrow based on your credit and payment history. The FHA official site features a list of loan limits by county Single Duplex Tri-Plex Four-plex $271,050 $347,000 $419,425 $521,250 (Belknap, Coos, Cheshire, Grafton, Merrimack, Sullivan, Carroll Counties) $295,550 $378,350 $457,350 $568,350 (Hillsborough County) $470,350 $602,100 $727,850 $904,500 (Strafford and Rockingham Counties) 9

10 GOVERNMENT LOANS - FHA FHA (summary) - Down payment as low as 3.5% - Allows the borrower to use 100% gift funds for the down payment -Loan limits are set by county 10

11 GOVERNMENT LOANS cont d. FHA (summary) - Fixed and ARM products available - Declining markets not a problem, more flexible underwriting guidelines, ratios, etc. - Sellers allowed to contribute up to 6% of the sales price to help with closing and settlement costs. 11

12 GOVERNMENT LOANS VA The main purpose of the VA home loan program is to help veterans finance the purchase of homes with favorable loan terms and at a rate of interest which is usually lower than the rate charged on other types of mortgage loans. For VA housing loan purposes, the term "veteran" includes certain members of the Selected Reserve, active duty service personnel and certain categories of surviving spouses (provided they do not remarry.) 12

13 GOVERNMENT LOANS VA VA helps Service members, Veterans, and eligible surviving spouses become homeowners. As part of their mission, they provide a home loan guaranty benefit and other housing-related programs to buy, build, repair, retain, or adapt a home for their own personal occupancy. VA Home Loans are provided by private lenders, such as banks and mortgage companies. VA guarantees a portion of the loan, enabling the lender to provide more favorable terms. 13

14 GOVERNMENT LOANS VA VA loans offer the following important features: Ensure that all veterans are given an equal opportunity to buy homes with VA assistance, without regard to their race, color, religion, sex, handicap, familial status, or national origin. No downpayment (unless required by the lender); the purchase price is more than the reasonable value of the property as determined by VA, or the loan is made with graduated payment features. A freely negotiable fixed interest rate competitive with conventional mortgage interest rates The buyer is informed of the estimated reasonable value of the property. Limitations on closing costs. An assumable mortgage. The assumption must be approved in advance by the lender or VA. Generally, this involves a review of the creditworthiness of the purchaser (ability and willingness to make the mortgage payments). Forbearance extended to VA homeowners experiencing temporary financial difficulty. 14

15 GOVERNMENT LOANS VA VA Benefits Purchase Loan help purchase a home at a competitive interest rate often without requiring a downpayment or private mortgage insurance. Cash Out Refinance loan allow cash out of a home s equity to take care of concerns like paying off debt, funding school, or making home improvements. Interest Rate Reduction Refinance Loan (IRRRL): also called the Streamline Refinance Loan helps obtain a lower interest rate by refinancing an existing VA loan. Native American Direct Loan (NADL) Program: helps eligible Native American Veterans finance the purchase, construction, or improvement of homes on Federal Trust Land, or reduce the interest rate on a VA loan. Adapted Housing Grants: help Veterans with a permanent and total serviceconnected disability purchase or build an adapted home or to modify an existing home to account for their disability. Other Resources: many states offer resources to Veterans, including property tax reductions to certain Veterans 15

16 GOVERNMENT LOANS VA Eligibility Requirements The length of service or service commitment and/or duty status may determine eligibility for specific home loan benefits. Purchase Loans and Cash-Out Refinance: VA-guaranteed loans are available for homes for personal occupancy. To be eligible, one must have a good credit score, sufficient income, a valid Certificate of Eligibility (COE), and meet certain service requirements. To obtain a Certificate of Eligibility (COE), one must have been discharged under conditions other than dishonorable and meet related service requirements. 16

