Housing Scorecard: Nearly 6 Million Fewer Underwater as Prices Hit 2005 Levels

Jan 13 2014, 10:49AM

Rising home prices are continuing to drive down the number of homeowners who are underwater according to the December Housing Scorecard published by the Departments of Treasury and Housing and Urban Development (HUD).  HUD Associate Deputy Assistant Secretary for Economic Affairs Edward J. Szymanoski said, “Since the beginning of 2012, the number of homeowners underwater has declined by 5.7 million and homeowners’ equity has risen by 55 percent to $9.7 trillion.”  Homeowners’ equity jumped $418 billion, or 4.5 percent, to $9.669 trillion in the third quarter of 2013, returning to a level slightly higher than at the end of 2003.

As of October 2013, the Federal Housing Finance Agency (FHFA) purchase-only index rose 8.2 percent from last year and ticked up 0.5 percent (seasonally adjusted) from September, showing that home values are now on par with prices in early 2005. The S&P/Case-Shiller 20-City Home Price Index for October posted returns of 13.6 percent over the past 12 months and was up 0.2 percent (not seasonally adjusted) over September, indicating that home values are at the same level as in mid-2004.

The Scorecard notes there is much good news to report but the overall recovery remains fragile.  Szymanoski said there remains more work to do to address the 6.4 million homeowners who remain underwater; “Nevertheless, these are encouraging signs that the housing market recovery is providing millions of American homeowners with more economic security.”

The Scorecard is a monthly recap of housing data from sources such as FHFA and S&P Case-Shiller as well as RealtyTrac, the National Associations of Home Builders and Realtors®, and the Census Bureau, most of which has been previously reported by MND.  It also contains by reference the monthly record of the Making Home Affordable (MHA) Program and nearly half dozen initiatives operating under that umbrella.

The MHA report this month contains data through November 2013 and this month spotlights the Second Lien Modification Program (2MP).  That program was expanded in September and now, when a borrower’s first lien is modified under the GSE Standard Modification requirements (which applies to loans owned or guaranteed by Fannie Mae or Freddie Mac) and the first lien satisfies the Home Affordable Modification Program (HAMP) eligibility criteria, the 2MP servicer must offer to modify or extinguish the borrower’s second lien under 2MP.

The report says that more than 123,000 second lien modifications have now been completed through 2MP and homeowners with an active permanent 2MP modification save a median of $153 per month on their second mortgage and a median total of  $784 on first and second mortgages, 41 percent of the pre-modification payment.  Homeowners who receive a full extinguishment of their second lien receive a median total first and second lien monthly payment reduction of $1,047, or 53 percent of their before-modification payment.

MHA says the various programs it operates, HAMP, 2MP, Home Affordable Foreclosure Alternatives (HAFA) and the UP Forbearance Program, have assisted 1.9 million homeowners since they were initiated in 2009 and later.  Of these, 1.3 million were modifications done through HAMP.  Since the last HAMP report there have been 22,814 permanent first lien modifications initiated and a total of 35,869 assisted through all MHA programs except its . Principle Reduction Activity (PRA).   That program has eliminated $10,124,838,950 in outstanding principal and another $2.5 billion in principle has been reduced outside of PRA.  GSE loans are not eligible for principle reduction.

Gift-funded Down Payments for Mortgage

by Ted Rood

New FHA Alternative Boosts Low Down-Payment Options

Jan 3 2014, 3:54PM

As Fannie Mae and Freddie Mac eliminated their 100% and 97% purchase loans following the housing meltdown, FHA financing once again became a preferred low down payment option. FHA loans offer a minimum 3.5% down payment, which can be gifted from a close family member. Thus, buyers whose sales contracts specify seller paid closing costs and who use the gift down payment, can often purchase a home with minimal out of pocket expenses.

FHA allows borrowers with credit scores as low as 580 to put just 3.5% down (those with lower scores face increased down payment requirements), and routinely approves higher debt loads than Fannie Mae or Freddie Mac. The combination of marginal credit scores and low (or no) buyer financial investment contributed to FHA’s default rates as the housing market crashed. As a result, FHA has raised MI significantly and has long since eliminated seller-paid down payment assistance programs.

Fannie Mae also allows down payment funds to be gifts from close family members for single family principal residences, with down payments as low as 5% for qualified borrowers. Until recently, however, private mortgage insurance (required for loans exceeding 80% of sales price) vendors required buyers to contribute at least 2% of their own funds in a transaction in addition to any gift funds. PMI provider United Guaranty recently altered their guidelines and now allow down payments to be exclusively gifts, a move likely soon adopted by competitors. The announcement gives eligible buyers a distinct advantage over FHA’s considerable MIP costs.

FHA’s upfront MIP fees are now 1.75% of the loan size added to the loan balance ($1750 on a $100,000 loan, 3.5% down), with an additional monthly charge of $108.33, which applies for the life of the loan. Conventional PMI costs vary slightly, but have NO upfront fee. United Guaranty’s pricing engine returned a price quote of $64.17/mn for a 720 score, 5% down borrower, a substantial savings of $4,399 over just the loan’s first 5 years compared with FHA’s fees.

The more conservative underwriting guidelines for Fannie Mae gift-funded down payments aim to ensure only qualified applicants receive these loans. Credit scores of 720 or higher (versus minimum scores of 620 for loans without gifts) are required. Debt ratios are limited to a 41% of applicants’ gross income, an even stricter restriction than non-gifted loans. The home must be a primary residence for all those on the loan, and no second mortgages, balloon notes, or temporary interest rate buy downs are allowed. The credit score, debt ratio, and other limitations set Fannie’s 5% down program apart from FHA’s less stringent standards and should result in far fewer defaults.

It is important to note, however, that many lenders have restrictions on gift funds, despite Fannie Mae’s acceptance. Shopping for this program may be challenging. Here’s a few steps to start the process: if you have a preferred lender, call and ask whether they offer this program; if you need a lender, contact a loan officer in your area. You might have to shop around to find a lender offering the program with no overlays.

About the Author

Ted Rood

Senior Mortgage Planner NMLS 543290, Wintrust Mortgage