Inmann News – Republicans on the House Financial Services Committee have drafted legislation that would raise the minimum down payment for FHA mortgages to 5 percent, cut FHA loan limits in most markets, and move the Agriculture Department’s rural housing program to FHA’s parent agency, HUD.

Though the draft bill has not been introduced, titled or assigned a number, it is expected to be the main subject of a hearing Wednesday before the Subcommittee on Insurance, Housing and Community Opportunity, chaired by Rep. Judy Biggert, R-Ill. After that, the bill is likely to be formally introduced and sped through subcommittee and committee votes and head for action by the full House.

The text of the draft bill appears to be a partial answer from House Republicans to the Obama administration’s call earlier this year for a smaller federal government footprint in housing.

By lowering maximum FHA loan limits in large numbers of local areas — well below even the limits that are already scheduled to kick in Oct. 1 — the bill would squeeze down FHA loan volume across the country, cutting a resource for some home purchasers who can’t obtain a conventional mortgage.

Here are some examples of current FHA loan ceilings, how they’re scheduled to adjust in October, and where they’d end up under the Republican plan:

• In Los Angeles County, the present high-cost area maximum is $729,750, which was set by the federal economic stimulus legislation passed by Congress following the financial crisis of 2008. That ceiling is scheduled to drop to $625,500 Oct. 1. Under the new bill, however, the maximum FHA-insured loan amount allowed in Los Angeles would be $412,500 — a $317,250 plunge from the current limit and $213,000 below the scheduled reduction this fall.
• Other counties in high-cost California would experience even sharper declines, such as Monterey, where the maximum would decline by $436,000 and Contra Costa, where the drop would be $379,750. Every county in California — from big urban communities to rural areas — would be on the losing end of the new FHA equation, and most reductions would be in the six figures.
• The lower limits would be significant in other states as well. Monroe County, Fla., would see maximum FHA loan limits go from $729,750 to $425,000. Under the scheduled Oct. 1 statutory decrease, the county — which comprises the Florida Keys — would have a $529,000 maximum. Sarasota, Fla., would see a $261,250 drop under the bill, Miami-Dade a decrease of $161,250, and Orange County (Orlando) limits would decline by $128,750.
• Large counties in the high-cost areas around Washington D.C. would see FHA limits drop by anywhere from $398,500 (Prince George’s, Md.) to $366,250 in Baltimore. Most New England and mid-Atlantic states would end up with lower loan ceilings along with major markets in the Midwest and the Rocky Mountain states.

The FHA loan limit formula would be revised to 125 percent of the median home sale price in the local county under the bill, and the current $271,050 floor for loan limits nationwide would disappear.

Though major housing, real estate and lending groups had no comments pending the Wednesday hearing, they are likely to oppose the sharp cuts in loan limits.

Mortgage industry consultant Brian Chappelle, head of Potomac Partners in Washington, D.C., is scheduled to testify at the hearing and told Inman News that the higher loan ceilings are a bad idea.

Audits of FHA loan performance, Chappelle said, repeatedly have shown that higher-balance mortgages default and trigger claims against FHA’s insurance funds at lower rates than smaller-balance loans.

“FHA is essentially an insurance company,” he said, “and you need those (higher-balance) loans to spread the risk,” just as private sector insurers do.

The Republican bill’s call for a 5 percent minimum down payment on FHA loans also is likely to draw criticism from industry groups.

The National Association of Realtors and the National Association of Home Builders have opposed such a move in the past, arguing that there is no statistical evidence that adding 1.5 percent onto the current 3.5 percent minimum would significantly affect default probabilities of new FHA loans.

However, the higher down payments, along with the bill’s prohibition of financing of closing costs, would make home purchases more difficult for substantial numbers of consumers.

Chappelle estimates that “40 percent of FHA borrowers would fall out” — unable to afford the transaction  – “if they go to 5 percent down.”