17 GOVERNMENT LOANS VA Obtain a Certificate of Eligibility (COE) Servicemembers, Veterans, and National Guard and Reserve Members Apply online: go to the ebenefits portal. Apply through your lender: Most lenders have access to the Web LGY system. This Internet-based application can establish eligibility and issue an online COE in a matter of seconds. Apply by mail: Use VA Form , Request for Certificate of Eligibility. Surviving Spouses Can take the VA form to their lender for processing. Call and follow the prompts for Eligibility. Mail completed form and DD214 (if available) to: VA Loan Eligibility Center Attn: COE (262) PO Box Decatur, GA

18 GOVERNMENT LOANS VA The Guaranty and limits The guaranty means the lender is protected against loss if you or a later owner fail to repay the loan. VA will guarantee up to 50 percent of a home loan up to $45,000. For loans between $45,000 and $144,000, the minimum guaranty amount is $22,500, with a maximum guaranty, of up to 40 percent of the loan up to $36,000, subject to the amount of entitlement a veteran has available. For loans of more than $144,000, the maximum guaranty is the lesser of 25% or $104,250 which is 25% of the Freddie Mac conforming loan limit for a single family residence for (This figure will change yearly.) 18

19 GOVERNMENT LOANS VA Restoration of Entitlement Veterans can have previously-used entitlement "restored" to purchase another home with a VA loan if: The property purchased with the prior VA loan has been sold and the loan paid in full, A qualified Veteran-transferee (buyer) agrees to assume the VA loan and substitute his or her entitlement for the same amount of entitlement originally used by the Veteran seller. The entitlement may also be restored one time only if the Veteran has repaid the prior VA loan in full, but has not disposed of the property purchased with the prior VA loan. Remaining entitlement and restoration of entitlement can be requested through the VA Eligibility Center by completing VA Form

20 GOVERNMENT LOANS VA Funding fees A funding fee must be paid to VA unless the veteran is exempt from such a fee because he or she receives a minimum of 10% VA disability compensation. If a veteran is awarded disability compensation after paying a funding fee, he/she can apply for a refund of this funding fee, so long as the beginning date of the disability is prior to the closing date of the home mortgage. The VA Funding fee may be paid in cash or included in the loan amount. Closing costs such as VA appraisal, credit report, loan processing fee, title search, title insurance, recording fees, transfer taxes, survey charges, or hazard insurance may not be included in the loan. However, the seller may pay these on behalf of the VA borrower. 20

21 GOVERNMENT LOANS VA Purchase and construction loans funding fee Type of Veteran Down Payment First Time Use Regular Military Reserves/Natio nal Guard None 5%-9.99% 10% or more None 5%-9.99% 10% or more 2.15% 1.50% 1.25% 2.4% 1.75% 1.5% Subsequent Use for loans from 1/1/04 to 9/30/ %* 1.50% 1.25% 3.3%* 1.75% 1.5% 21

22 GOVERNMENT LOANS VA Cash-out refinancing loans funding fee Type of Veterans Percentage for First Time Use Regular Military 2.15% 3.3%* Reserves/National Guard 2.4% 3.3%* Percentage for Subsequent Use 22

23 GOVERNMENT LOANS VA Other types of loans funding fee Type of Loan Interest Rate Reduction Refinancing Loans Percentage for Either Type of Veteran Whether First Time or Subsequent Use.50% Manufactured Home Loans 1.00% Loan Assumptions.50% 23

24 GOVERNMENT LOANS VA VA- Summary - Restricted to individuals qualified by military service or other entitlements - In most cases no down payment is required - No monthly mortgage insurance; VA acts as a co-signer with eligible borrowers 24

25 GOVERNMENT LOANS VA- Summary - Seller is allowed to pay for closing costs and settlement items on behalf of buyer(s). - Loan principle generally follows FNMA/FHLMC conforming limits - Self-sustaining through use of VA funding fee which is waived for 10% or greater disability. 25

26 GOVERNMENT LOANS Rural Development (RD) Single Family Housing Programs provide homeownership opportunities to low- and moderate-income rural Americans through several loan, grant, and loan guarantee programs. The programs also make funding available to individuals to finance vital improvements necessary to make their homes decent, safe, and sanitary. We will detail the Guaranteed Loan Program For information on all programs, visit rurdev.usda.gov/nhvthousing 26

