Mortgage and Real Estate Blog

NEWS FLASH: FHA changing MIP / PMI requirements effective July 14, 2008

This information is very important for writing FHA purchase agreements and when speaking to buyers. We suggest you print out and save the graphs below and pass this along to others.

FHA, as with many other lending options is switching to new RISK BASED PRICING. Risk-based premiums enable FHA to respond to changes in the market, like the recent implosion of subprime lending, by reaching out to higher-risk borrowers without having to raise premiums for all borrowers. Borrowers are better off, even with higher mortgage insurance premiums, because FHA insurance gives borrowers access to substantially lower interest rates than are charged for subprime loans, thereby lowering borrowers' overall borrowing costs.

Many of FHA's lower-income borrowers have FICO scores above 680 and would qualify for premium reductions relative to today's premium levels. In fact, as a result of the predominantly low- and moderate-income character of FHA borrowers, a larger number of low-income borrowers would benefit from premium reductions than would moderate-, middle-, and upper-income borrowers combined.  

The first number is the UP-FRONT MIP. The second number is the monthly PMI 

 Call Joe Metzler for all your MINNESOTA FHA deals at  (651) 552-3681

Need all the details?

For easy reading, start at page 26....     http://portal.hud.gov/pls/portal/docs/PAGE/FHA/IMAGE_LIBRARY/5171-N-02%20RBP%20FINNTC%20TO%20PUBLISH%20%205-13-08%20.PDF

Home owners are still optimistic about their home’s value, despite falling home prices all around them, according to a survey of homeowner confidence conducted by Harris Interactive for Zillow.com According to the survey, 72 percent of home owners believe their home's value has increased or stayed the same in the past year.

The reality is 75 percent of U.S. homes actually decreased in value from the same period a year ago, according to Zillow. In fact, in the first quarter home values dropped 7.7 percent year-over-year, which was the largest year-over-year decline in more than a decade, Zillow points out.

But home owners could be growing more realistic. Since the confidence survey was first conducted last December, home owners show signs they are moving closer to reality as 5 percent more respondents in the first quarter said they think their home value has decreased in the past year compared to those surveyed in the fourth quarter of 2007. Source: Zillow.com

What came first, falling home prices or a slumping market?

Chicken or the Egg?

While pundits galore will claim many different views, the answer is rather simple in economic terms.  After years and years of record home price increases, the market simply couldn't support the increases anymore. Buyers could no longer afford the prices. House prices started falling first simply because no one was willing to pay the price anymore.

Most loan programs like to see debt ratios no higher than around 40% of income. FHA for example is 43% on a manual underwrite. Again, simple economics apply here. If the average wage in Minnesota (where I am at) is $784 per week ($40,784 per year), assuming no other debt (not likely), 5% down, PMI, taxes and insurance, this person could buy around a $180,000 home. Start throwing in debt, car loans, credit cards, etc., and the maximum home price starts sinking as fast as a rock in water.

As home prices increased, buyers started switching to high risk, short-term loan products to make homes more affordable. As we can see by today's market, that was a short sighted plan that didn't work out well for many.

Therefore there really is only one way to get demand up and people to start buying again. Affordable prices. Simple supply and demand economics. Too much supply because of too little demand forces prices to drop. As unsold inventory clears, the result will be higher prices, but fewer sales.

The higher price but fewer sales, the normal supply and demand cycle was dramatically upset the past ten years as people threw caution to the wind and kept demand artificially high. Everyone wanted in and was willing to pay whatever price was asked. Everyone figured you could make a killing in the housing market. This was especially evident in the investment property market.

A killing has occurred. Just not the one most people expected.

So what do we do? Nothing. The market will correct itself as prices drop, rates stay attractive, and housing affordability returns.

(C) 2008 Joe Metzler - www.JoeMetzler.com