With Private Mortgage Insurance Credit Ratings in Decline, are the GSE's Propping up "Zombies"?; Should PMI be Dropped from HASP Loans?

As I have previously posted HERE Moody's has recently downgraded the ratings for several private mortgage insurance companies and is looking at the impact of these downgrades on state housing finance agencies, including Oregon's.

Since Fannie and Freddie also use private mortgage insurance for loans above 80% loan to value I decided to look more closely at how much exposure the GSE's have to potential credit losses if private mortgage companies fail to pay claims.

I focused on Fannie and found:

1. Fannie says that they have a maximum of $118.7 Billion in single family mortgage credit insurance in their guarantee book of business in place as of December 2008; that's ONLY 4% of their total guarantee book of business. Fannie also says at the end of 2008 they had $1.2 Billion in receivables from private mortgage insurance companies (See 2008 10k form, page 192 HERE).
   
2. Moody's expects that private mortgage insurance companies rated at A3 will have the ability to pay 40% of the claims presented for an Aaa bond. For companies rated Baa1 or below, the expected claims paying ability for an Aaa rated bond drops anywhere from 30% to zero.
3. Unfortunately, Fannie has only one private mortgage insurance company with a rating of A 3, United Guaranty Residential Insurance Company. That company provides only 14% of the coverage provided by private mortgage insurance companies for Fannie.
4. This means that the remaining companies provide 86% of the private mortgage insurance coverage for Fannie and all of those companies are rated in the B tier of ratings, OR they are unrated.

With the federal government providing an "effective" full faith and credit guarantee it is possible that these weakened credit ratings for private mortgage insurance companies will have no impact on the ratings of Fannie debt.

The GSE regulator recently issued a letter HERE to the private mortgage insurance industry organization indicating that existing PMI would NOT be dropped on GSE loan refinances, but the letter does not directly address PMI on loan modifications.

This raises a second question. If the market is using the "effective" full faith and credit rating of the federal government instead of the claims paying ability of private insurers as a factor in rating Fannie debt, would it be LESS EXPENSIVE (for the government and borrowers) to NOT require the continuation of private mortgage insurance on loans refinance or modified under the upcoming HASP program? (Since for HASP loan modifications,PMI would possible/likely be a partially government funded cost that will be factored into getting borrower down to 31% debt to income ratio).

Put differently, is the borrower paying for a cost now that won't provide significant benefit to the government and, will the government end up paying a portion of those costs for the borrowers to get the debt ratio down to 31% for a modified loan?

I don't have an answer to these questions.

I am wondering what YOU think about the pros and cons of continuing to require private mortgage insurance on HASP modified loans, refinances, or for that matter any Fannie loan, if the likelihood of Fannie collecting claims payments is already significantly diminished?. If ultimately the payout will be the same AND at least the government would be collecting the mortgage insurance premiums, would net government costs be less if mortgage insurance was switched to FHA or RD?

Bottom Line: Is the government propping up "Zombie" private mortgage insurance companies by keeping private mortgage insurance in place on Fannie Mae refinanced or modified loans, when the likelihood of those companies continuing to fully pay claims is in serious doubt?

If you have some thoughts drop them in the comment box below.

OHCS Single Family Bond Program Likely Impacted by Moody's Drop of MGIC Credit Rating to Junk Level.

The latest bond report from OHCS HERE (pg 7) shows that about 20% ($219 Million) of the principal balance of their SF revenue bond loans had private mortgage insurance from Mortgage Guaranty Insurance Corp.

Yesterday Moody's cut the rating of that company from A 1 to Ba2. As the story HERE indicates, that is a cut to a junk bond rating level. (Ratings of several other private mortgage insurance companies were also cut; total private mortgage insurance is 25% of the principal balance of OHCS SF revenue bond loans).

Moody's published in December 2008 an explanation of how it evaluates the strength of private mortgage insurance on HFA bonds , titled Methodology Update: Incorporating Private Mortgage Insurance in Housing Finance Agency Single Family Housing Program Bond Ratings. (Available from Moodys.com, with a free subscription).

In that explanation the assumed support level (claims paying abiility) of a A 1 rated private mortgage insurance company ranged from 60% for a Aaa HFA rated SF bond to a 100% assumed support level for a Baa rated bond.

IF the private mortgage insurance rating dropped below Baa3 this would drop the assumed private mortgage insurance support level (claims paying ability) to ZERO, regardless of the bond rating.

I am not sure what options are available to OHCS in the near term, but unless I find some new information, my assumption is that this downgrade could have a very significant impact not only here in Oregon, but around the country.

At a minimum this will accelerate the flight to FHA insured loans and their greater protection against possible loss. ( I wish I were more confident in the institutional ability of FHA to propertly scale their operations and control loan underwriting in this challenging environment).

Extension of Mortgage Insurance Deduction: Unpublished Letter to Oregonian Editor.

[Link Correction]
I sent this letter on Thursday December 27th to the Letters to the Editor at the Oregonian. I expect it will not be published.

To the Editor:

Today's editorial Gordon Smith on the Home Front (HERE) lauded Senator Smith for passage of an extension of the tax deductibility of mortgage insurance premiums. The editorial projected that 90% of the Oregonians would be income eligible for the deduction. There are two problems I see with your endorsement of this costly revenue reducing tax provision.

