Chapter 16 – Real Estate Financing Practice

The 15th Edition of Modern Real Estate Practice in Texas was published in November 2011.  Updates to the content of Chapter 16 include:

FHA Mortgage InsuranceStarting April 1, 2013, FHA annual mortgage insurance premiums increased from 1.25 percent of the loan amount to 1.35 percent. (A previous increase on April 1, 2012, raised the MIP from 1.15 to 1.25.) Starting June 1, 2013, for loans above $625,500, premium costs will increase to 1.55 percent of the loan amount. Up-front mortgage insurance, which is paid at closing, increased from 1 percent to 1.75 percent of the loan on April 1, 2012.

Effective June 3, 2013, FHA will require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan–not just until homeowners build equity of 22 percent in their homes.  Based on original principal amount, one of the two plans listed below will apply:
1.  For all mortgages regardless of their amortization terms, any mortgage involving an original principal (excluding financed UFMIP) less than or equal to 90% LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first. 
2.  For any mortgage involving an original principal with an LTV greater than 90%, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first. 
(FHA Mortgage Letter 2013-04, January 31, 2013)

Additionally, the National Association of Realtors reported that
1.  the standard fixed-rate home equity conversion mortgage (HECM) and saver fixed rate HECM pricing options would be consolidated and
2.  downpayment requirements for mortgages with original principal balances above $625,500 will be raised from 3.5% to 5%. (National Association of Realtors.  “E-Newsletter Update,” February 2013.)

Rural Development: Effective 10/1/12, for 2013 the annual fee on a Rural Development guaranteed rural housing loan was raised to .4% of the unpaid principal balance.  The guaranty fee for 2013 remains at 2% of the loan amount. (http://www.rurdev.usda.gov/SupportDocuments/NE_Change%20in%20Fees%2010.1.12.pdf)

The Secondary Mortgage Market, the QM and the QRM:  On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued the long-awaited qualified mortgage rule. The Dodd-Frank Wall Street Form and Consumer Protection Act requires lenders to look at a consumer’s financial information and determine a borrower’s “ability to repay” a loan before making a mortgage loan.  Such a loan is called a Qualified Mortgage (QM).  Under the Ability-to Repay rule:
1.  a lender must collect and verify financial information;
2.  a borrower must have enough assets or income to pay back the mortgage;
3.  a lender will generally have to consider the highest interest rate that a borrower would have to pay – not a temporary initial low interest rate; and
4.  home equity lines of credit, timeshare plans, reverse mortgages, and temporary loans are excluded.

The Ability-to-Repay/QM rule presumes a lender has met the ability-to-repay requirements if the lender makes a Qualified Mortgage.  To be a Qualified Mortgage,
1.  it must contain no toxic loan features (it cannot be an interest-only loan, a negative amortization loan, or a balloon loan [a balloon loan may be permitted in a rural or underserved area] and it cannot have a loan term longer than 30 years);
2.  the debt-to-income ratio cannot exceed 43%;
3.  upfront points and fees cannot exceed 3% of the loan amount; and
4.  full documentation of loans must be preserved by lenders for three years.

The QM rule goes into effect January 20, 2014.  It spells out underwriting standards that lenders must meet to be shielded from litigation. During a transition period that could last up to seven years, loans approved by GSE (Fannie Mae, Freddie Mac) and FHA automated underwriting (AU) systems (even with debt-to-income ratios above 43%) will be considered QM loans. (http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-summary.pdf)

The Dodd-Frank Act also requires the CFPB to issue a qualified residential mortgage (QRM) rule, which will be based on the requirements of the QM rule summarized above.  The QRM rule will determine which securitized mortgages should be exempt from a 5% risk retention requirement on home loans made to consumers.  Although the QRM still has not been defined at press time, possible rules include imposing a minimum 20 percent down payment and rigid credit standards in addition to the 43% debt-to-income ratio.

Page updated: April 18, 2013.
Information has been obtained from sources believed to be reliable. However, because of the possibility of human or mechanical error, the authors and editors do not guarantee the accuracy, adequacy, or completeness of any information and are not responsible for any errors or omissions or for the results obtained from use of such information. We assume no responsibility, express or implied, for errors or omissions of any kind, and no warranties of merchantability or fitness, express or implied, are made or to be implied, the product being accepted as is and with all faults. The information in this Website is not a final statement of the law on any given matter and does not substitute for experienced legal counsel.

© 2009 Cheryl Nance. All Rights Reserved.

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