The bill also proposes shifting the Agriculture Department’s rural housing program to the U.S. Department of Housing and Urban Development. A Republican staff member said “HUD has the housing responsibility and the expertise,” so the change is logical.

However, proponents of the rural housing programs may not want to risk being swallowed up in an urban-oriented agency, nor is the Agriculture Department likely to want to lose a chunk of its traditional turf.

Where’s the bill headed? Republicans say they are merely seeking to move the agenda they share with the Obama administration — the smaller footprint concept — which is, in turn, part of a larger agenda to phase out Fannie Mae and Freddie Mac.

Passage of the bill by the full House appears to be a real possibility, as Republicans are in control on that side of Capitol Hill.

But all bets are off in the Senate, where Democratic support for continuing FHA’s role in the market is far stronger, and where dramatic cuts in loan limits in places like California, New York, Massachusetts and the East Coast’s expensive markets likely won’t fly.

Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.

National Apartment Market

REIS Reports – The recovery in apartment fundamentals and the projected supply/demand imbalance in the sector has created frenzy and drawn investors back to the market. Weak transaction activity coupled with low cap rates indicates a strong selection bias from investors, whereby they favor the best-quality assets with low cap rates.

The data clearly demonstrates that there is a persistent rift between the class B/C cap rate and class A cap rate, and it’s widening over time. It signals that the risk aversion in the transactions market continues as investors preferred high-quality assets to low-quality assets. Many market participants are already claiming that this segment of the market seems overpriced.

How low are investors willing to push class A apartment cap rates before market sentiment shifts to favor lower quality apartment properties, other property sectors, or the development of more class A properties? Go to reisreports.com to find out.

From Princeton Capital – The price of granite has declined by about 50 percent. You can thank competition for the reduction as producers in Asia and Brazil quarries now market granite in the United States.

Remodeling contractors say the cost of labor for kitchen projects is down as well. People who have waited out the recession and have the money to do it are moving forward with kitchen updates.

The Harvard Joint Center for Housing Studies say remodeling spending fell 16 percent between 2007 and 2010. Now, affordable prices for traditionally upscale appointments are perking up homeowners’ remodeling plans.

According to the National Association of Home builders, overall remodeling costs are running at least 20 percent lower than 2006.

The biggest budget killer: impulse buying.

Studies at the University of Pittsburgh show that impulse buying adds up to 30 percent of overall spending. Here are some tricks to keep you from unplanned purchases:

Look at the clothing or electronic gadget but don’t touch them. Picking up an expensive sweater or cellphone increases your sense of ownership, which makes it more difficult to resist buying.
Consider what you would rather do with the money. Save it toward a grand vacation? Focus on which one you would rather give up.

Shop with a list. This classic idea can be one of the biggest money savers of all. Decide what you want and need. Mentally decide how much you are willing to spend on gifts, personal care and items for your home, and how you could save one-third of those costs over a year.

Create separate savings accounts for items like vacations, Christmas, and new furniture. One Dartmouth researcher says a reminder on your calendar can help. Reminders like “Deposit tax refund to Roth IRA” can boost savings by 15 percent.

Just last week – as millions of Americans continued to struggle with unemployment and foreclosure – the 20-year-old Marshall moved into his first home: a three-bedroom, two-bath ranch on an Elk Grove cul-de-sac, which he bought for $115,000.

The financial nightmare of the past several years has turned into Marshall’s American Dream.

“This is more than I could imagine,” said a beaming Marshall, who bought his first house, dog and barbecue all in one week. “I thought I’d never be able to buy a home.”

Marshall’s experience highlights the reward at the end of a string of modern-day conditional clauses: If you have a job, if you aren’t underwater on a home, if your credit isn’t ruined and you have some cash, then you can find some ridiculous deals on property these days.

How much will $250,000 get you in this market? $500,000? What about $1 million?

“The opportunities right now are amazing,” said Nadia Zierke, a Coldwell Banker agent, who helped Marshall find his home.