1. The deduction is NOT targeted. Whether good or bad, the SCHIP child health insurance debate helped to focus attention on income targeting. This deduction is NOT targeted and would allow homeowners with income in excess of $100,000 to claim the deduction (phase out begins only at $100,000 of adjusted gross income for married couples). Up to the phase out levels, the higher the income and the higher the cost of mortgage insurance/more expensive the home, the higher is the potential cost to the government in lost revenue. (The 90% of Oregonians cited as income eligible in the editorial is meaningless—renters can't claim the deduction, and only those owners who pay mortgage insurance AND who itemize the deduction will be able to take the deduction on their federal tax return). See this Tax Foundation Fact sheet (http://www.taxfoundation.org/files/ff49.pdf) for more information on who benefits from the home mortgage interest deduction.

2. The Cost for this Additional Home ownership Subsidy Is Not the Highest Housing Priority. The Congressional Budget Office projects that the cost of the mortgage insurance provision will be $570 million dollars over the next 10 years. (See CBO cost estimates for H.R. 3648 found at http://www.cbo.gov/ftpdocs/86xx/doc8667/hr3648.pdf). With the current federal revenue loss from property taxes, mortgage insurance, and gain on sale estimated at more than $120 BILLION a year [see footnote at the bottom page 17 of the Congressional Research Service analysis of H.R. 3648 found at http://assets.opencrs.com/rpts/RL34212_20071206.pdf) and with other housing programs facing budget cutbacks, adding yet another additional subsidy without significant income targeting for home ownership cannot be the highest housing priority facing our country.

New Excel Tool Shows Condo Affordability at Different HOA Levels, Down Payments, and Other Variables.

I did a recent blog post HERE with a PDF file that showed how condo affordability is impacted by different HOA fee levels, using a standard 20% down payment. 

I have created a new Excel workbook HERE, and embedded below, that builds on that earlier post:

1. It adds a variables for mortgage insurance that allow calculations of affordability for down payment levels below 20%. (Default mortgage insurance fees shown are for FHA loans with a loan to value of 95% or more). 
2. It includes differing fees for home insurance for a single-family property that has no HOA fees vs home insurance fees for condos. (Generally, condo home insurance is less than for comparable single-family properties since part of the HOA fee covers insurance on the common elements).
3. It includes an additional section that shows how the Portland mortgage credit certificate (MCC) program could further increase condo affordability.  The Portland MCC program offers an annual 20% federal income tax credit of the amount of home interest paid for first time home buyers. Details on the Portland MCC program can be found HERE. The MCC can be particularly useful for median family and above households without children who have significant federal tax liability (and cannot benefit from federal child tax credits).  

Observations: [With default purchase and loan assumptions.  $269,000 sales price, 3.5% down, 4.5% interest rate, FHA mortgage insurance premiums, property tax and insurance assumptions as shown, and a 43% debt to Income limit]. 

The two person HUD 2019 100% median income in the Portland metro area is $70,320.

Without a Mortgage Credit Certificate:

IF the home purchased does NOT have a condo fee, the income required to qualify is $64,655   [But the universe of single family homes at that price point is smaller than for condos].

IF the home purchased has a $400 monthly HOA/condo fee, the income required to qualify is $75,067, 16% more than required for a single family home purchase (with NO HOA/condo fee].

WITH a Mortgage Credit Certificate
If the home purchased does NOT have a condo fee, and IF the purchaser is a first time home buyer who is otherwise eligible, the purchaser would only need an income of $59,167 to qualify if they can use a City of Portland MCC. That is 8.5% less than required if NO MCC is used. 

If the home purchased has a $400 HOA/condo fee and IF the purchaser is a first time home buyer and are otherwise eligible they would only need an income of $69,579 to qualify if they can use a City of Portland MCC (with a condo fee of $400). That is 7.3% less than required if NO MCC is used AND note that income level is below the Portland metro 2 person MFI of $70,320.

NOTES: 
You likely will have to scroll to right to see all columns in the Excel workbook, download to avoid this issue. 

In the Excel workbook grey shaded cells are where data can be entered, other cells are protected to avoid inadvertent data entry. A second worksheet includes links to a comparison of FHA and private mortgage insurance fees, a FHA loan calculator, and the City of Portland median income and related income and rent limits.  

Portland's current 2 person MCC income limit is $87,900, substantially below the Oregon Housing Bond program limit of $97,680 for Multnomah county, even though both programs are subject to the same IRS limits. (IRS will likely soon publish new 2019 income data and this provides a new opportunity to increase the Portland MCC income limit).  

Originally created and posted on the Oregon Housing Blog. 

Update: Mortgage Insurance Deduction: Universe of Annual Insured Loans in 2 Million Range.

My earlier post took Senator Smith to task for claiming that 12 million families benefitted in the first year when the mortgage deduction was available. One thing that may not be clear to all is that only those filers who take out NEW loans during an eligible period AND use mortgage insurance are eligible to claim the deduction. So I went back and did some research on annual mortgage insurance volume:

1. Private mortgage insurance companies have done about 2 million loans in the last 12 months (PMI data is HERE).
2. FHA and VA in 2006 did about 600,000 loans
   
3. Even if FHA/VA/RD loan volume picked up to 1 million a year, the total volume of PMI and Government Insured loans would likely be in the 3 million range.

