Accessing Credit: Permanent Mortgage

U.S. Department of Housing and Urban Development HUD NSP Webinar Accessing Credit: Permanent Mortgage Financing Thursday, February 24, 2011 Community Planning and Development

Presenters: Host: Kent Buhl Moderator: Robert Grossinger, Enterprise Community Partners Panelists: Tom O Neill, Bank of America LaDonna Reed, Chase Bank Mike Dawson, Freddie Mac U.S. Department of Housing and Urban Development Community Planning and Development 2

Format & Objectives Examine trends and changes in the mortgage origination system. Identify Myths and Realities of the current mortgage market. Panel discussion with question and answer. U.S. Department of Housing and Urban Development Community Planning and Development 3

What to Expect in the Current Market. CURRENT TRENDS U.S. Department of Housing and Urban Development Community Planning and Development 4

Mortgage Rates Are At 59-Year Lows 18 18 16 16 14 12 10 8 April 1951 4.19% 30-Year SF Fixed Conforming Mortgage Rate Record Low: November 11, 2010 4.17% 0.8 points 14 12 10 8 6 4 10-Year Treasury 6 4 2 0 April 1954 2.29% December 2008 2.24% 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 1967 1965 1963 1961 1959 1957 1955 1953 1951 1949 2 0 U.S. Department of Housing and Urban Development Community Planning and Development 5

Large Inventory Surplus Remains in Market Excess Unsold Homes for Sale (Numbers in Thousands) 1000 Annual Data Quarterly Data 900 800 700 600 500 400 300 200 100 0-100 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 1996 2000 2004 2005 2006 2007 2008 2009 2010 U.S. Department of Housing and Urban Development Community Planning and Development 6

House Price Declines In the U.S Cumulative Change - 2006Q2 to 2010Q2-24% -50% -40% -40% -40% > 2% -2 to 2% -10 to -2% -20 to -10% < -20% 7 U.S. Department of Housing and Urban Development Community Planning and Development Source: FHFA Purchase-Only House Price Index by State, 2006Q2 and 2010Q2. 7

Increased Homebuyer Affordability Low Interest Rates & Lower Home = Increased Affordability Index 190 170 150 130 110 90 NAR Affordability Index (left scale) 30-Year Fixed Mortgage Rate (right scale) Percent 19 17 15 13 11 9 7 70 50 Index = 100 means median income buys median priced home Forecast 5 3 1971.1 1973.1 1975.1 1977.1 1979.1 1981.1 1983.1 1985.1 1987.1 1989.1 1991.1 1993.1 1995.1 1997.1 1999.1 2001.1 2003.1 2005.1 2007.1 2009.1 2011.1 Source: Freddie Mac Office of the Chief Economist. National Association of Realtors Composite Housing Affordability Index (% of median priced home affordable on median income with conventional mortgage and 20% down), seasonally adjusted; Freddie Mac Primary Mortgage Market Survey and October 2010 Outlook. 8 U.S. Department of Housing and Urban Development Community Planning and Development 8

Mortgage Securitization in Today s Market Dramatic shift in mortgage securitization since 2008 Market share is now dominated by Fannie, Freddie and Ginnie Mae. Fannie & Freddie Ginnie i 70% 28% 2010 Private Label 2% U.S. Department of Housing and Urban Development Community Planning and Development 9

MORTGAGE MARKET MYTHS AND LENDING REALITIES U.S. Department of Housing and Urban Development Community Planning and Development 10

MORTGAGE MARKET MYTHS? The Myths #1 #2 FHA is the only option available for permanent fixed-rate mortgages #3 The PMI companies are not active in the first-time homebuyer market #4 Lenders will not originate mortgages with public soft seconds (such as NSP) or other federally subsidized support #5 Mortgage financing options with Federal money are too complicated. U.S. Department of Housing and Urban Development Community Planning and Development 11

Panel Perspectives Tom O Neill, Senior VP, Affordable Housing Programs U.S. Department of Housing and Urban Development Community Planning and Development 12

Neighborhood Stabilization Programs Secondary Financing Overview If an NSP program is structured for lenders to originate a first mortgage with a concurrent close of the agency s second mortgage, the lender has specific responsibilities to the investor of the first mortgage The lender of the first mortgage is responsible for ensuring the second meets the eligibility criteria of the secondary market investor, primarily Fannie Mae, Freddie Mac, and FHA For consistency in terminology, the secondary financing provided by an agency under NSP, will be referred to as Community Seconds Programs (CSP s) Nationwide, Bank of America has currently approved over 1,800 CSP s for use in conjunction with one of our first mortgage products. Of these, 170 programs were developed in conjunction with NSP funds However, many CSP s, including some using NSP funding, were not approved because they did not meet secondary marketing guidelines 13 U.S. Department of Housing and Urban Development Community Planning and Development 13

