Insurance Discussion

By Rebecca Mowbray, The Times-Picayune
First-time homebuyers in the New Orleans area may soon find it more difficult to purchase a home after the U.S. Department of Housing and Urban Development announced changes last week to shore up a key loan guarantee program.

On Wednesday, HUD announced that the Federal Housing Administration, which has emerged as a critical guarantor of loans during the housing crisis, would increase the premiums on mortgage insurance for loans that it guarantees, require borrowers to meet a minimum credit score or make higher down payments, and decrease the amount of help that sellers can offer buyers to bring transactions to closing.

The changes are essential to preserving the Federal Housing Administration, which has gone from backing 2 to 3 percent of all mortgages made each year to guaranteeing more than 30 percent of all new home loans as borrowers’ other options have dwindled in the housing crisis. While the program has expanded, its financial reserves have shrunk because it has had to pay more claims on loans that went into foreclosure. The changes announced Wednesday are aimed at replenishing reserves.

“It’s certainly going to be adverse to people in the New Orleans market. It will restrict some people from buying homes who could have gotten homes before,” said Arthur Sterbcow, president of Latter & Blum, the city’s largest real estate brokerage.

But, Sterbcow said, the changes are necessary to make sure the Federal Housing Administration can continue guaranteeing loans, and that directly benefits New Orleans. The Federal Housing Administration has been especially important to New Orleans, which has low salaries and historically low rates of homeownership. Sterbcow estimates that locally, Federal Housing Administration-guaranteed loans now make up about 45 percent of new mortgages. Among first-time homebuyers, the Federal Housing Administration is probably responsible for 80 percent of local loans.

Buyers urged to act now

Anyone who is thinking about buying a home but might be affected by the new rules might want to complete the purchase before the changes take effect this spring and summer.

“There’s a window of opportunity. If you’ve got people in the pipeline, hurry up and get them in there,” said Sterbcow, who met with the FHA commissioner in Washington the day the new rules were announced.

But Sterling Joe Ory, a Re/Max Properties broker in New Orleans who is 2010 president of the New Orleans Metropolitan Association of Realtors, doesn’t think two of changes will be a big deal.

In the spring, the Federal Housing Administration will increase the premiums for mortgage insurance by 50 basis points to 2.25 percent. Unlike private mortgage insurance on conventional loans, which is treated as a separate fee and paid monthly until the homebuyer has accumulated enough equity in the property that the coverage is no longer needed, mortgage insurance on FHA loans involves a lump sum up front that gets rolled into to the cost of the loan. On the negative side, higher mortgage insurance rates will increase what borrowers have to pay on their mortgage, but on the positive side, since the fees can be absorbed into the mortgage and amortized over 30 years, it shouldn’t contribute to the upfront costs that are barriers to buying a home.

For the first time, the Federal Housing Administration has also set a minimum credit score for borrowers. Starting this summer, borrowers must have a credit score of at least 580 to qualify for the FHA’s 3.5 percent down payment program. Borrowers with lower credit scores will be required to put down at least a 10 percent down payment.

With the average credit score in Louisiana at about 673, Sterbcow noted the damage from a late payment or two on a credit card bill could be enough to bounce someone out of eligibility for homeownership.

But the Mortgage Bankers Association says that less than 3 percent of all loans are approved for borrowers with a credit score below 580, suggesting that few people will be affected.

“The 580 is a pretty rough score. If you’re worse than 580, you really shouldn’t be getting a loan,” Ory said.

Seller concessions limited

But the change that does worry local real estate professionals is the plan to limit the amount of concessions that a seller can make to a buyer, from 6 percent to 3 percent, to be in line with the conventional lending industry.

With home sales in decline, many sellers have begun assisting would-be buyers with the purchase of their home. Sellers might pay for the closing costs, pay for the first year of homeowners insurance, or even buy appliances for the house to help the buyer preserve enough cash for the down payment and closing without lowering the listed sale price of the property. But the housing administration is concerned that the practice encourages people to inflate the appraised value of homes to absorb the concessions, so the agency is restricting the value of seller concessions to 3 percent.

Ory said the change could stifle a number of first-time home purchases. “Most buyers have a good income stream and nothing in the bank,” he said.

But on the positive side, Sterbcow said the change should give homeowners more confidence in the value of their real estate, since the change will limit how much sellers can subsidize purchase prices. “It creates a solid bedrock of values for homes. There’s not that false bottom that the appraiser covered up for the closing costs,” he said.

This entry was posted on Sunday, January 24th, 2010 at 4:06 am and is filed under Home Insurance, News. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.