THE BASIS POINT

No More California Tax Credits, Treasury Auctions Dictate Rate Movement, Update On Condo Mortgages

Ah, inflation – at all levels. During the life of a 30-yr fixed-rate mortgage, there are bound to be periods of inflation. It is debatable, in the market of mortgages, whether or not borrowers and lenders take inflation into account. Certainly ARM loans do to some extent. But bond prices (aside from TIP securities, some of which are being auctioned today) are not indexed to inflation. Yes, a bond holder who owns $1 million in bonds earning 4% earns $40,000 per year, but at the end of 30 years, that bond holder still has $1 million in bonds, which might be worth $500-600k in today’s buying power.

Economic Preview For Week
How is the week looking for economic news? Today at 10:00AM EST we have the ISM Services number for June. Thursday we’ll see our friend Jobless Claims. And on Friday we have Import and Export Prices, along with the Trade Balance figures and the preliminary University of Michigan Consumer Sentiment Survey. Currently Treasury securities and mortgage prices are worse by about .125 in price from Thursday afternoon’s levels (the 10-yr yield is around 3.54%).

Treasury Auctions Dictate Rate Movement
But of greater importance, since data is limited, are the Treasury auctions, which begin tomorrow. (We also have an $8B 10-year TIPS auction.) Tomorrow is a $35 billion 3-year note auction, Wednesday’s $19B 10-year note auction, and Thursday’s $11B 30-year bond auction. Don’t look for much change in mortgage rates until or unless there is more substantial news about the economic outlook.

Flagstar Appraisal Rules
Flagstar, who had already come out with information about the HVCC approval process, reduced their net worth requirement for HVCC approval from $1,000,000 to $500,000. A few of the requirements needed to be approved include a net worth equal to or greater than $500,000, a signed HVCC correspondent addendum which reps and warrants that the appraisal conduct conforms to HVCC guidelines, and org chart identifying the employee responsible for ordering the appraisal, and a copy of the company’s written HVCC compliance procedures including the appraisal.

For condominiums, Flagstar requires an HO-6 insurance policy equal to at least 20% of the appraised value for all condominiums. If you want to originate condo loans and sell them to Flagstar, when dealing with an HO-6 policy, coverage is required for all condominiums to close, the coverage amount on the HO6 must be AT LEAST 20% of the total appraised value, customers should not include the HO-6 insurance into their escrow analysis, the HO6 must include wind and hurricane coverage if the property is located in a hurricane prone area, the Certificate of building coverage under the master for the association must be collected, and the mortgagee clause should reflect their published address for insurance docs.

Which Lenders Are Doing Condo Mortgages
So which investors are buying loans on condominiums? Well, just about everyone. That being said, practically everyone is buying them only when they meet Freddie/Fannie guidelines.

Flagstar, mentioned above, is going with the Fannie/Freddie guidelines.

Taylor Bean is basically following the Freddie/Fannie condo guidelines, and in fact have them posted on their website although they have eliminated the reciprocal approval portion of the guideline. “Currently, it does not matter if you have a Fannie Mae or HUD approval for a project; the lender must either send the docs listed on the Lender Certification to TBW’s Project Approval Department or review the docs and approve the project themselves as a delegated lender. All correspondents are delegated to approve condo projects.” TBW has always followed the Freddie Mac limits on percentage complete, owner-occ vs. investment, etc.

AmTrust, who may be updating their guides this week, but they pretty much follow Fannie guidelines.

Franklin American does the same, and follows agency guidelines for percentage completion.

Bank of America Home Loans follows Fannie Mae guidelines. “We require 100% completion on established projects and on new projects we require that the subject property’s legal phase be substantially complete.” With BofA there is no difference in LTVs for condos vs. SFRs.

CitiMortgage pulls their guidelines directly from FNMA’s for both completion percentage and LTV/CLTV eligibility for Limited Review. Florida condos carry the restriction of 75%/75%-Primary, 70%/70%-Second home, and Investment properties are not permitted.

