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What’s New in Single-Family Housing Finance NALHFA Spring Conference San Francisco, CA May 20, 2011.

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Presentation on theme: "What’s New in Single-Family Housing Finance NALHFA Spring Conference San Francisco, CA May 20, 2011."— Presentation transcript:

1 What’s New in Single-Family Housing Finance NALHFA Spring Conference San Francisco, CA May 20, 2011

2 Agenda  FHA and Rural Housing Program Updates  Tightened Credit Standards / Overlays  Mortgage Credit Certificates – Now More Than Ever? 2 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

3 FHA Updates  In two separate announcements in less than a 6 month timeframe, HUD introduced changes to its mortgage insurance premiums in an effort to ensure the Insurance Fund remains financially sound. However, these changes significantly increase the cost of an FHA loan:  The net effect of these two changes is that, while the upfront premium was lowered by 1.25%, this fee is typically financed in the loan and has little impact to the borrower’s housing expense. However, the annual MIP changes, again assuming a $150,000 loan, increase the borrower’s housing expense by $75 / month. 3 Effective October 4, 2010 The annual mortgage insurance premium (MIP) was increased by 35 bps. (Mortgagee Letter ). Effective April 18, 2011 The annual mortgage insurance premium (MIP) was further increased by 25 bps. (Mortgagee Letter 11-10).  For most transactions (loan terms > 15 years and LTV’s > 95%) this represented an increase from 55 bps to 90 bps  On a $150,000 loan, this amounts to an increase in the borrower’s monthly payment of $44  On a positive note, the Up Front Mortgage Insurance Premium (UFMIP) was lowered from 2.25% to 1.00%  For most transactions (loan terms > 15 years and LTV’s > 95%) this represents an increase from 90 bps to 115 bps  On a $150,000 loan, this amounts to an increase in the borrower’s monthly payment of $31  No changes were made to the Up Front Mortgage Insurance Premium (UFMIP). It remains 1.00% at this time THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

4 FHA Updates  FHA has now introduced, for the first time, minimum credit scores (Mortgagee Letter 10-29)  Also effective as of October 4, 2010, the new requirements are:  Borrowers with a minimum credit score above 580 will continue to be eligible for maximum financing  Borrowers with a credit score between 500 and 579 will be limited to a 90%LTV  Borrowers with a credit score below 500 are no longer eligible for FHA financing 4 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

5 Rural Housing (RHS) Updates  Like FHA, USDA-Rural Housing Services (RHS) has also recently announced a significant change in fee structure in its efforts to remain taxpayer subsidy neutral  Effective October 1, 2011, RHS will require an annual fee that, at least initially, will be set at.3% of the unpaid loan balance  On a $150,000 loan, this amounts to an increase in the borrower’s monthly payment of $38  On a positive note, the current up front guarantee fee for an RHS loan of 3.50% on a purchase transaction will be reduced to 2.00% Note: This is a particularly significant change. It is the first time RHS has imposed an annual fee. Lenders will need to not only modify their origination platform, but also servicing platform as well to accommodate these fees and the payments to RHS 5 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

6 Tightened Credit Standards / Overlays  The industry as a whole has made sweeping changes in credit standards and more is expected.  The questions we face are:  Has the pendulum on tightened credit swung too far?  To what extent are these changes impeding the housing recovery?  From a lender’s perspective, where we are subject to default / indemnification risk, our objective is to “manage” credit risk – not eliminate it  Responsible lending Sustainable homeownership 6 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

7 Tightened Credit Standards / Overlays  Responsible lenders employ internal risk controls exceed the minimum guidelines of investors (overlays)  The majority of credit overlays tend to focus on:  Layered risk attributes (eg. high LTV’s combined with high debt ratios)  Overall credit profile – beyond just credit scoring  Credit risk management will continue to evolve and be based on sophisticated performance analysis across a full spectrum of loan characteristics  As the industry redefines itself (QRM’s, reduced LTV’s, etc.), lender imposed overlays will likely diminish 7 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

8 Mortgage Credit Certificates (MCC’s) - Background  The Deficit Reduction Act of 1984 created the Mortgage Credit Certificate (MCC) alternative, allowing HFA’s to substitute MCC’s for MRB authority  Intent of program was a more efficient, less costly, and less prone to interest rate risk than MRB’s  With lower transaction costs than MRB’s, a greater percentage of the subsidy would go to the intended recipients  The Tax Reform Act of 1986 affected both MRB’s and MCC’s by introducing a state ceiling on the annual volume of activity, combining existing caps into a Private Activity Bond (PAB) allocation  From its PAB cap, each state determines and allocates a portion to subsidize housing and the relative amounts to issuers of revenue bonds and credit certificates 8 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

