July 6, 2022

Bucks Blog: A Freddie Mac Rule Change May Help Some Borrowers

A change in Freddie Mac’s rules could help retiring baby boomers, and other home buyers with limited incomes but substantial financial assets, qualify for low-rate conventional mortgages.

Freddie Mac, the giant mortgage finance company, actually changed the rule two years ago. But many borrowers and loan underwriters are apparently unaware of it, according to a blog post on the company’s Web site.

Why would someone near or in retirement want to take on a mortgage? They may want to refinance an existing loan at a lower rate. Or, they may want to sell and downsize to a smaller property. The slow housing market and depressed home values have made that difficult for some, until recently.

Now, the housing market is improving, values are rebounding, and interest rates are still relatively low. Those improvements, plus the more expansive income eligibility criteria, may help more people move into new loans, said Brad German, a spokesman for Freddie Mac.

“Perhaps someone was waiting for home prices to come back so they could sell their home and responsibly combine part of the sale proceeds with a mortgage to buy a smaller home or a retirement home,” he said in an e-mail.

The change allows lenders to take into account a significant portion of a borrower’s financial assets when determining if their income qualifies them for a Freddie Mac mortgage. (Freddie Mac doesn’t make loans directly; rather, it buys them and pools them for sale to investors, and guarantees them against default.)

For instance, under the new guidelines, a portion of assets like individual retirement accounts (I.R.A.’s) and 401(k)s can count toward a borrower’s income eligibility.

The assets must be in a fully vested retirement account recognized by the Internal Revenue Service, and they can’t be subject to a withdrawal penalty. (The change doesn’t apply to accounts that are already being tapped, since that means they’ve already been taken into account in the borrower’s income.)

To determine eligibility, the lender adds up the eligible assets; multiplies the total by 70 percent; and subtracts the funds needed to complete the transaction, like down payments, closing costs and escrows. Then, the remaining amount is divided by 360 months, and counted toward the borrower’s monthly income.

Say you had an I.R.A. worth $100,000 and a down payment of $20,000, leaving $80,000 in assets to be used to determine your income for qualifying purposes. Seventy percent of $80,000 leaves $56,000, which is divided by 360 months, leaving roughly $155 a month added to your income.

The assets are separate from dividends, interest payments, trust distributions and Social Security payments, which have long been eligible for consideration when calculating a borrower’s qualifying income.

The new requirements are “a potentially big deal” for many prospective home buyers, including the “rapidly growing” population of retirees and near-retirees who would like to buy or refinance a home, Freddie Mac says.

“We want to make sure people know about this option,” Mr. German said.

Would this rule change help you obtain a mortgage?

Article source: http://bucks.blogs.nytimes.com/2013/05/24/a-freddie-mac-change-may-help-some-borrowers/?partner=rss&emc=rss

DealBook: A Mortgage Agency Pick Is Likely to Cause Conflict

President Obama nominated Representative Melvin Watt, left, on Wednesday to lead the Federal Housing Finance Agency. At right is Tom Wheeler, nominated by the president to head the Federal Communications Commission.Christopher Gregory/The New York TimesPresident Obama nominated Representative Melvin Watt, left, on Wednesday to lead the Federal Housing Finance Agency. At right is Tom Wheeler, nominated by the president to head the Federal Communications Commission.

President Obama’s overhaul of the mortgage market has been a long time coming.

But he took a significant step forward on Wednesday, announcing his intention to nominate a new director for an agency that plays a crucial role in the housing market.

The president tapped Representative Melvin L. Watt, a Democrat of North Carolina, to become the new director of the Federal Housing Finance Agency. Mr. Watt has advocated for strong measures to provide relief to struggling homeowners, including reducing how much borrowers owe on their mortgages.

“Mel understands as well as anybody what caused the housing crisis,” President Obama said on Wednesday. “He knows what it’s going to take to help responsible homeowners fully recover.”

Still, Mr. Watt’s nomination will most likely inflame long-running political battles over how much the government should do to make mortgages available and support homeowners. Most immediately, Republican senators opposed to Mr. Watt’s housing stances might try to hold up his confirmation.

“I could not be more disappointed in this nomination,” Senator Bob Corker, Republican of Tennessee and a member of the Senate Banking Committee, said in a statement.

As director of the housing agency, Mr. Watt would oversee Fannie Mae and Freddie Mac, the two taxpayer-owned mortgage finance giants that have provided enormous support to the housing market since the financial crisis of 2008. They guaranteed two-thirds of all the mortgages made last year.

The Obama administration wants to reduce government involvement but has made almost no big moves in that direction. Some critics question its resolve to scale back the role of Fannie and Freddie, which received one of the biggest bailouts of the financial crisis. They say Mr. Watt’s nomination looks like tactical maneuvering, designed in part to placate progressives in Congress who say the president has done too little to help homeowners.

“It seems like a political move when a substantive one is needed,” said Phillip L. Swagel, a professor at the University of Maryland School of Public Policy. Mark Zandi, an economist at Moody’s Analytics who has focused on housing, was also a candidate to lead the housing agency. Mr. Zandi, “seemed to be a perfect nominee,” said Mr. Swagel, who was an assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.

Consumer advocates are upset that Mr. Obama did not long ago remove Edward DeMarco, the current head of the Federal Housing Finance Agency. He effectively stopped Fannie and Freddie from cutting loan balances for stressed homeowners. Last year, Mr. DeMarco argued that such a program “would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers.”

Reducing mortgage balances could be the issue that draws the most scrutiny for Mr. Watt during the confirmation process.

Given the level of controversy around this policy, some mortgage market analysts questioned on Wednesday why the White House had nominated someone who has identified so closely with it.

But Gene B. Sperling, an assistant to the president on economic policy, said the administration stood behind Mr. Watt’s support for cutting mortgage balances. “That’s our position, and we’re not going to disqualify someone for agreeing with us,” he said.

In an interview, Mr. Watt said that, as director of the agency, he would be obliged to take into account the risk of losses to taxpayers from writing down mortgages.

“My role would be to look at this from all sides, from the homeowner’s perspective and the taxpayer’s perspective,” he said. “There are a lot of things I might have to approach differently as a director of this agency.”

Those in favor of cutting mortgages received some support on Wednesday. The nonpartisan Congressional Budget Office released a study showing that reducing the amounts borrowers owe could actually save taxpayers money by reducing the chance underwater homeowners would default and end up in foreclosure, thus causing losses to Fannie and Freddie, which own or guarantee more than half of all residential mortgages. But other analyses suggest that the approach is not a silver bullet. About one-third of borrowers who had their mortgage balances reduced by more than 20 percent went back into default within two years, according to a study by Fitch Ratings.

Despite the mortgage relief questions, Mr. Watt may still gain support in the Senate for his nomination. He is well known in Congress and sits on the powerful House Financial Services Committee. Some Republicans may vote for him.

“Having served with Mel, I know of his commitment to sustainable federal housing programs and am confident he will work hard to protect taxpayers from future exposure to Fannie Mae and Freddie Mac,” Senator Richard Burr, Republican of North Carolina, said in a statement.

While Mr. Watt is known for promoting lending to low-income and minority borrowers, he is not considered unfriendly to banks. Financial firms and insurers are among his biggest donors, in no small part because Charlotte, part of which is in Mr. Watt’s district, is a banking center.

Still, many members of Congress and analysts are eager to reduce the government’s role in housing, and feel Mr. Watt may not push hard enough to curtail the activities of Fannie and Freddie.

“It’s coming up on five years and nothing has happened,” said Edward Pinto, a resident fellow at the American Enterprise Institute.

But Mr. Watt says he’s firmly behind the administration’s plans to have the government largely withdraw from the housing market.

“I’ve indicated in committee that I am committed to finding a new model, and that model includes winding down Fannie and Freddie,” he said. As director of the housing agency, “I’d be ideally situated to facilitate that.”

Should Mr. Watt fail to win Senate confirmation, the White House could name him as a recess appointment.

Article source: http://dealbook.nytimes.com/2013/05/01/a-mortgage-agency-pick-is-likely-to-cause-conflict/?partner=rss&emc=rss

News Analysis: For Obama, Housing Policy Presents Second-Term Headaches

A house for sale in the Pacific Palisades area of Los Angeles. The top limit of government-backed loans is a big question.Michael Nelson/European Pressphoto AgencyA house for sale in the Pacific Palisades area of Los Angeles. The top limit of government-backed loans is a big question.

A second-term president may be just the person to tackle America’s housing problems.

When President Obama first came into office, home prices were crashing, foreclosures were soaring and the previous Bush administration had just initiated the bailout of Fannie Mae and Freddie Mac, the government-backed entities that agree to repay mortgages if the original borrower defaults.

With the market in shambles in 2009, the Obama administration pursued a tentative housing policy, for the most part avoiding big moves that might have further weakened the housing market or banks. Eventually, there were some bolder initiatives, like the national mortgage settlement with big banks as well as the Treasury Department’s aid programs for homeowners.

But as President Obama’s first administration comes to an end, the government is still deeply embedded in the mortgage market. In the third quarter, various government entities backstopped 92 percent of all new residential mortgages, according to Inside Mortgage Finance, a publication that focuses on the home loan industry.

Mr. Obama’s economic team has consistently said it wants the housing market to work without significant government support. But it has taken few actual steps to advance that idea.

“I think Obama is absolutely committed to reducing the government’s role,” said Thomas Lawler, a former chief economist at Fannie Mae and founder of Lawler Economic and Housing Consulting, an industry analysis firm. “But no one’s yet found a format to do that.”

Housing policy is hard to tackle because so many people have benefited from the status quo. The entire real estate system — the banks, the agents, the home buyers — all depend on a market that provides fixed-rate, 30-year mortgages that can be easily refinanced when interest rates drop. That sort of loan is rare outside of the United States. And any effort to overhaul housing and the mortgage market could eventually reduce the amount of such mortgages in the country, angering many and creating a political firestorm.

In other words, the best person to fundamentally change how housing works may be a president who won’t be running for office again.

Most immediately, the housing market has to be strong enough to deal with a government pullback. Some analysts think it’s ready. “I think the housing recovery is far enough along that they can start winding down Fannie and Freddie,” said Phillip L. Swagel at the University of Maryland’s School of Public Policy, who served as assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.

The administration can take smaller steps first. Mr. Lawler, the housing economist, thinks the government could start to reduce the maximum amount that it will guarantee for Fannie and Freddie loans. In some areas, like parts of the Northeast and California, it is as high as $625,000. Before the financial crisis, it was essentially capped at $417,000.

The big question is whether the private sector — banks and investors that buy bonds backed with mortgages — will pick up the slack when the government eases out of the market. If they don’t, the supply of mortgages could fall and house prices could weaken.

Banks say their appetite depends on how new rules for mortgages turn out. In setting such regulations, some tough choices have to be made.

The new rules will effectively map the riskiness of various types of mortgages. In determining that, regulators will look at the features of the loans and the borrowers’ income. Banks say they are unlikely to hold loans deemed risky, and their lobbyists are pressing for legal protection on the safer ones, called qualified mortgages.

The temptation will be to make the definition of what constitutes a qualified mortgage as broad as possible, to ensure that the banks lend to a wide range of borrowers. But regulators concerned with the health of the banks won’t want a system that incentivizes institutions to make potentially risky loans.

One set of qualified mortgage regulations, being written by the Consumer Financial Protection Bureau, could be completed as early as January. Other regulators, like the Federal Reserve, are expected to take longer in finishing their mortgage rules.

Resolving the conflict between mortgage availability and bank strength may depend on the person who replaces Timothy F. Geithner as Treasury secretary. Mr. Geithner is stepping down at the end of Mr. Obama’s first term.

The Obama administration faces other daunting decisions.

One is how to deal with the considerable number of troubled mortgages still in the financial system. Banks might be reluctant to make new loans until they have a better idea of the losses on the old loans. “If you don’t ever deal with these problems, you may never get to where you want to go,” said Mr. Lawler, the housing economist.

To help tackle that issue, the new administration might decide to make its mortgage relief programs more aggressive. It might even aim for more loan modifications, writing down the value of the mortgages to make them easier to pay. The Federal Housing Finance Agency, the regulator that oversees Fannie Mae and Freddie Mac, has effectively blocked such write-downs on the vast amount of loans those entities have guaranteed.

A new Obama administration may move to change the agency’s stance on write-downs, perhaps by replacing its acting director, Edward DeMarco. If that happened, it would be a sign that the White House had a taste for more radical housing actions. The agency declined to comment.

Then there’s what to do with the Federal Housing Administration, another government entity that has backstopped a huge amount of mortgages since the financial crisis. The housing administration was set up to focus on lower-income borrowers, and it backs loans that have very low down payments. Its share of the market has grown since the crisis. The F.H.A. accounted for 13 percent of the market in the third quarter, according to Inside Mortgage Finance.

The new administration has to decide whether it wants the F.H.A. to continue doing as much business. The risk is that a big pullback by the F.H.A. could reduce the availability of mortgages to lower-income borrowers. Banks almost certainly won’t want to write loans with minuscule down payments since they are considered riskier.

Ultimately, housing policy comes down to one question: Which borrowers should get the most subsidies?

Right now, the government largess encompasses a wide swath of borrowers. But most analysts believe government support should be focused on lower-income borrowers.

“We will know that the Obama administration is serious about housing finance reform when it comes up with a proposal for affordable housing,” said Mr. Swagel, the University of Maryland professor.

A version of this article appeared in print on 11/09/2012, on page B1 of the NewYork edition with the headline: Obama Faces Tough Choices on Housing in 2nd Term.

Article source: http://dealbook.nytimes.com/2012/11/08/for-obama-housing-policy-presents-second-term-headaches/?partner=rss&emc=rss

Mortgages: Broker Fee Rules Take Effect

Regulators and consumer advocates say borrowers are bound to benefit. Broker trade groups say their industry will shrivel and consumer costs will go up.

Mortgage brokers are middlemen who work with multiple lenders to arrange home loans for customers. They say they add value by helping borrowers find the best deal; their detractors say they add costs that have been hidden in complex fees.

The business has contracted significantly in the last five years. In 2005, during the real estate boom, brokers accounted for 31 percent of mortgages originated, according to Inside Mortgage Finance, a trade publication. Last year it was just 11 percent, and the market was only half as big.

Brokers used to be compensated by a mix of borrower-paid origination fees and lender-paid fees. The most controversial was a “yield spread premium,” paid by lenders when a broker placed a borrower in a loan that charged higher interest than other loans. The justification was that higher rates allowed lower upfront closing costs. The criticism was that the premiums were an incentive to push expensive loans and that the system contributed to a flood of risky loans and thus to the financial crisis.

In response, the Federal Reserve put out rules that prohibit loan originators from being paid by both the borrower and lender on the same deal, and also barring commissions based on anything other than loan size. The rules were set to take effect April 1; two trade groups sued, delaying enactment a few days before a federal appeals court allowed it. Both the National Association of Mortgage Brokers and the National Association of Independent Housing Professionals say they will keep pressing their lawsuits.

On the front line, the problem is that there has been “no clear guidance” on exactly how to arrange commission structures for employees who originate loans, said Melissa Cohn, the president of the Manhattan Mortgage Company, a loan brokerage firm.

“To be honest with you,” she said, “in some cases it’s going to create higher-priced mortgages.” Although the spirit of the law is to protect borrowers, she added, “the reality of it is it’s just going to cause more confusion.”

Mike Anderson, the director of the National Association of Mortgage Brokers, speaking just two days after the rules went into effect, said: “It’s already happening. Rates have already gone up; fees have gone up.” Mr. Anderson, who is also a broker in New Orleans, cited situations in which brokers could no longer cut fees to make deals go through, and others in which banks were raising charges. “The rules basically pick the winners and losers,” he said, with the winners being the big banks. “The losers are the small businesses.”

The Facebook page of the National Association of Independent Housing Professionals is full of complaints from what appear to be mortgage brokers saying the rules will hurt their business, and recounting how unnamed lenders have raised prices.

Despite industry opposition, the change is a victory for borrowers, according to representatives of the Center for Responsible Lending, an advocacy group long critical of the yield-spread premium system. Borrowers “should be getting more honest services from the originator they’re working with,” said Kathleen E. Keest, a senior policy counsel, “because that originator is no longer going to have a conflict of interest if they put a borrower in a loan with a higher interest rate or riskier terms.”

“If people were saying that the way things worked, worked well,” she added, “that’s one thing, but it’s very clear the way things worked before didn’t work for anybody. The notion we need to have the same rules is denying what happened. It’s denying that the way the market was working was disastrous for everybody.”

Article source: http://feeds.nytimes.com/click.phdo?i=240a54cef430bcb13f44e660f487a3bd