27 GOVERNMENT LOANS RD Guaranteed Housing Loans, Applicants for loans may have an income of up to 115% of the median income for the area. Families must be able to afford the mortgage payments, including taxes and insurance. In addition, applicants must have reasonable credit histories. Direct Housing Loans, Purpose: Section 502 loans are primarily used to help low-income individuals or households purchase existing homes in rural areas including modular and manufactured homes; funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities. 27

28 GOVERNMENT LOANS RD WHY USE USDA/RURAL DEVELOPMENT GUARANTEE PROGRAM? Increases your purchasing power. No down-payment required. Loans can be for the total purchase price of the home. The up-front guarantee fee of 2.0% can be included in the loan amount. Apply at a local lender a lender of your choice. Qualifying ratios of 29/41 are generous. If you have good credit scores over 660, ratios can be stretched to expand your purchasing power. If you have no credit history, lenders can use other alternatives to check your creditworthiness. No maximum purchase price limits - The only limiting factor is your purchasing power as determined by the ratios 28

29 GOVERNMENT LOANS RD OVERVIEW OF THE RURAL DEVELOPMENT (RD) GUARANTEE PROGRAM: The purpose is to provide low cost mortgage insurance for loans financed through local lenders for applicants who need insurance. Loans can be used to purchase a single family home, including installation of a new mobile home, modular home, or refinance an existing USDA/RD direct loan. Unlike the USDA/RD direct program, these loans are not subsidized. There is no recapture of subsidy in the guaranteed program. Summary of features for purchase transactions include: 102% LTV Financing. One-time up-front fee of 2% for acquisition and.4% annual fee Fixed rate 30 year term. No purchase price limits. Income up to 115% of county Gifts and seller contributions can be used to pay closing costs Escrow accounts must be established for taxes and insurance. 29

30 GOVERNMENT LOANS RD WHAT ARE THE PROPERTY REQUIREMENTS The property must be a single family unit or an approved condominium unit. Homes must be located in designated rural areas. In New Hampshire, the following communities are ineligible: Concord, Derry, Dover, Hudson, Keene, Londonderry, Manchester, Merrimack, Nashua, Portsmouth, Rochester, Salem, and parts of Goffstown and Hooksett. All other communities are eligible. Homes may be new construction stick built, modular, or new manufactured housing is acceptable on individual sites. Camps, existing mobile homes, multifamily dwellings and Income-producing property cannot be financed. 30

31 GOVERNMENT LOANS RD Guaranteed Program: Maximum income limits, by family size and by area of the State are shown below. Household Size: 1-4 PERSON 5-8 PERSON. $86,700 to $114,444 (Belknap, Carroll, Cheshire, Coos, Grafton and Sullivan counties) $91,800 to $121,176 (Hillsborough county) $88,550 to $116,886 (Manchester metro) $91,450 to $120,714 (Merrimack county) $93,450 to $123,354 (Nashua Metro) $100,900 to $133,188 (Portsmouth-Rochester metro) 31

32 GOVERNMENT LOANS HECM FHA Reverse Mortgages (A/K/A) HECM exempt from QM definition) - Must be 62 years of age or older to be eligible - May be an equity line, closed end loan or annuitized payment based on life expectancy of borrower(s). - No credit or income requirements, loan is collateral-based. 32

33 GOVERNMENT LOANS cont d. FHA Reverse Mortgages (A/K/A HECM ) - No restrictions on use of funds - No required payments from borrower(s) - Borrower(s) retain title to home - Must maintain and insure property and keep property taxes paid. 33

34 GOVERNMENT LOANS cont d. FHA Reverse Mortgages (A/K/A HECM ) - Must remain in property for at least one month out of every twelve - Principle balance comes due if borrower passes away or moves out and stays out for more than 12 consecutive months - Borrower(s) retain title to home 34

35 CONVENTIONAL LOANS Conforming - Meaning conforms to FNMA/FHLMC guidelines and now also includes QM - Fannie and Freddie establish loan amounts, terms, credit, collateral and other standards - Typically must carry PMI if down payment is less than 20%. - Seller allowed to contribute up to 3% of sales price to help with closing and settlement costs. 35