Actual annual USERS of the deduction however would be substantially less than that 3 Million as a significant percentage of filers do not claim itemized deductions.

My current expectation is that users of mortgage insurance who got their mortgage insurance in one [qualified] year could continue to claim the deduction for any and all years where the deduction was available, currently 2007-2010. Therefore, if 1.5 million users annually were eligible AND used the deduction each year , and continued to do so, by the end of 2010 there would be a total of 6 million users of the deduction.

New Excel Workbook Includes Multiple Home Loan Affordability Estimating Tools.

Independence Day (appropriately) marked the start of my 16th year of retirement; I started this blog the week after I retired and 3,500+ posts later here we are. 

I've noticed recent news stories that project how many potential homebuyers will be priced out of the market because of increasing interest rates. 

While rising interest rates clearly decrease the pool of eligible buyers there are a variety of  loan level and program specific adjustments that can be made that would increase home loan affordability. 

Down payments and variable rate loans are two examples, but the use of compensating factors (FHA) and residual income (VA) are two less than obvious variables that can impact affordability calculations. 

Figuring out the impact of those adjustments can be complex so I compiled a unique new Excel workbook HERE that allows users to estimate home loan affordability using a wide range of variables and loan programs. 

There are a total of 5 worksheets currently in this Loan Qualification Tools workbook. 

1. Side by Side Loan Estimator: 

This worksheet uses as defaults the variables used for the 2022 Harvard Joint Center for Housing Metro affordability map. A total of 5 side by side scenarios are available for the user.

Each scenario allows different variables for purchase price, interest rate, down payment, taxes and insurance, mortgage insurance rate and the side-by-side structure allows easy comparisons of qualifying income as individual variables are changed.

Graph (Pasted below)

The worksheet includes a graph showing Portland metro comparisons for all 5 scenarios. If you change the variable inputs you can relabel the scenario names and than also change the title text in the graph. (To also keep the Portland data simply make a copy of the original worksheet and make changes to the copied worksheet). 

Note that the default entries include a variable rate loan rate (4.5%) in Scenarios 3-5, a  20% down payment in Scenario 5, and a $200 monthly recurring debt in Scenario 2 and 4.  All of these variables impact the maximum loan amount and the borrower ability to qualify. 

2. FHA Loan Estimator, Includes "Compensating Factor" Analysis

This unique workbook shows that qualifying income for a given FHA purchase price can vary significantly based on FHA specific “compensating factors”. 

A total of four side by side scenarios with different compensating factors are shown. The underwriting ratios used for each scenario are locked as they represent ratios permissible with specific compensating factors. 

The base loan amount in the left column can be compared with the loan amount permitted via three different “compensating factor” scenarios. The worksheet includes not only the monthly mortgage insurance amount but also the up front mortgage insurance fees and adds it to the loan amount.

Unlike the Side by Side and VA Estimator the default down payment is 3.5% not 5%.

The qualifying income required for the monthly expense is calculated and also compared to the median family income for the Oregon county for 2022; the worksheet also incorporates the 2022 FHA mortgage limits by county. 

The results showing the income required to qualify using the front and back ratios are displayed in a graph below the table. 

3. VA Loan Estimator

This was the most challenging estimator to create because of multiple inputs required, including a complicated calculation of residual income that varies by home size and family size and an FICA cost input. 

This estimator is for 1st time users of VA loans, not for prior VA borrowers who still have some, but not complete access, to their VA loan entitlement). This estimator is also NOT for Oregon Department of Veterans Affairs loans--those require mortgage insurance and limit LTV to 95%. 

Unlike the other estimators there is no mortgage insurance variable since VA charges an upfront fee in lieu of on going mortgage insurance. This fee however is waived for veterans who receive disability compensation (10% or above) or those in service who have a purple heart. [The 5 year ACS 2020 (Table B21100) estimate is that 66,000+/25% of Oregon veterans have a 10% or higher disability rating]. 

The target back ratio for VA loans is 41%, not 43%. This may be exceeded with compensating factors but unlike FHA loans,  I have not located a matrix with specific factors that would justify a higher than 41% DTI. (When DTI>41% there is a higher requirement for residual income, and "high residual income" is one permissible compensating factor). 

While I have entered a default 5% down payment VA loans can be zero down  which would then increase the income required to qualify. 

Because this estimator focuses on one loan at a time it ALSO includes a unique loan equity/appreciation estimator that shows as of  the end of year 1 and year 5 the projected amount of home equity using user variable input of the estimated annual appreciation rate. 

For the default entries, assuming 1% annual price appreciation I calculate that total increase in equity at the end of year 5 would be $70,110,including $29,331 in home price appreciation. 

4. Input and Output Matrix 

This worksheet shows for each of the three estimators the inputs made and the calculations that result from those inputs. While there are the same inputs for multiple line items, there are also inputs and outputs unique to specific FHA and VA loan programs. 

