Guy Barre, MBA

Is time running out on the long-running mortgage rates decline of 2009?

While rates have been steady for a while, the long-term outlook could look more and more like an inflationary one, which should trigger higher mortgage rates before too long. That means higher interest payments for mortgage customers.

Opinions as to where our economy is headed for are conflicting and even contradictory. Some claim that deflation threatens our economy. Some, on the other hand, believe that the real threat to the U.S. economy is inflation, even hyper-inflation.

I tend to believe that once we are truly out of the current recession ("Main Street" recovery, not "Wall Street"), and unemployment is back to average historical level ( it may take a few years,) our economy will experience "contained" inflation. Increased global demand for agriculture commodities, and higher oil prices due to systemic weak dollar, will force the Federal Reserve to raise rates to keep rising inflation at bay.

That's why sooner than later rates are poised to rise.

Here is my question. How long will it take for mortgage rates to go up again, and why?

I look forward to your comments and opinions.

If we believe what we read from various sources loan brokers are facing a bleak future.

A number of reasons are often cited: restrictions on yield-spread premium payments, new national registration requirements and licensing costs, and a general lack of interest on the largest remaining wholesalers in growing their broker channels.

According to one source the number of brokerage firms could be down to 15,000 from a high of 54,000 three years ago. Let keep in mind however, that many brokerage firms are small "mom and pops" employing less than five people, and sole proprietor operations.

There is a ray of hope however in the industry's future. The main reason is costs.

Brokering is a form of outsourcing for lenders; it costs the wholesaler nothing in terms of fixed salary costs, etc. Keeping full-time loan officers is expensive. When a brokered loan doesn't close the broker doesn't get paid by the wholesaler. Time will tell if better quality control systems will give lenders the level of confidence needed to reinter or expend their current wholesale channels.

Until then, it is going to be "a survival of the fittest"

• A minimum investment of 3.50%. This can include a combination of borrower paid down payment and closing costs, or gift funds. Most conventional loans today require 5% down or greater, not including closing costs. Some costs are excluded such as discount points, prepaid items, seller paid closing costs, etc. No minimum FICO requirement, making loans available to those who don't have high enough FICO scores for a conventional loan.
• More lenient qualifying ratios of 31% front-end (gross income /PITI) and 43% back-end (gross income / PITI + other monthly liabilities). The conventional loan qualifying ratios are 28% and 36%, respectively. FHA allows buyers to use a higher percentage of their income towards housing costs.
• People with bankruptcies may qualify. For Chapter 7, borrowers may be eligible two years from the discharge date. For Chapter 13, borrowers may be eligible while in repayment status.
• Allow for seller concessions and contributions up to 6% of the sales price. This is above and beyond the buyer's 3.5% contribution. Examples of seller contributions include closing costs, prepaid expenses, discount points and interest rate buy-downs.
• Cash reserves are not required, except for 3 or 4-unit properties.
• Gift funds are acceptable. All funds can come through via a gift; the gifter must be someone close to the buyer such as family, significant other or friends with a justification letter.
• Loans are assumable, provided the prospective buyer qualifies.
• There is no pre-payment penalty.

Specific to FHA:

FHA loans are subject to a maximum amount depending on location.

FHA requires two types of mortgage insurance premiums (MIP) - up-front and annual. The up-front MIP is 1.75% of the base loan amount and can be added to the total loan amount or paid in cash at closing. The annual MIP is termed annual but paid monthly. On a 30-year fixed the premium is 0.5% of the base loan amount, which is applicable for a minimum of 5 years and cancelable when LTV reaches 78%. Two important notes regarding the annual MIP: 1) even if the LTV drops below 78% the buyer must wait 5 years before they can cancel the MIP, and 2) it cannot be canceled for condos.

One loan limitation. FHA only insures loans for principal residences, so buyers are limited to one FHA loan at a time. There are exceptions for relocation, increased family size, divorce and if the borrower is a non-occupant co-borrower.

Who is eligible for FHA?

• U.S. citizens
• Permanent resident aliens
• Non-permanent resident aliens - must have an SSN and hold a valid visa or is eligible to work in the US as evidenced by an EAD issued by the U.S. Customs and Immigration Service. Acceptable visas include H1, L-1, E-1, TN, A Series and G Series.

FHA is not available to non-citizens who do not have lawful residence in the U.S. or individuals with diplomatic immunity.

FHA Enhancements:

As a result of Congressional reform actions this year, several enhancements were made to the FHA program. The FHA appraisal requirements were relaxed, the required $150 seller fee is no longer necessary and processing and underwriting were streamlined and standardized. Other changes include the expanded qualifying ratios, the increase in borrower investment from 3% to 3.5% (delayed) and a change in the up-front MIP percentage.

FHA and Condos:

For condominium purchases the condominium development must be approved by HUD in order to be eligible for FHA loans. To view a list of approved condos, click here. In Seattle, there are currently 325 condominiums that are HUD approved, though the list may not be up-to-date. However, FHA spot approvals for condos are becoming increasingly utilized, primarily for resales. Lenders can receive a case-by-case spot approval provided the condo meet certain qualifications, which does limit the number of condos that are available under the program. For spot approvals, generally the development must be at least 51% owner occupied, 90% of the units have sold, the HOA has existed for at least 1 year, must have been converted for at least 12 months (if a conversion), plus a number of other requirements. While there are some hurdles, it is an often overlooked mortgage option and worth looking into.

Fortunately, developers are paying heed. New developments like Thornton Place applied for HUD approval and expects to receive acceptance shortly, if not already. Developers of a number of conversions have also applied for HUD approval as many now meet the guidelines.

Given the ever constricting conventional mortgage loan availability, FHA is becoming an appealing option for many buyers. For more information or questions about FHA loans, call me today.

With an estimated $290 billion in FHA loans projected for fiscal 2009 FHA now has 25% of the country's mortgage market, up from 3% a few years ago. The agencyhas an 80% share for first-time homebuyers.

FHA insured loans

• 2008 - 1.5 million loans
• 2007 - 580,000 loans
• 2006- 500,000 loans
• 2005- 523,000 loans

FHA borrowers' FICO scores now average 693, up from 633 two years ago. Then, nearly half of FHA borrowers had FICO scores under 620. Now, just 7.5% do.

FHA's reverse mortgage program insured 115,000 Home Equity Conversion Mortgages in 2008, a 67% increase from 2005.

Some data were taken from an article written by Mark Fogarty in National Mortgage News