Community Seconds Program (CSPs) Basics The combined loan-to-value (CLTV) can be up to 105% for conventional loans and to a level that covers all eligible costs on an FHA loan The subsidy provider generally places their own restrictions on borrower eligibility. The most common restrictions are: Income limits Purchase price limits First-time buyer There may also be resale restrictions 14 U.S. Department of Housing and Urban Development Community Planning and Development 14

Community Seconds Program (CSPs) Structures Repayment can be structured in many different ways Common structures include: Zero interest or a very low interest rate In lieu of interest, t the subsidy provider may want a share in the appreciation of the property Payment deferral for the first several years No payment at all for the entire term of the loan, sale of the property, or change in occupancy whichever occurs first Forgiveness of the debt, either partially or fully over a period of time. Note: Loans with deferred payments of at least 5 years (conventional) or at least 3 years (FHA) do not have to be included as a debt by the lender in qualifying the loan 15 U.S. Department of Housing and Urban Development Community Planning and Development 15

Community Seconds Program (CSPs) Agency Guidelines Prior to originating a first mortgage that involves a subordinate community second, Bank of America must review the terms and conditions of the second mortgage against the guidelines of Fannie Mae, Freddie Mac, HUD and/or VA. Conventional Loans If interest is charged on the subordinate mortgage, the interest rate cannot be higher than 2 points above the interest rate of the first mortgage (very rare) The subordinate mortgage may not provide for negative amortization (accrual of interest during a period when payments on the loan are deferred) The subordinate mortgage may not require a balloon payment that is earlier than 15 years after the note date of the first mortgage or the maturity date of the first mortgage The subordinate mortgage may not require both interest and shared appreciation There are limits on the amount of shared appreciation the subsidy provider can receive 16 U.S. Department of Housing and Urban Development Community Planning and Development 16

Community Seconds Program (CSPs) Agency Guidelines FHA Loans The subordinate lien must be in the name of the eligible subsidy provider. It may not be made in the name of the lender or any other agent If the second mortgage is offered through a government agency or a nonprofit instrumentality of government, the community second may be used to cover the down payment and closing costs, including the borrower s minimum investment. If it is through any other non-profit or a private entity, the borrower must still make their minimum investment per standard FHA requirements If, with the subordinate lien, there are resale restrictions imposed on the borrower, those restrictions must terminate in the event of a foreclosure or deed-in-lieu of foreclosure VA Loans Generally, the VA requires the lender to simply confirm that the veteran benefits from the community second VA does not require their approval of a community seconds program offered through a government entity, however, programs offered through non-profits or private entities must be directly approved by the VA 17 U.S. Department of Housing and Urban Development Community Planning and Development 17

Community Seconds Program (CSPs) Program Review Before Bank of America can fund any first mortgage that also involves a Community Second subordinate loan, the Community Second program must be reviewed and approved by our Affordable Housing Programs team. The documents that must be submitted for a program review consist of: The program description / guidelines - This will outline how the program works including eligibility requirements, income and purchase price limits, maximum assistance amounts, financial terms of the subsidy, etc. Agency contact information Sample copy of the Community Seconds Promissory Note Sample copy of the Community Seconds Deed of Trust / Mortgage Copy of a Lender Participation Agreement (if applicable) 18 U.S. Department of Housing and Urban Development Community Planning and Development 18

Neighborhood Stabilization Program FAQ s What are some of the more common causes for a CSP (including those submitted using NSP) to be declined for use by the first mortgage lender? Some component of the basic structure /terms of the second mortgage do not meet guidelines (eg. excessive shared appreciation) The agency may require a Lender Participation Agreement where one or more of the provisions are not acceptable to the first mortgage lender Some aspect of the processing and/or funding of the concurrent loans is incompatible with the first mortgage lender s systems Rehab processes and administration of funds 19 U.S. Department of Housing and Urban Development Community Planning and Development 19

Neighborhood Stabilization Program FAQ s Can the agency fund the rehab and complete the disbursements? It depends on the extent of the rehab and when it will be completed Extensive rehab work that is required for health and safety and or will not be completed prior to closing of the first mortgage, must be funded by a lender using a rehab product (eg. FHA 203k) and the first mortgage lender must administer the rehab disbursements Can the agency put the funds into an account and allow the lender to manage rehab? there are systems complications that make this arrangement very difficult or unworkable 20 U.S. Department of Housing and Urban Development Community Planning and Development 20