36 CONVENTIONAL LOANS Cont d Mortgage Insurance (MI) Three ways to pay - Borrower paid monthly - Borrower paid single premium - Lender paid single Premium - MI coverage and cost goes away when loan amortization schedule reaches 78% LTV or less automatically. 36

37 CONVENTIONAL LOANS cont d Types of loans - - Fixed rate for the life of the loan - Fixed rate with temporary buy-down. - Adjustable rate, A/K/A ARM - Portfolio loans (meaning held in-house) 37

38 2 Year Buydown option - Sale price: $250,000 - Loan amount: 237,500 - Note rate: 5.50% - Regular payment: 1, Buydown amount: 5,126.00* Year 1 Year 2 Year 3 $1, , , $3, (cash needed to fund) $1, (cash needed to fund) *Can be buyer funds, gift or seller concession 0 38

39 Adjustable rate loans Interest rate and monthly principle and interest payments can change over the life of the loan Rate and monthly payment change according to a pre-determined schedule In negative amortization ARMs, the rate can change but not the monthly payment. Interest difference is added to the outstanding principle with each payment. 39

40 Adjustable rate loans cont d. - With negative amortization loans, the principle increases over time, rather than being paid down. - Negatively amortized loans usually come with a balloon payment at the end of the term. - Reverse mortgages are a type of negatively amortized loan. 40

41 Adjustable rate loans cont d. - Adjustable rate loans were first developed in the high rate environment of the 1980s to help keep home-buying affordable. - Lenders were willing to accept a lower rate in the early years of the loan in exchange for a higher rate, later on. - Borrowers were helped, as well, as they could qualify for more home if the start rate was lower and that was used in qualifying. 41

42 Components of the ARM - Initial rate is typically 1% to 3% lower than the fixed rates offered at the time. - Fixed rate period is the time that the rate is fixed, or locked in, until the first and subsequent rate adjustments - The index is the variable built into the loan to determine future rate adjustments, typically LIBOR or one of the U.S. Treasury indices. 42

43 Principles of Mortgage Banking Products & Pricing Components of the ARM cont d - The margin is the constant component that is added to the (variable) index to determine rate adjustments. - Margins are a set of numbers such as 2.00% or 3.250% which is added to the index to determine the rate through the next fixed rate period. - Indices represent the rate of return a bank would receive for an investment. 43

44 Components of the ARM cont d The margin represents the amount above that rate of return the bank expects to receive for added risk in a mortgage The calculation of index + margin is referred to as the fully-indexed rate. The ATR rules now require the borrower to be qualified at the higher of the start rate, fully indexed or the projected rate as of payment #61 in the amortization schedule. 44

45 Components of the ARM cont d Caps are put into place to limit the amount the rate can increase in a given period and over the life of the loan. Interim caps are used on the periodic rate adjustments. Life of loan or lifetime caps limit the rate can increase over the entire amortization period. Common rate caps are 2% (interim) and 6% (lifetime). 45

46 Components of the ARM cont d Example of Caps 2/2/6 2 - How much rate % rise or fall in first adjustment. 2 - How much rate % rise or fall annual adjustment 6 - How much rate % rise or fall from start rate over life of loan. 5/1 ARM 2/2/6 CAPS, means the initial rate is fixed for 5 years then annual thereafter. Start of 6 th year rate could move +-2%, than annually rate could move +-2% and no more than 6% +- lifetime. 46

47 Common ARM Indices - Constant Maturity Treasury (CMT) - Treasury Bill (T-Index) - London Interbank Offering Rate (LIBOR) - Prime Rate - published in Wall Street Journal - Average Prime Offer Rate (APOR) 47

48 Common ARM Indices cont d. CMT, Treasury and LIBOR are the most commonly used indices. Approximately 80% of all ARMs, today, are based on one of these. Each index has its own advantages and disadvantages which either lead or lag changing market rates. An index is a lagging index when it rises after market rates begin to rise. A lead index is slightly ahead of market rates and would tend to rise in advance of market rates. 48