Chase follows Fannie and Freddie condo guidelines, along with having some Chase-specific condo options, which pretty much mirror the agencies.

Wells Fargo, who in the first quarter had nearly a quarter of the mortgage origination market, also follows agency guidelines, with a few additions. For example, if more than 15% of units are more than 30 days delinquent, the project is ineligible, Fidelity bond coverage is required on all projects more than 20 units, commercial or non-residential space may not exceed 20% of the total square footage, at least 70% of units in the project or subject phase must be sold, including closed sales and units under contract with bona fide purchasers, etc.

Fannie/Freddie Condo Requirementsw
What are agency guidelines? “The project, or the subject legal phase, must be “substantially complete.” This means that a certificate of occupancy (or other substantially similar document) has been issued by the applicable governmental agency for the project or subject phase and that all the units in the building in which the unit securing the mortgage is located are complete, subject to the installation of “buyer selection items” such as appliances. At least 70% of the total units in the project or subject legal phase must have been conveyed or be under a bona fide contract for purchase to owner-occupant principal residence or second home purchasers. For a specific legal phase (or phases) in a new project, at least 70% of the total units in the subject legal phase(s), considered together with all prior legal phases, must have been conveyed (or be under contract to be sold) to owner occupant principal residence or second home purchasers. For the purposes of this review process, a project consisting of one building cannot have more than one legal phase.”

Flagstar, who defines a “short refinance” as refinance transactions in which the current mortgage holder will accept less than the outstanding balance to settle the mortgage, consider these to be restructured loans by the agencies and effective immediately short refinances not eligible for delivery to Flagstar Bank under any conventional programs. Short refinances are eligible for FHA rate and term refinances. Flagstar goes on to say that “When a borrower is purchasing a home, ownership of the property must be verified. Property ownership from the sales agreement, AVM, appraisal and title commitment should all match. Any discrepancies must be addressed. A sales trend has emerged in which sale transactions are being submitted with concurrent sales occurring at closing (flipping). Homes are purchased/acquired at a reduced price. That purchaser then attempts to sell the property to a potential applicant without closing on the transaction prior. These transactions are not eligible. All sales and property transfers must be disclosed.

Saturdays Are Disclosure Day Under New Regs
When I was a kid, Saturday’s were for watching cartoons like Scoobie Doo or The Archies. Under the Housing and Economic Recovery Act of 2008 (HERA) Mortgage Disclosure Improvement Act, Saturdays are now considered a business day for purposes of disclosure receipt. Business days will include all calendar days except Sunday and legal federal public holidays.

No More California Tax Credits
Here in California, the California Franchise Tax Board has turned off the $10,000 California New Construction Tax Credit after they reached the $100,000,000 maximum investment, as well as their maximum application status of 10,000. “The CA Franchise Tax Board did continue to accept additional applications – up to 12,000 total – to allow for duplications in faxes or for any home buyers that were not authorized for the tax credits, and to allow for any expected rejections. Both limits have been reached and applications for the California New Construction Tax Credit will no longer be accepted.” The state began accepting applications in March.

Daily Humor
A friend’s maid asked for a pay increase. His wife was very upset about this and decided to talk to her about the raise. She asked, “Now Maria, why do you want a pay increase?”

Maria: “Well, Señora, there are three reasons why I want an increase. The first is that I iron better than you.”

Wife: “Who said you iron better than me?”

Maria: “Your husband said so.”

Wife: “Oh.”

Maria: “The second reason is that I am a better cook than you.”

Wife: “Nonsense, who said you were a better cook than me?”

Maria: “Your husband did.”

Wife: “Oh.”

Maria: “My third reason is that I am a better lover than you.”

Wife: (really furious now): “Did my husband say that as well?”

Maria: “No Señora…the gardener did.”

Wife: “So how much do you want?”