9 Mortgage Credit Certificates (MCC’s) - Background  Tax Code generally allows a 4:1 exchange rate of MRB authority for MCC authority – for example, $4 million in MRB authority can be converted to $1 million in MCC issuance  However, this $1 million in MCC’s can be leveraged based on the tax credit rate applied to the program. For a tax credit rate of.25%, $4 million in total mortgage debt can be accommodated  Historically, relative to MRB’s, MCC’s have been very underutilized. MCC’s have only been issued in half the states and we estimate less than 25 local HFA’s have issued MCC’s. 9 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

10 Specifics on MCC’s  Tax code eligibility requirements for borrowers to receive an MCC mirror those requirements for MRB eligibility  Unlike MRB’s, where the tax exempt bonds allow a below market interest rate on the mortgage loan to be passed on to the borrower, thus subsidizing a borrowers housing debt, MCC’s are issued in conjunction with a standard market rate first mortgage loan.  Rather than a housing debt subsidy, the MCC subsidy is provided through a direct reduction in the borrower’s income tax liability.  The MCC allows the borrower to apply a portion (the tax credit percentage) of their annual mortgage interest as a dollar for dollar reduction in their tax obligation, with the balance of their annual mortgage interest itemized as normal for a reduction in their taxable income  The tax credit percentages are established by the issuing agency and range from 10 – 50% 10 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

11 Specifics on MCC’s  The borrower may claim up to the lesser of $2,000 in tax credit or their actual tax liability per year. Where the tax liability is less than $2,000 in any year, the IRS allows a 3 year carry-forward **  As with MRB’s, recapture rules apply  Although the MCC credit is formally taken only through the tax return, borrowers can realize immediate benefit through a revised W-4 withholding form with their employer – reducing the amount of federal income tax withheld from their pay  The MCC credit can be estimated in underwriting the loan and taken into consideration for loan qualification ratios  Annual IRS reporting on MCC activity by both the issuer and the lender is required ** For tax credit rates under 20%, the $2,000 ceiling does not apply 11 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

12 MRB and MCC Comparisons Example *: No Tax MRBMCC Subsidy Mortgage (25% Rate) House Price$150,000 $150,000$150,000 Down Payment (3.5%)$5,250$5,250$5,250 Mortgage Principal$144,750$144,750$144,750 Mortgage Rate5.75%5.00%5.75% Annual Mortgage Payments$10,137$9,325$10,137 Annual Interest Paid $8,323$7,189$8,323 Real Estate Taxes$3,375$3,375$3,375 Annual MIP$1,665$1,665$1,665 Insurance$720$720$720 Total First-Year Housing Cost$15,897$15,085$15,897 Tax Benefits $812 **$2,000 *** Reduction in After-Tax Costs 5.4%12.6% * Example is based on first year housing costs. ** There is a small additional relative benefit of the MRB vs. an MCC due to a higher interest deduction *** Assumes borrower had a tax liability of at least $2, THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

13 MRB and MCC Comparisons  MCC’s are not very profitable, although agencies that perform compliance review earn fee income  MCC’s avoid the transaction costs of MRB issuance  Although there is a 3 year carry-forward period, the value of the MCC from one year to the next is reduced or negated depending on the borrower’s tax liability  MCC’s can be more challenging to market:  MCC’s are not as “tangible” to most first-time homebuyers, most of whom have never filed more than a 1040-A or 1040 EZ  The borrower seems to understand the lower rate of an MRB, or the down payment assistance it offers, better than the tax benefit of the MCC  Loan officers prefer originating the standard loan product vs. the bond loan, but have difficulty explaining the MCC. 13 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

14 MRB and MCC Comparisons  In summary, MCC’s:  Are more efficient and cost effective to issue than an MRB  Arguably provide a deeper subsidy for the homebuyer  Present some challenges in selling the value of the subsidy relative to an MRB – educating the borrower and the loan officer  MCC’s alone won’t keep the “lights on” for the issuer but they definitely serve the affordable housing mission, perhaps now more than ever. 14 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America: Proprietary

15 15 Ban k of Ame rica: Prop rieta ry THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES. Bank of America, N.A. Member FDIC. Equal Housing Lender. © 2011 Bank of America Corporation. Trademarks are the property of Bank of America Corporation. Some products may not be available in all states. Credit and collateral are subject to approval. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice. Terms and conditions apply. All rights reserved.


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