49 Interest Only Mortgages Interest only, negative amortization and terms greater than 30 years are not QM loan products. Interest only payment option loans can be fixed-rates or ARMs They allow the borrower to pay just the accrued interest every month and make their own principle reductions. Typically the interest only payment options runs for a set time frame; 3, 5, 7 or 10 years. Then the principle balance must be paid off or amortized. 49

50 Balloon Loans Balloon payment loans are also not QM loans Option to pay principle in full at a pre-determined time in loan term Often couple with interest only loan terms in first few years. Or, a commercial loan which requires the existing loan to be renewed at a particular point in the loan amortization typically 5 years. 50

51 Documentation Types & Requirements - Full Doc complete file of supporting documentation for the file: W2s, deposit statements, pay stubs, etc. Everything is verified. Only fully documented loans are now considered QM loans. - Stated Income - Income stated but not verified. Assets are verified. - No Income/ No Assets Verified Known as NINA loans. 51

52 Documentation Types & Requirements - cont d No ratios Employment and assets are verified, but debtto-income ratios are not calculated. Stated Income/Stated Assets (SISA)- Income and assets are stated but not verified. No Doc with Assets Only assets are verified. 52

53 Documentation Types & Requirements - cont d No Doc - Income, assets and even employment are neither stated on the application or verified in anyway. All of these have various levels of risk involved with the last one, the true no doc loan, being the riskiest to the lender and ultimately, in hindsight, to the borrowers as well which is why they have been ruled non QM loans by the CFPB. 53

54 Pricing - How Does a Lender Generate Revenue? - If the lender is retaining the loan as their own income-generating asset, their revenue stream comes mainly from the spread or difference between what the loan is generating for an interest rate and the lender s cost of funds. - For a depository, spread is the difference between deposit rates and loan rates. The lower the rate of interest they can afford to pay for deposits, the better the spread. 54

55 Pricing - How Does a Lender Generate Revenue cont d - If the lender is selling their production into the secondary market, their revenue will come mainly from the gain on the sale of the loan. - A second form of revenue comes from servicing the loan for the investor, although that comes as annual income based on a percentage of the dollar amount of the loans being serviced. Servicing also generates gains in the form of a servicing-released premium or SRP if the servicing contract for the loan is sold along with it. 55

56 Pricing How Does a Lender Generate Revenue cont d - Lenders also generate revenue through fees such as origination, underwriting, and other charges known as junk fees. - An additional new rule, known as the 3% rule limits the amount a lender can charge in retained fees. - When a loan is sold above par, it means that there will be a gain generated from the difference between the par rate and the actual loan note rate. This is known as yield spread. Much the same way that a loan servicing contract has value which is turned into revenue when the loan is sold, so does yield spread. 56

57 Pricing- How Does a Lender Generate Revenue cont d - Points, which are a percentage of the loan principle typically paid by the borrower but also by the seller in some situations, is another form of revenue or gain received by the originator at the time the loan is sold. - Note: there are differences both legally and in the way they operate between mortgage lenders, mortgage bankers and mortgage brokers and the way they generate their revenue. 57

58 Pricing- How Does a Lender Generate Revenue cont d Broker: Closes with lender funds, does not underwrite or service. YSP in fee sheet Correspondent: close with own funds, do not service, sell to large consolidators. SRP Direct Seller: Avoid consolidators, sell direct to GES s Depository: May keep servicing, sell to GSE s 58

59 Factors That Affect Pricing - Loan-to-value ratio - Loan purpose (cash-out, or debt consolidation vs. LCOR or limited cash-out) - Loan principle - Loan product - Margins (ARM) - Credit score of the borrower - Property type - Rate lock time line 59

60 Pricing Other Forms of Revenue Servicing released premiums or SRP This is the net value of servicing rights paid to the lender when they sell off the servicing contract for the loan as well as the loan itself. Points a percentage of the loan charged as an up-front fee to (the borrower) which increases the gain on the sold loan. 60

61 Thank You Please complete module evaluation Rick Herrick, CMP President, MBBA-NH Cell: