Orange County Register

In his blog this week, mortgage broker Dennis C. Smith of Stratis Financial in Huntington Beach looks ahead. He sums up next year this way: “Outlook for 2010? More regulations, more policies, more paperwork and fewer opportunities for borrowers.  And at some point rates will break and stay above 5% and probably 5.5% before summer.” Some excerpts:

Q.:  ”How about a Mortgage 2010 with a look into what may be ahead in the coming year?
 
A.: ”I have been predicting higher rates in 2010 for much of the year.  The Federal Reserve just went over the $1 trillion mark in purchasing mortgage backed securities and will purchase another $250 billion by the end of March.  Once they leave the market the artificial demand created by the Fed goes away, less demand means lower prices, lower prices mean higher rates.  

Tighter lending criteria:  FHA is losing money and its reserves are well below the level established by Congress. Fannie Mae and Freddie Mac are losing money and looking for additional funds to prop them up from Washington. Mortgage Insurance companies are losing money and some will leave the business. 
 
FHA:  The losses from FHA are on newer loans, an inordinate amount of refinances that were used by homeowners to get out of Interim or Option ARM programs. From 2000 to 2007 FHA mortgages as a percentage of overall mortgages funded dropped.  In 2008 and 2009 the percentage of FHA mortgages funded leapt due to declining equity across the country, higher loan limits for FHA mortgages and lack of low down payment/equity financing. With unemployment breaking through 10% FHA defaults are being impacted.  FHA is raising the bar on qualifying. 

“The biggest changes in FHA are going to be on the industry side.  A major change is anticipated to be issued with a “Mortgagee Letter” in December that will reduce the number of companies able to originate FHA mortgages and shifting liability from FHA to lenders for originator oversight. What this means is that lenders will reduce the number of brokers who they will allow to originate FHA mortgages. 

The tighter criteria for FHA in 2010 may include higher down payment requirements, higher mortgage insurance premiums, higher FICO score requirements and lower debt-to-income requirements.  

Conventional:  Fannie Mae has already announced lower debt-to-income requirements and as the saying goes, as Fannie goes Freddie follows. The new limit is 45% for the back or bottom ratio for total debt to income.  Fannie is also releasing a new version of its Desktop Underwriter software program that is used to approve mortgages (and in my opinion one of the most under-reported causes of the mortgage market meltdown). The new version of the program will have other “enhancements” that will further tighten down the underwriting criteria for consideration of non-employment income, reserve requirements for borrowers and credit.
 
Lenders:  Many of the lenders still standing have already introduced ‘over-lays’ on underwriting guidelines from FHA and Fannie/Freddie. These over-lays are stricter requirements than the agencies require and/or pricing add-ons to discourage the use of certain criteria.  Lenders are insuring their portfolios will be purchases on the secondary market, are anticipating upcoming guideline changes from agencies and most importantly want to make sure they will not have foreclosures and defaults in the future.  Using analytical programs they have been able to analyze all the criteria of defaults and foreclosures, spot patterns such as gifts for closing, co-signers, etc and target those underwriting standards. While defaults mount in 2010 more and more will be as a result of the current economic situation and less and less from the mortgages made in 2004/5-2007 heyday of no down, stated income programs.
 
While there have been almost no new regulations imposed on Wall Street traders at this point relative to derivatives, hedge funds and margins … everyone wants to make new policies, increase disclosure, add forms, and evidently further confuse the consumer [about mortgages]. Currently our application package in California runs over 25 pages for a conventional transaction (we crest 30 on FHA).  With the new changes we look to add at least five more pages to do what our current forms already do.”

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