Distressed properties – short sales and foreclosures – continue to dominate the market, driving down prices for everyone. That’s bad news if you own a home and are watching it slowly slip under water. But for investors, first-time buyers and those with the ability to move up, the market couldn’t be better.

Since the 2006 market peak, the median price per square foot for homes in Sacramento County has fallen by anywhere from a third in east Sacramento to nearly 77 percent near Cannon Industrial Park in North Sacramento, according to sales data from DataQuick Information Systems. Only three of 40 ZIP codes in the county had a higher median price per square foot last quarter than in the first quarter of 2003, the San Diego-based researcher found.

All of this means buyers can get more home for less.

If you want to live in the suburbs, three-quarters of the 1,500 Elk Grove homes now for sale are going for $250,000 or less, according to listings on MetroList. The median listing in that city is a 2,100-square-foot, four-bedroom, three-bath home priced at $210,000 – $100 a square foot.

Or if the bustle of midtown Sacramento is more your thing – and if you can make it through the short sale process – $399,000 could get you a high-water bungalow at 14th and T Streets. That’s 35 percent less than the property sold for at the peak. Over in east Sacramento, a four-bedroom Spanish-style home at 31st and H Streets could run you $449,000 – just five years after selling for $800,000.

For country living, you can get a four-bedroom house on 20 acres of land in Wilton for $649,000 – property worth more than $1.5 million at the peak. If you want to live along the Sacramento River, $715,000 will get you a 5,000-square-foot foreclosure that listing service Zillow estimates is worth nearly $1 million today.

The prices have fallen so much that Zierke, the Coldwell Banker agent, recently jumped in herself and snapped up a property.

“I just bought a home in January because I couldn’t pass up this market,” she said.

Zierke and her husband bought a 5-acre property in Wilton complete with an airplane hangar and space for horses for $400,000 through a short sale. The home had sold in 2004 for $880,000 and the owner had put in close to $900,000 in work, she said.

“Your money gets you a lot farther,” Zierke said.

Some agents, like Chuck Klein of Real Living/Great West, are still dazed by what happened to the market but are trying to make the best of what was a devastating situation for many.

“It’s astonishing what happened. We’re just trying to live through it,” Klein said.

One of his current listings, a 3,400-square-foot Elk Grove home, epitomizes everything that has happened over the past few years.

The monstrous, tri-level home is selling for $231,500 – less than $70 a square foot. The price, however, is about $150,000 less than the owners owe, meaning they had to go through the process of getting a short sale approved by their lender, Klein said.

Inside the cavernous house where the family once ran a day care business, it looks like someone left in a hurry. Mounds of clothes, children’s toys and other mementos are strewn about.

“It’s going to be a wonderful home for someone,” Klein said.

Scott Marshall never contemplated buying a home until about a year ago when a family friend suggested he consider taking advantage of the historic low prices.

He looked at the time but didn’t have enough work history to qualify for a loan, Marshall said. So he put in another year at his job as a merchandiser at the Sacramento Coca-Cola facility and started looking again last month.

Almost immediately he found a home on the 8700 block of Crucero Drive that Wells Fargo was trying to unload. The bank had foreclosed after the owner defaulted on a $221,500 loan from 2007. In less than a month Marshall closed, putting only 3 percent down after qualifying for a 30-year FHA mortgage at 4.75 percent.

Marshall’s monthly mortgage payments are going to be $853 – less than the $1,000-a-month rental apartments he was also looking at, he said.

While he can’t yet legally have a beer to celebrate his new home, Marshall can grill up a steak on his new barbecue – one of those deluxe propane models with an extra burner and lots of chrome.

“No one can believe it,” Marshall said. “It’s never too early to be smart.”

And he doesn’t need to worry about feeling lonely after moving out of his parents’ house, where he lived while saving his money for a down payment. In addition to buying a dog last week, he also has been named by his neighbors as the unofficial guardian of the neighborhood’s stray cat and a chicken that wanders the streets.

