Economic Insights

BUSH ADMINISTRATION TO IMPLEMENT FHASECURE EXPANSION USING FAIR, FLEXIBLE PREMIUM PRICING
FHA prepares to assist more struggling homeowners while protecting taxpayers from risk

WASHINGTON – The Bush Administration today issued final guidance that will permit its flagship mortgage insurance program to assist more homeowners who are struggling to keep up with their high-cost subprime adjustable rate mortgages. To ensure taxpayers do not assume the cost of this expansion, HUD’s Federal Housing Administration (FHA) will implement a fair and flexible premium pricing structure beginning July 14, 2008.

Modifications to FHASecure will help homeowners who can no longer afford their mortgages and missed up to three monthly mortgage payments over the past 12 months. As an alternative to foreclosure, eligible borrowers can refinance with FHA and lenders can voluntarily write down the outstanding subprime mortgage principal balances. Implementation of FHA’s new premium pricing plan on July 14 will coincide with the start date to expand FHASecure.

“With a flexible premium structure, FHA can fulfill its mission of assisting families who do not have access to prime-rate financing. Fair pricing will allow FHA to reach more troubled homeowners without placing excessive risk on its insurance fund,” said HUD Deputy Secretary Roy A. Bernardi.

Currently, FHA has a ‘one size fits all’ premium structure that charges borrowers 1.50 percent of the loan balance upfront and .50 percent annually regardless of their credit standing. FHA feels this approach does not treat borrowers equitably and may put the FHA insurance fund at risk. Under the new rule, FHA’s upfront mortgage insurance premium will range from 1.25 percent to 2.25 percent. Borrowers must continue to adhere to FHA’s strict underwriting criteria. By charging different premiums, FHA will operate like most other insurance companies. This premium structure will preserve lower premium costs for FHA’s traditional borrowers, including low-income and minority families who have a strong credit history and save for a downpayment.

By charging slightly higher premiums based on risk, FHA will be able to extend the benefits of its FHASecure program to more homeowners affected by the volatility in the mortgage market. Borrowers refinancing into FHA from the subprime market are better off, even with slightly higher mortgage insurance premiums, because FHA insurance gives them access to substantially lower interest rates, and lowers their overall mortgage costs. The difference between the existing 1.50 percent upfront premium and a 2.25 percent premium for a $150,000 mortgage is only about $7 per month. With families turning to FHA in record numbers, the agency is on pace through its expansions to help approximately 500,000 families refinance into its affordable mortgage product by the end of this year.

“Charging borrowers a fair premium based on their credit risk means that they pay their own way, allows FHA to reach more borrowers, and helps create a more financially sound FHA. That’s good news since FHA, like any other insurance company, supports its flagship program through its premiums – not taxpayer dollars,” said Assistant Secretary for Housing – Federal Housing Commissioner Brian D. Montgomery.

FHA has the statutory authority to charge as much as 2.25 percent for the upfront premium and .55 percent for the annual premium. This premium structure will give borrowers an incentive to improve their credit and thereby pay lower premiums. Today’s announcement will allow FHA to offer a range of premiums, depending on the level of risk borrowers represent based on their credit profile and the amount of their downpayment. In other words, to determine a fair premium, FHA will look at the borrower’s financial responsibility and how much they are willing to invest in their home.

To make this information available as soon as possible, HUD is posting guidance on risk-based pricing electronically on its website in advance of the Federal Register publication on May 13, 2008.

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HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development, and enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov. For more information about FHA products, please visit www.fha.gov.

Contact Heath Lefort is you have interest in refinancing 401-461-9987

Home sales slip, stock of unsold homes rises

Home resales fell 1 percent in April to a 4.89 million-unit annual rate, the National Association of Realtors said.

The sales pace was a bit better than expected on Wall Street, but the stock of unsold homes surged 10.5 percent to 4.55 million units, leading economists to warn of further market woes ahead.

At the current sales pace, the supply of homes reached 11.2 months' worth, the highest since the trade group began tracking single-family and condo properties together in 1999. For single units, the supply was 10.7 months' worth, the most in 23 years.

The increase in unsold inventory suggests that the housing downturn will continue on through this year and well into next

Stocks initially got a slight lift from the data, but later turned lower as the market digested the news and warily eyed a resumption in the steep run-up in oil prices. In early afternoon, the Dow Jones industrial average was off 150 points.

Prices of U.S. government bonds rose as investors shifted out of stocks, while the dollar fell and oil climbed above $131 a barrel.

The report showed the median home price in April was down 8 percent from a year ago, at $202,300. It was the second-largest price decline on record, following the biggest drop in February.

"The big surprise was the inventory of unsold homes rising to a record level,' "This would suggest to us that further price declines are going to be necessary for the inventory to clear."

A report on Thursday showed home price declines accelerated in the first quarter. The federal Office of Housing Enterprise Oversight said its price index fell 1.7 percent in the first quarter, the steepest drop in the index's 17-year history.

Other price measures have shown even steeper drops. The Standard & Poor's/Case Shiller home price index of 20 metropolitan areas showed a drop of 12.7 percent in the 12 months through February, with prices down 15.8 percent from their June 2006 peak. The March index will be released on Tuesday.

"With prices collapsing, the incentive not to buy a home is increasing by the week, and with inventory showing no sign of improvement prices will keep falling. One-fourth of the sales likely were due to foreclosure, which he said was another negative sign.

Foreclosed homes, which sell at substantially lower prices, are increasingly showing up in the existing home sales data.

Several markets are seeing a significant rise in home sales.  These markets are also the markets that have witnessed a substantial decline in prices.

The trade association said last month's existing home sales pace was 17.5 percent below the rate of April 2007, with single-family home sales off 16.1 percent and sales of multiple family units down 27.9 percent

Today,  real estate is a great investment, but you have to be smart about what you are offering.  I recommend that clients bid 12-15+% below the asking price. This will allow you to build in the market decline as real estate inventories increase putting downward pressure on house prices.

If you have any questions, please just call.

Happy Memorial Day!

Heath Lefort -Personal Financial Advisor & Economist

401-461-9987