5. Links

This worksheet lists a variety of reference sources I used to create these estimators.

It also includes an ACS table showing distribution of Oregon veterans receiving service related compensation by their rating level. 

Notes:

For the side by side and VA estimators, I've set as the default entry a $575,000 sales price, the May 2022 RMLS median sales price for the Portland metro area and a fixed interest rate of 5.7% and variable rate of 4.5% using the latest Freddie Mac primary mortgage survey rates as of June 30, 2022.  The FHA estimator uses a 3.5% down estimate but all other default entries are the same as the Side by Side estimator (This graph does not include a specific VA loan estimate).

I have added a note with the version number for each of the three estimators and have locked cells where appropriate to avoid inadvertent data entry. 

Originally created and posted on the Oregon Housing Blog. 

 

Senator Smith’s Mortgage Insurance Deduction Benefit Numbers Are WRONG.

A December 2007 press release from Oregon Senator Gordon Smith HERE about the extension of the mortgage insurance tax deduction claimed that “Over 12 million American homeowners benefited from this deduction in the first year alone.”.

The Congressional Budget Office in another December 2007 cost estimate HERE said that the cost of mortgage insurance deduction during all of FY 2009 will be $109 million. (estimated costs over 10 years were $570 million).

Dividing CBO’s cost estimate of $109 million in FY 2009 by Senator Smiths assertion that 12 million households benefitted in the first year results in the calculation that the average ANNUAL revenue loss would be $9.08 per household. ($109,000,000/12,000,000=$9.08).

Conclusion: The calculated home ownership tax benefit per household of a little more than $9 per year clearly cannot be accurate. Instead, I seriously doubt that there were 12,000,000 ACTUAL beneficiaries of the mortgage insurance deduction in the first year as claimed by Senator Smith. Instead at best, I expect that there MAY be 12,000,000 POTENTIAL beneficiaries who had incomes below the phase out threshold AND who owned a home AND who had mortgage insurance on their homes. (This potential beneficiary base however ignores the fact that many homeowners do NOT itemize their deductions and therefore could not claim this deduction).

Note : If the ACTUAL annual number of beneficiaries were only 1/10 of the Smith 12 million assertion (1,200,000 households) the net benefit per household would still be less than $91 annually, an amount insufficient to convert many (if any) renters into homeowners.

FHA Reserves Sufficiency Hearing Testimony from Today.

HERE is consolidated file (166 pages) I constructed with all the prepared testimony for today's scheduled House Financial Services hearing on the sufficiency of FHA reserves.

I could not ignore piece of the self serving (and laughable) testimony from the private mortgage insurance industry representative:

"The percentage of MI originations has declined from 14.7% in the first quarter of 2008 to 4.3% during the second quarter of 2009. This has primarily been due to the mortgage insurers changing credit guidelines and adjusting pricing to properly address the current market risks...... the MI industry is WILLING TO BRING ITS EXPERTISE to FHA and to Congress so that we can work together on a solution to ensure the existence of a robust mortgage market."

My [editorial] translation of what private mortgage insurance companies are saying:

We have "adjusted our pricing" including "changing [our] credit guidelines" so well that we have 4% of the current market. Let us tell you how to reduce the appeal of the FHA product (which currently has 20%+ market share) and red line individual sub markets like we have now done so that we can compete.
Like health insurance companies, private mortgage insurance companies don't want to compete with the public sector. We are ENTITLED to get back to the 20% +market share that WE used to have when we grabbed market share by underwriting mortgage insurance on all the junk loan products of the recent past. P.S. We will also push for subsidies, but let's call them tax breaks or let's use some other kind of bailout fund source so they are not as obvious as the direct appropriations that government agencies require.

Originally created and posted on the Oregon Housing Blog.

Combo OHCS VA Loan Offers An Expanded Home Loan Choice for Oregon Veterans.

The OHCS/VA combo loan that I recently posted about HERE provides an alternative to the Oregon Department of Veterans Affairs home loan program. [The post notes that a veteran does NOT have to be a first time home buyer to use the OHCS bond loan program, so long they have not previously used a bond loan program or Mortgage Credit certificate program in Oregon or elsewhere].

The downside to the ODVA loan program is the 5% minimum down payment, which then triggers the need for private mortgage insurance. Also, condos, townhouses, and manufactured homes all require a minimum 20% down payment for the ODVA loan program.  [ODVA's loan origination guide is HERE].

ODVA's lowest note rate of 3.125% IS below the lowest 3.25% OHCS note rate but that rate is only available to veterans whose loan reservation occurs within 25 years of discharge. The ODVA lowest rate for all veterans is 3.875%, higher than the OCHS/VA combo rate. 

The VA loan program also waives the federal funding fee for veterans with more than 10% disability; the ODVA program has no similar cost savings for disabled veterans.

The first table here shows my comparison of ODVA and OHCS/VA combo loan features. 

The second table below shows that for a $425.000 purchase price the OHCS/VA combo loan would actually have a $18 lower monthly loan payment (before taxes and insurance) by avoiding the $178 monthly mortgage insurance expense the ODVA loan program requires. This is despite a higher total loan amount ($434,138 vs $403,750) and even when the lowest ODVA loan rate (not available to all veterans) is used.  

While the lower monthly expense using the combo OHCS/VA loan provides a benefit, the bigger benefit is that a veteran using a combo OHCS /VA loan would not have to make a $21,250 minimum down payment required by ODVA program.

To summarize:

The OHCS/VA Combo loan may be the better choice IF

• The veteran does not have the funds available for 5% minimum down payment OR
• Discharge is greater than 25 years from fund reservation OR
• Veteran has service-connected disability of 10% or more OR
• Veteran is purchasing a condo, townhome, or manufactured home OR
• Veteran wants to avoid monthly mortgage insurance cost.

The ODVA loan may be a better choice IF

• The veteran has at least 5% of the purchase price available for a down payment AND
• Discharge is within 25 years of fund reservation OR
• Income or purchase price is above 0HCS limits.

Originally created and posted on the Oregon Housing Blog. 

Oregon Hardest Hit Mtg. Payment Program: Can Make 12 Monthly Payments on $1.25 Billion of Mortgage Debt AND $10 Million in Property Tax/Insurance Payments.

I thought it might be useful to put in perspective how much mortgage debt that the $100 million in Oregon Mortgage Payment Assistance will support over the next 12 months.  The results I calculated are shown in the table HERE.

Results/Methodology:

Per Family Calculation

Using the $20,000 per family limit and a set aside of 10% of the funding per family to pay for property taxes and insurance would leave $18,000 annually /$1,500  per month available to pay debt service. Using a 6% assumed interest rate this level of funding can make 12 full debt service payments on a mortgage of $250,187 AND also cover $2,000 in property tax and insurance payments.

Total Program Calculation

Multiplying the $250,187 per family mortgage/debt service support for the 5,000 expected families results in the calculation that the program would be able to make 12 months of full debt service payments on mortgages that total $1,250,937,108.

Program funds would also be sufficient to ALSO make $10 million in property tax and insurance payments. 

(Changing the assumed interest rate or the assumed % reserved for property tax or insurance would change the total mortgage debt serviced amount; changing the $20,000 amount per family would NOT, but it would change the number of families served.).  

Final note: For more perspective, the $1.25+ billion in mortgage debt supported by the Oregon Hardest Hit Mortgage Payment Assistance Program is 76% of the $1.65+ billion FHA refinance loan volume in Oregon during all of CY 2010.

Harvard Joint Center Annual Report Shows Metro Affordability Impacts of Increasing Mortgage Rates; I Show 20 Oregon Metro Impacts of 6% Loan Rate.

One of the infographics included in the just released Harvard Joint Center for Housing Studies State of the Nation's Housing 2022 report is a map that shows by metro area the income required to afford a medium priced home. 

The map uses a 3.5% down payment and some standard rate assumptions for mortgage interest, mortgage insurance, property insurance, property taxes and a 31% ratio of housing expense to income. 

Use of the 3.5% down payment is an improvement over other models that I’ve seen that use a 20% down payment which is not representative of the overall market. 

At the bottom of the map page the Harvard report helps users by listing their property tax , mortgage insurance, and property tax rate assumptions, so it is possible to replicate their calculations and modify them to see results with other assumptions. 

I did so and applied a change in interest rate to see what the impacts would be for the Oregon metro areas included in their report. (My calculations may vary slightly from the Harvard report because of the use of different rounding formulas). 

Building on the Harvard Report: My calculation of 20 Oregon metro area impacts of a boost in the mortgage rate to 6%.

I downloaded the data for 20 Oregon metropolitan [CBSA] areas and added three columns showing the increase in borrower income required if the mortgage rate went from the 4.98% rate used in the Harvard report to 6%.

RESULTS:

The 1 page PDF HERE and embedded below shows the results.

The income required would go up by a uniform 8.3%, but the dollar increase varies from $ 17,020 to $6,326.

The highest Oregon metro median price home in Bend at $712,359 would require an income of $212,903, up $17,021. HUD has the 4 person median family income for Bend/Deschutes county at $97,700 for FY 2022.

The lowest Oregon metro median priced home in La Grande at $264,786 would require an income of $79,137, up $6,327. HUD has the 4 person median family income for Union county at $70,300 for FY 2022

Originally created and posted on the Oregon Housing Blog. 

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OHCS Single Family Bond Program: 1. Only FHA and RD Credit Enhancements Permitted; 2.Submitting Data to Moody's for Bond Rating Review.

I attended the State Housing Council meeting today (The agenda for meeting is HERE).

During the meeting staff announced three significant developments related to the single family Oregon bond program.

1. Future loans must have either FHA or Rural Development mortgage insurance--private mortgage insurance will no longer be permitted.
2. OHCS staff are assembling information to submit to Moody's as part of a credit rating review process. Staff indicated it is possible that the rating for agency bonds could be downgraded.
(One of my posts from last week HERE, has more background about the problems with HFA's and private mortgage insurance].
3. The outlines of a subprime refinance mortgage program are in place. A couple of key points from my notes. A. Loans must be either FHA or RD insured, and B. loans will be limited to borrowers with incomes below 80% median family income. The program will be available on a pilot basis but ONLY when and IF the bond market improves.

Oregon Housing Council SF Presentation: Uninsured and Private Mortgage Insurance Losses Per Loan to OHCS Were 10X Higher than for FHA Loans.

At Housing Council meeting today, there was one of best and most detailed single family presentations I have ever seen at a Council meeting. Kudos to Bob Larson for a very informative presentation.

I will encourage OHCS to share or post the presentation on their website, but in interim I fixated on the data in one table. It showed by insurer, the number of OHCS SF [foreclosure] acquisitions, the net loss, and the average loss per property for CY 2011 through September 30th. 

I expanded upon that to show in table format how much different the losses would have been in the average loss per loan to OHCS for all insurers had matched the average loss to OHCS from FHA loans ($6,274 per loan). The table is pasted below and my observations are below the table.  

Observations:

1. IF all loans had been FHA insured total losses to OHCS would have been reduced by 69%, or $1.7 million.
2. Uninsured loans were a relatively small number, but the average OHCS loss per loan was $65,255, more than 10 times the average loss to OHCS from an FHA loan. (Note that uninsured loans started with a LTV of 80% or less; a loss of $65,255 per loan suggests that the value of the uninsured home must have dropped by 20% PLUS the portion of the average loss per loan that did not include closing costs (about $53,000) . Big Wow!
3. Average OHCS losses per loan for acquisitions with private mortgage insurance was even larger at $70,840 per loan. Even Bigger Wow!
4. Keep in mind that the loss to OHCS is NOT the loss per loan; the lower rate of loss per loan to OHCS for FHA and RD loans is because those programs cover a greater share of the loss than did private mortgage insurance or when the loan was uninsured. Losses in those cases transfer to FHA and RD.
5. While OHCS losses from single family acquisitions were $2.4 million through September, SF bond revenue was more than enough to pay those costs, and the indication was that the actual losses may have been less than conservative estimates used by OHCS in their  financial assumptions.

Originally created and posted on the Oregon Housing Blog.

Settlement of Washington State Fair Housing Pregnancy Mortgage Lending Case; Private Mortgage Insurance [MGIC] Case Still Pending.

WaPo has story HERE. From the story:

Cornerstone agreed to pay $15,000 to Elizabeth Budde, an oncologist living in Washington state, based on her claims that she was initially denied a mortgage loan even though she was on paid maternity leave and planned to return to work.

Budde had been approved for a loan but ran into problems with Cornerstone after an e-mail to the doctor bounced back with information that she was on maternity leave, Trasviña said.

Cornerstone will also create a $750,000 victims’ fund to compensate other borrowers who allegedly experienced discrimination because they were on pregnancy or maternity leave at the time they were applying for a loan, according to HUD.

In a separate action, HUD is charging Mortgage Guaranty Insurance Corporation (MGIC) of Milwaukee, Wisconsin and others with engaging in pregnancy discrimination in issuing mortgage insurance in violation of the Fair Housing Act.

Originally created and posted on the Oregon Housing Blog.

Even W Proposed $15k MID Limit New Excel Tool W Graphs Shows Substantial Benefits of Home Ownership.

The current efforts to reform the Oregon mortgage interest deduction (MID) have often focused on how much home buyers might lose if the MID was limited to $15,000. 

A new Excel tool I constructed offers a comprehensive view of the financial benefits of homeownership and demonstrates, with 3 graphs, that the proposed Oregon $15,000 limit on mortgage interest deductibility on state income tax returns: 

1. Would have a tiny impact in comparison to the full range of financial benefits that homeowners get (and that are not available to ANY renter).
2. Would keep in place substantial state MID subsidies and 100% of state property tax deductions/subsidies and 100% of federal MID and property tax deductions/subsidies.

[Because the Excel workbook is copy protected, I can't embed it in this post, but you can download it HERE. While you may be able to view the workbook in your browser I recommend downloading and using in Excel for full functionality ].

The workbook estimates ALL homeownership financial benefits: MID subsidies at both the state and federal level, accrued equity as loan principal is reduced yearly, additional equity accrued through home price appreciation, and savings from state and federal property tax income tax deductions.

There are eight variables that you may choose to enter/change at the top of the worksheet. The inputs populate the table in the worksheet AND three graphs to the bottom and to the right of the data entry section. 

• Graph 1 shows for the first year how much the MONTHLY benefit is for each component and the total combined benefit
• Graph 2 shows, for the first ten years, the MONTHLY total benefit vs any loss of MID because of the proposed $15k MID limit. 
• Graph 1 shows the cumulative total benefit vs any loss of MID benefit because of the proposed $15k annual MID limit, and provides a comparison to the down payment. 

These are the default entries in the workbook. (They are all variable except the property insurance rate):

• Borrowers are a married couple with income of $99,950. This is 170% of the 2016 2 person Portland metro HUD median family income of $58,640.
• The home is located in Multnomah County (Average property tax rates vary by county and are based on 2015-2016 Oregon Department of Revenue data).
• The home has a sales price of $381,147, which is affordable to the homebuyer with this income, using a 30% of income underwriting ratio (see "Affordability" below for more discussion about underwriting ratios)  That sales price is $31,000+ MORE than the Feb 2017 RMLS reported Portland metro median sales price of $350,000.
• Loan has a 5% down payment, 
• 4.5% interest rate 30 year loan. This rate is 1.25 % higher than the Oregon Bond home loan program rate of 3.25% for first time home buyers.
• 9% state income tax rate, 
• 20% federal income tax rate. [A conservative estimate, 2017 taxable income brackets are HERE]. 
• And a conservative annual home price appreciation of 2%. (The average Oregon home price index annual increase from 2017-2026 in the latest Oregon Economic forecast is much higher at 4.6%)
• A .0025% insurance rate. [Standard for all scenarios].
• Inflation of the proposed $15k MID limit by the average annual CPI of 2.6% found in the Oregon Economic Forecast for 2017-2026.

With default entries the results, including 3 graphs, are in PDF HERE and embedded below:

BENEFITS 
FIRST YEAR Benefits: Graph 1
The MONTHLY average benefits (WITH the $15,000 State MID limit).: 
$1,606 Total

• $488 equity increase because of principal reduction.
• $637 home price appreciation.
• $338 in continuing federal income tax subsidies+
• $144 in continuing state income tax subsidies=
• $481 a month in continuing state and federal income tax subsidies.

The average monthly loss of state MID is $9. (Because MI was greater than $15,000)

The federal MID will fully remain, and write off of property taxes without limits will remain for both state and federal income taxes. 

Average MONTHLY Total Benefits for Each of the First Ten Years: Graph 2

• The second graph, covering the first 10 years, shows that average MONTHLY average for the total benefits, vs the MONTHLY total average of MID lost (if any). 
• With the default entries, the total MONTHLY average benefit GROW every year, while the MONTHLY average MID loss (if any) DECLINES each year. In year 1 the MONTHLY total benefits are $1,606, but in year 10 they grow to $1,934; 
• MID loss because of the $15k limit (inflated ) averages $9 a MONTH in year 1, but drops to $4 a month in year 2 and ZERO in year3.

Average CUMULATIVE Benefits for Each of the First Ten Years: Graph 3. 

• The 3rd graph, covering the first 10 years, shows that cumulative benefits grow from $19,273 at the end of the first year to $211,884 at the end of year 10. 
• NOTE that with the default entries the first year financial benefits EXCEED the 5% down payment of $19,107 (The down payment amount is also shown on this graph).
• The MID loss in the first year totals $110, and the total MID loss is only $50 more in year 2 ($160 total) AND there is NO further loss after year 2. (Interest declines each year as a greater share of the monthly payment goes toward principal and the initial $15k MID limit increases as it is adjusted to inflation).

Any owner with more than $15,000 in eligible home interest (inflation adjusted) will continue to get $113 a month in state MID subsidy if their state income tax rate is 9%, and more if they state income tax rate is higher.

The federal MID will fully remain, and write off of property taxes without limits will remain for both state and federal income taxes. 

Affordability
In addition to showing the financial benefits of home ownership completion of the inputs for the 8 data entry cells (shaded in grey) will produce an estimate of the income required to buy the home with the inputs made. Because these assumptions vary from reality for each property, borrower, and lender the affordability level shown should be viewed ONLY as an estimate.  

The worksheet uses inputs of principal and interest, interest rates, property tax, insurance costs, mortgage insurance estimates AND the underwriting ratio [share of income assumed to be available to pay housing costs).   

The default underwriting ratio used is 30% of income (the same share of income that renters are expected to pay for housing). "Qualified mortgage" under CFPB rules however allow families to qualify for a loan if their total reoccurring debt does not exceed 43% of their gross income. 

This means that income based affordability determinations can span a wide range of loan values, depending on the specific financial details of each transaction. (including credit scores, reoccurring financial obligations, mortgage insurance rates, AND the down payment percentage). 

To illustrate the wide range of potential qualifying incomes, using the default data, here are qualifying incomes at different underwriting ratios to a Multnomah county home with a sales price of $382,147 and loan of $363,040:

30% of income (my default entry):  $99,950                         
36% of income (DTI max ratio for Fannie/Freddie :$83,292
43% of income (CFPB qualifying loan max DTI ratio): $69,733        
[Given the wide range of potential qualifying incomes for the default loan there is no graph associated with the affordability estimate]. 

Excel Notes:
In addition to changing the values in the 8 variable cells, use of the "Goal Seek" function in Excel allows a wide range of customization of results. For example you can use goal seek and change either of the two qualifying income cells to a specific value by having the goal seek function change the purchase price. 

The table of data below the first graph is copy protected and outside the designated print area for that sheet.

However, you can copy and paste the values [not formulas] from that worksheet into another worksheet and then format and print that table.



Originally created and posted on the Oregon Housing Blog. 

FHA Does Away with 1% Loan Origination Fee Limit as Part of RESPA Reforms.

FHA has issued a new mortgagee letter HERE, explaining the changes it made to FHA fees and disclosures to comply with RESPA reforms going into effect January 1st.

As a result of regulatory changes to 24 CR § 203.27, FHA no longer limits the origination fee to 1 percent of the mortgage amount for its standard mortgage insurance programs. However, both Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance Programs retain their statutory origination fee caps

Originally created and posted on the Oregon Housing Blog.

5 Portland Metro Examples: Down Payment and Interest Rate Differences Have Big Impact on Home Purchase Qualifying Income Requirements.

As I previously noted the Harvard Joint Center for Housing Studies 2022 State of the Nation's Housing report has an interactive map that allows users to see estimated qualifying income for metro areas using a standard interest rate and standard loan assumptions for down payment, property taxes, and mortgage insurance. 

Their calculations also use a standard 3.5% down payment which I find more representative of the market than the 20% down payment assumption I often see in examples of income qualification requirements. 

Starting with the Harvard assumptions I created 5 scenarios to show how qualifying income varies depending on interest rates and down payments. 

The two page PDF I created HERE  and embedded below starts with a graph of the results on page 1 and then page 2 has a table with all the inputs and those results.

The results from those 5 scenarios show that qualifying income ranges from $117K to $171K. 

• Scenario 5 has the lowest qualifying income ($117,096) because it uses a 20% down payment and a 5/1 ARM (Adjustable rate mortgage). This scenario eliminates the monthly $393 cost for mortgage insurance.  
• Scenario 4 has the second lowest qualifying income ($150,722) because while it has a 3.5% down payment it also has the 4.81 % ARM used in Scenario 5.
• Scenario 2 has the highest qualifying income ($171,815) because it assumes a 6% interest rate, slightly higher than the current Fannie Mae fixed rate of 5.81% found in scenario 3. 

NOTE: 

I used the May 2022 lower RMLS Portland metro median sales price ($575,000) instead of the Zillow derived price ($592,256) used in the initial Harvard Joint Center data. 

A Consumer Handbook on ARM's from the Consumer Financial Protection Bureau is HERE. 

The addition of condo fees and overall debt to income ratio limits can also further limit the maximum loan amount for a given income level. 

Originally created and posted on the Oregon Housing Blog. 

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FHA Running Out of Loan Authority; Bill Raising Limit Now in Congress.

H.R. 3357 is a bill that increases funding for the Highway Trust fund and ALSO includes a provision that would increase the authority of FHA to make guaranteed loans for the fiscal year ending Sept.30th.

More from this AP story HERE:

"The bill would also raise the Federal Housing Administration's Mutual Mortgage Insurance fund limit from $315 billion to $400 billion.

The FHA became the main source of home loans to borrowers with poor credit and low down payments after the subprime lending market's collapse. The agency lets borrowers take out home loans with a down payments as low as 3.5 percent, compared with 20 percent for a typical loan that doesn't require mortgage insurance. The FHA currently backs around a third of new home loans, up from about 3 percent in 2006.

Monthly volume has averaged almost $33 billion a month over the last three months, and with only $59 billion left in the fund for the fiscal year ending in September, it appears likely that the remaining authority will be exhausted in August. Because the program has a mechanism for repayment of the loans, the action has no immediate effect on the budget.

The suspension of FHA loan backing could have repercussions on the mortgage markets and the government's efforts to ease the foreclosure crisis.

The Senate is also expected to take up the package before its planned Aug. 7 departure for the summer break. The House is scheduled to recess at the end of this week."

Originally created and posted on the Oregon Housing Blog.

Largest Private Mortgage Insurance Company CY 2010: Continued Losses, 21% of All Insurance Written Was HAMP.

Housing Wire has summary for MGIC HERE.

Buried at end of story is $ 3.2 billion HAMP insurance volume, which works out to 21% of total insurance written: 

New insurance written for the full year 2010 was $12.3 billion compared to $19.9 billion in 2009. HARP activity for 2010 totaled an additional $3.2 billion.

Originally created and posted on the Oregon Housing Blog.

Oregon Legislature Passes Bill Allowing Behind the Curtain REDUCTION in Risk Capital Requirements for Private Mortage Insurers.

Sometimes you just have to wonder.....

The Oregon Senate passed yesterday a bill that had already passed the House and will now be on its way to the Governor for signature. HB 3654A essentially allows the Director of the Oregon Department of Consumer and Business Services to unilaterally water down private mortgage insurance company capital, reserve and surplus requirements to a level BELOW the currently required 25 to 1 ratio. (A House amendment to the original bill permits this to happen WITHOUT any administrative rule making).

The logic of the REDUCTION in ratios is explained in the Oregon House legislative summary HERE.

... while current economic conditions demonstrate the need for private mortgage insurance (PMI), these same conditions are driving higher claims rates and in some states, are putting companies at risk of not being able to write new business although they are sufficiently capitalized to meet all of their policyholders’ claim obligations. The statutory restriction prevents flexibility needed for regulatory entities to adjust risk-to-capital ratio requirements to meet market needs.

While the bill passed unanimously in the House, 6 Senators voted against it:Ferrioli, Girod, Kruse, Shields, Whitsett, Winters.

Editorial Comment: At a time when greater transparency and increased capital requirements for financial firms are the order of the day, the Oregon Legislature caved in favor of behind the scenes "flexibility" and reduced capital requirements. (The House argument for "market needs" was the same excuse made for sub prime loan products).

Originally created and posted on the Oregon Housing Blog.