On an afternoon last week, Marshall watched that chicken wander across his front lawn near the spot where he plans to put in a retaining wall and over the driveway he plans to repave.

“I lived in Wilton. I’m used to chickens. I feel at home,” Marshall said.

Wall Street Journal – Already plagued by stubbornly low home prices, homeowners soon may be facing another blow: rising insurance premiums.

After five years of relatively stable premiums, some of the country’s biggest insurers have raised rates—or say they plan to. Premiums vary by state, but last year, State Farm Mutual Automobile Insurance Co. says it increased homeowners rates 7.3% on average and, this year, has raised them in 18 states, including a few by more than 7%. By contrast, it cut rates in just two states.

In Florida, upscale insurer PURE Risk Management raised premiums 11% this year. Fireman’s Fund Insurance Co., a subsidiary of Allianz SE, says it has started to raise premiums in some areas. For some Pennsylvania homeowners, premiums shot up 33% last year.

For homeowners, the increases may seem counter-intuitive. Why are they paying more to protect a house that may have lost significant value? Insurers say premiums are partly based on rebuilding costs, not on a home’s appraised market value. When energy and building-material costs rise, insurers sometimes raise premiums, said Mike LaRocco, chief executive of Fireman’s Fund Insurance. Even with the recent decline in commodities prices, gasoline is up 37% in the past year, copper is up about 20% and plywood is up around 8%.

There may be more premium increases on the way, experts say, given the rising toll of natural disasters, including recent tornadoes and extreme weather in the U.S. and the earthquake and tsunami in Japan in March.

New risk models also are causing insurers to reassess rates, said PURE President and CEO Ross Buchmueller. A new hurricane model used widely across the industry forecasts a higher “wind risk,” even for homes far from the coasts, driving premiums higher.

Federal flood-insurance prices may rise as Congress looks to erase the remaining $18 billion deficit from Hurricane Katrina. One congressional proposal would raise the limit on annual premium increases to 20% from 10% and make it harder for the most flood-prone properties to get coverage. The average flood premium is about $600 annually; rates go to nearly $6,000 for the highest-risk coastal properties, the National Flood Insurance Program says.

All this may be a shock to homeowners, who have gotten used to premiums kept stable by the absence of big storms and costly disasters since Hurricane Katrina caused insured losses of more than $45 billion in 2005. The recession and decline in home construction also sapped demand for insurance, according to industry researcher Insurance Information Institute. The average annual premium for homeowners’ insurance fell 3.8% to $791 in 2008 from 2007, Institute figures show. It estimates the average premium rose to $807 last year.

There may be little home owners can do, beyond the usual shopping around. Jack Powers, an independent agent at Gulfshore Insurance in Naples, Fla., says some of his customers face rate increases of 20% or more. Still, he advises many of them to swallow the increases. The alternatives, he says, are smaller, unrated insurers that may not withstand a storm financially.

Los Angeles Times - Borrowers who can afford higher mortgage payments, and who meet lenders’ stricter loan guidelines, often opt to replace their 30-year mortgages with shorter term loans at near-record low rates.

Making sense of the story

• The latest Freddie Mac quarterly survey of homeowners who refinanced found that more than one in three borrowers who refinanced from a 30-year fixed-rate loan opted to replace it with 15-year or 20-year mortgages at near-record low rates.
• Homeowners considering refinancing into a shorter-term mortgage must have the income or financial reserves sufficient to pay the extra money each month.
• Borrowers not only need to have the income or financial reserves, they also have to qualify for a refinance, have the credit score needed, and the home appraisal to support it.
• For some low-cost refi programs, lenders want to see at least 25 percent equity in the house. Higher FICO credit score requirements by Fannie Mae and Freddie Mac are another impediment, as both companies reserve their best rates for borrows with FICO scores of 740 or higher.

Foster Weeks publishes a weekly mortgage report which is updated every Monday morning. How is this affecting the San Francisco real estate market? Read our weekly and monthly market reports. Here’s what Mr.Weeks says about last week’s activity:

“SLOW AND STEADY?” Last week, the economy appeared to be slowing. But despite the negative economic news, Bonds and home loan rates held steady and were unable to improve further.

Let’s look at what happened and what it means…

Housing Starts and Building Permits, which are leading indicators of the new home construction market, both came in below expectations that were already low. If you consider the significant amount of foreclosures and inventory overhang weighing on the market, it is no surprise to see a weak indicator on new home construction. Broadly speaking, foreclosures and short sales are expected to continue weighing on new home construction for the next couple of quarters… but as we all know, real estate is very local – so your particular market may be quicker or slower to improve.

Manufacturing reports were also disappointing last week. For example, Industrial Production, Capacity Utilization, and the Philadelphia Fed Manufacturing Index all came in below expectations – which helped Bonds last week.

So why didn’t Bonds and home loan rates improve?

The recent rally in Bonds and home loan rates was partly sparked on the notion that US economic growth will slow – which the economic reports last week seemed to indicate. And when you also factor that the only two ways the government can lower the budget deficit is either by cutting spending or raising taxes – or some mix of both – the austerity measures could indeed slow the economy.

Normally, such soft economic data would help Bonds and home loan rates. But last week, Bonds had trouble making gains because – despite the negative economic headlines – some of the reports included data that was unfriendly to Bonds.

Here’s an example…

Last week, the Empire State Manufacturing Index was reported a lot weaker than expected. But, when you look beyond the headline number, you see that the “Prices Paid” component of that report – which measures wholesale inflation – showed the highest rate of inflation in three years… and the second highest reading ever! Remember, inflation is the archenemy of Bonds and home loan rates.

Additionally, the employment index of the Empire State Index was positive, which suggests hiring. And, in a separate report released last week, the Labor Department’s Initial Jobless Claims number also showed the lowest level of unemployment claims in a month. Not only was that a good number from the standpoint of beating expectations, but it also indicated that April’s surge in unemployment claims was more likely due to temporary factors rather than a worsening labor market.

In the end, the positive employment news combined with the concerns over inflation offset some of the negative economic news last week and held Bonds and home loan rates in check. Both Mortgage Backed Securities and Treasuries traded dead on a ceiling of resistance last week. And unless Bonds can break above this ceiling, prices can’t improve further. I’ll be watching the markets closely this week to see if Bonds break above that ceiling this week.

Even if they don’t, the good news is that home loan rates are already historically low and present an ideal situation. If you or someone you know is looking to purchase a home or refinance, please call or email today to see how you can benefit from that situation.

Forecast for the Week

A second chance for better news? We’ll see new reports this week on housing and inflation. Here’s what to watch:

• After last week’s disappointing Housing Starts and Building Permits, we’ll see more housing news this week. First up is the New Home Sales report on Tuesday, followed by the Pending Home Sales report on Friday. I’ll be watching closely to see how these reports come in and how they impact the markets.
• We’ll also get another read on the economic recovery with Wednesday’s Durable Good Orders, which gives us an update on consumer and business buying behavior on big-ticket items.
• On Thursday, the markets will see the latest report on Gross Domestic Product (GDP) – which is the broadest measure of economic activity.
• The Jobless Claims report also comes out Thursday. As stated above, the report released last week came in better than expected and the lowest number of unemployment claims in a month. That said, we still have a lot of wood to chop in terms of a labor market recovery – and we all know that this is the key factor to an improving housing market as well.
• The big news of the week will be released on Friday in the Personal Consumption Expenditures report, which is the Fed’s favorite gauge of inflation. This report is closely watched and could move the markets, especially after the inflation concerns indicated in last week’s release of the Empire State Manufacturing Index.
• Finally, Friday will also provide a look at reports on Consumer Sentiment, Personal Spending, and Personal Income.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.

Read the entire article and see the graphs here.

- Foster Weeks