Neighborhood Stabilization Program Lending Solutions If the agency does not own the property, they can fund and manage the completion of non health and safety issues, such as carpet, paint, landscape and updated appliances with a second mortgage recorded concurrently with the first and the work can be completed after the closing If the agency does not own property and the Servicer/Investor allows, the agency can fund any type of repair/upgrade allowed by NSP, including health and safety issues provided: Health and safety work is completed prior to close It is likely the contractor will need to agree to being paid until close of escrow and the agency will need to record the second mortgage concurrently with the first at closing Note amount of second may include funds disbursed to contractors, as well as down payment and/or closing costs 21 U.S. Department of Housing and Urban Development Community Planning and Development 21

Neighborhood Stabilization Program Lending Solutions An agency can provide a subordinate loan after closing for additional work done to the property the agency may want to provide additional oversight of the rehab and work closely with the borrower while the work is being done An agency can fund down payment / closing cost assistance the property must meet standard property conditions when the loan closes 22 U.S. Department of Housing and Urban Development Community Planning and Development 22

Panel Perspectives LaDonna Reed, Multi-Cultural Affordable Lending U.S. Department of Housing and Urban Development Community Planning and Development 23

Mortgage Financing Challenges Credit Down Payment Property Condition U.S. Department of Housing and Urban Development Community Planning and Development 24

Credit Score Challenges Challenge - Bank overlays on FHA/VA products that place minimum credit score guidelines. Banks support credit counseling agencies that provide budget and credit counseling and refer borrowers for assistance and support. We provide support to groups for training by supporting the Neighborworks Training Institutes and place based trainings throughout the country to train counselors U.S. Department of Housing and Urban Development Community Planning and Development 25

Down Payment/Asset Challenges Challenge - MI companies have pulled back on coverage so it is hard to get MI on higher LTV loans without high credit scores Challenge - Loans even with community seconds need a 660 to 680 Banks actively look to work with non profits and HFA s offering down payment assistance to borrowers Other sources of funds include employer workforce housing incentives i Again counseling for borrowers on budget, credit and savings is also a key critical factor U.S. Department of Housing and Urban Development Community Planning and Development 26

Property Condition Challenges Not all banks offer a rehabilitation product Rehabilitation products can be stressful transactions for FTHB and affordable borrowers Opportunities still exist for some borrowers to be taken advantage of if they are not savvy NSP is a great alternative as a majority of the programs are rehabbing the properties first and then reselling them Banks should look for opportunities to work with experienced non profits that provide construction expertise throughout the process for borrowers U.S. Department of Housing and Urban Development Community Planning and Development 27

Affordable Products FHA/VA Dreamaker (Chase Affordable Product) My Community Home Possible State Bond Programs U.S. Department of Housing and Urban Development Community Planning and Development 28

Use of Down Payment Assistance Programs (DAP s) Program Guidelines Sample Note Sample junior lien Sample recapture agreement Sample deed (needed if a deed restriction program) A Chase review by our National Underwriting Department has to be completed before use by a Chase LO. U.S. Department of Housing and Urban Development Community Planning and Development 29

DPA Program Challenges The program benefit is often in the form of a second mortgages/subordinate financing but may also be in the form of a gift or grant. The program restrictions defining eligible purchasers generally are established through: Inclusionary zoning Resale restrictions U.S. Department of Housing and Urban Development Community Planning and Development 30

Your MCA Contacts National Channel Executive: Denise Smith - (312)732-3989 denise.n.smith@chase.com MCA Business Development Managers: Northeast Region: New York, New Jersey: Edward Patane (856)396-2871 edward.m.patane@chase.com West Region: California, Arizona, Nevada, Oregon, Washington, Utah, Idaho: George Hernandez, Jr. (714)336-9537 george.x.hernandezjr@chase.com West Region: Northern California, Oregon, Washington, Utah, Idaho & Nevada: Duane M. Webb (916) 338-8519 duane.m.webb@chase.com South Region: Texas, Louisiana, Geor gia, Florida, and Colorado: Oscar Chow (956) 821-9626 oscar.r.chow@chase.com Midwest Region: Chicago, Wisconsin, Michigan, Indiana, Ohio, West Virginia, Kentucky: LaDonna Reed (708)567-7629 7629 ladonna.k.reed@chase.com Strategic Markets: St. Louis, Boston, Delaware, Maryland, Washington DC, Virginia: Scott Willis (410)884-1088 scott.e.willis@chase.com U.S. Department of Housing and Urban Development Community Planning and Development 31

Panel Perspectives Mike Dawson, CFA Vice President Single Family Affordable Lending & Deal & Contract Management U.S. Department of Housing and Urban Development Community Planning and Development 32

Essential Liquidity Since the start of 2009, Freddie Mac has funded over $850 billion of mortgage loans in the nation, serving over 4 million borrowers. Over that time Freddie Mac has enabled almost 3 million families to refinance, saving roughly $6 billion. We have financed 267,000 First Time Homebuyers during this time In 2010 alone, we funded mortgages for over 390,000 low income borrowers, (at or below 80% of median area income) nationwide. U.S. Department of Housing and Urban Development Community Planning and Development 33

Freddie Mac Affordable Offerings 30-year fixed-rate mortgage a cornerstone of U.S. home financing - requires a minimum five percent borrower down payment Home Possible Fixed Rate mortgage targeted at low and moderate income buyers Affordable Seconds - Freddie Mac s standardized requirements for down payment and closing cost assistance secondary financing Down Payment Assistance Programs permissasable for use with Home Possible if programs meets Affordable Seconds requirements www.freddiemac.com U.S. Department of Housing and Urban Development Community Planning and Development 34

Freddie Mac s Home Possible Mortgages A responsible, low down payment mortgage option for first-time homebuyers and low and moderate-income borrowers Borrower Profile Key Features Borrower Benefits First-time homebuyers, 15-, 20- and 30-year Stable monthly move-up borrowers, and fixed-rate mortgages for payments with fixed-rate retirees 1- to 4-unit primary mortgages Families in underserved areas New immigrants and very low and low- tomoderate-income borrowers residences 40-year fixed-rate mortgages for 1-unit primary residences 5/1 (2/2/5 caps), 7/1 and 10/1 CMT- and LIBOR-indexed ARMs Manufactured homes eligible (with certain restricti tions) Maximum financing up to 105 percent total loanto-value (TLTV) for qualified borrowers Flexible closing cost funding options Reduced mortgage insurance coverage levels No cash-out refinancing U.S. Department of Housing and Urban Development Community Planning and Development 35

Affordable Seconds Provides a funding option for low- and moderate income borrowers Borrower Profile Key Features Borrower Benefits Borrowers who need flexible secondary financing Low- and moderateincome borrowers Available through Loan Prospector Multiple Affordable Seconds May be originated with Home Possible Mortgages Increases homeownership opportunities Offers funding flexibility for down payment; closing and financing costs; prepaids; and rehabilitation costs through various sources U.S. Department of Housing and Urban Development Community Planning and Development 36

Down Payment Assistance Combine down payment and closing cost assistance sources with sustainable mortgage solutions and build new business for first-time homebuyers Benefits to Business Helping you grow your first-time homebuyer and other business by identifying down payment and closing cost assistance resources that help well-qualified borrowers close on their mortgage loans Enhancing your customer service and borrower retention capabilities by providing affordability gap solution information Assisting you in building a knowledgeable loan originator, Realtor, and housing counselor network Stabilizing the communities you serve by offering sustainable mortgage solutions Borrower Benefits When you provide information on down payment and closing cost assistance solutions, well-qualified borrowers: Can fund their closing cost gap from a variety of authorized sources Borrowers can keep more funds in reserve to maintain the home and make their regular mortgage payments U.S. Department of Housing and Urban Development Community Planning and Development 37

Rebuilding the Purchase Market Position lenders to succeed when the mortgage market turns from refinancing to purchase Resource Center on FreddieMac.com Tools and resources to strengthen business relationships Purchase Market Resource Center Mortgage product and underwriting information Collateral to reach real estate professionals & housing counselors Borrower information First-time homebuyers Downpayment information Short-sale process Housing market trends U.S. Department of Housing and Urban Development Community Planning and Development 38

Purchase Market Resource Center: FreddieMac.com/purchasemarket U.S. Department of Housing and Urban Development Community Planning and Development 39

Panel Questions and Answers Questions welcomed What are the barriers to accessing mortgage credit in your communities? Credit standards? Lender partnerships? Are there local challenges soft-second mortgage programs for NSP? Has your community used the FHA 203(k) or other products to allow Buyers to finance acquisition and rehabilitation? U.S. Department of Housing and Urban Development Community Planning and Development 40

Contact information Tom O Neill, Bank of America Home Loans Phone: 847-545-3748 E-Mail: tom.o'neill@bankofamerica.com LaDonna Reed, Chase Multi Cultural and Affordable Phone: 312-732 3990 E-mail: ladonna.k.reed@chase.com com Mike Dawson, Freddie Mac VP Single Family Affordable Lending Phone: 571-382-3812 3812 E-Mail: mike_dawson@freddiemac.com U.S. Department of Housing and Urban Development Community Planning and Development 41

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