DROdio Real Estate

I just got off the phone with Mike Farrell of Countrywide phone loans. We talked about the differences between FHA, VA and conventional loans, and what the market was doing. A transcript of the phone interview will be available here when posted.You can listen to the 14 minute audio here:

Here is a transcript of that conversation:

DRODIO: Daniel R. Odio

MF: Mike Farrell

DRODIO: Hi there. I’m on the phone with Mike Farrell from Countrywide Home Loans. Mike are you there?

MF: Yup, I’m here.

DRODIO: Excellent. So Mike I’d love to just see if you could just give everybody that’s listening an idea of the current state of the market. We’re in the Spring of 2008 right now how things are going and specifically at Countrywide, give us details about the whole loan process and loan landscape right now for you.

MF: Okay. Well basically right now what we’re seeing currently the trends in the market are a obviously with a major reduction in home prices right now it’s opened up the doors to a lot of first time home buyers and investors, especially in the Washington Metro D.C. area market that we’re in. Currently right now our biggest, probably, loan trend that we’ve been seeing is a move back from conventional financing to government financing. So right now a lot of people have been being approved or getting loan approval through government entities, such as an FHA Loan or a VA Loan. And right now we’re really focused on educating a lot of buyers and real estate agents and any professional in the industry who is interested in buying on what those products do for people. We’ve been seeing applications rise on government loans. 57% month over month right now. And what that does is allows people with little to no money down still buy a home in this market for a great price.

DRODIO: So that’s exactly what I’m seeing from clients, everybody’s asking me what the difference between FHA and VA is and we rarely did this before.

MF: Right.

DRODIO: Used to be very popular. Can you just explain an FHA versus a VA Loan and how it compares to a conventional financing loan?

MF: Absolutely. Well conventional financing would be anything that’s purchased by a bank, such as Countrywide, Countrywide being a bank or also the biggest entity, which is Fannie Mae. And Fannie Mae would buy anything underneath a 417 loan limit with a minimum, used to a 100% down, now it’s 95% financing. With FHA they’re sponsored by or FHA or VA are sponsored by the government so they’re purchased by those entities and what that does is allow the goal for, it’s always been for as long as I can remember, is the goal is that every American be able to buy a home in this country and we need to have those homes available. So what FHA allows is a very little down payment, which is minimum 3% and the best part about that is it can be given as a gift to somebody or through a grant program that’s available through the Nema<ph> Grant Program or Mariargry<ph> Grant, which is a charity donation from a seller or third party. That can be a tax deduction to a seller to incentify them to buy that home and be able to use that money for a down payment. The best part about FHA is there is no minimum credit score requirement. You just need to have a twelve month clean history. Now conventional financing they are very strict on as far as down payment and credit history, whereas the FHA does not really look at that. On the later VA, which is a better loan for someone who is either active military or former active military and even a disabled veteran. It is a 100% financed loan with obviously no money down and there is also no credit restrictions as well. You just have to have your VA eligibility through the department of veteran affairs. So that’s the two major loans that we’re seeing, you know, our stats show that government financing FHA and VA will represent over 41% of all transactions in 2008.

DRODIO: So we use a lot of terms in the industry. Let’s just break it down, because I don’t know that people understand the process. To confirm what you’re saying, anybody can get a conventional loan as long as they qualify. Anybody can get a FHA Loan. Only military active or formerly active military can get a VA Loan right?

MF: Or an actual spouse of a deceased veteran as well.

DRODIO: Okay. Now you say that the loan is purchased by Fannie Mae for example. Can you explain what that means? I don’t think a lot of people know kind of what happens behind the scenes. So when Countrywide does a loan you don’t necessarily hold onto that loan right? You might sell it to a different entity.

MF: Correct. Now what happens is that Countrywide and other banks, major banks in the industry there’s two ways to actually do it. One we could portfolio that loan in our own and securitize in our own bank, but 99% of the time normally what will happen is those loans will get packaged up into a security and sold off to like Fannie Mae or Freddy Mac or even, you know, for the past five years it’s been major banks on Wall Street and which are then packaged and sold to the consumers as a real estate investment trust or mortgage back security or bonds and stuff like that. So what happens on our side is that we represent, we service that loan. Countrywide doesn’t own the actual paper, it is sold. However, you always make your payments to Countrywide, which keeps the client a little bit more happy, because they keep their payments in the same place and they don’t have to worry about where that payment goes.

DRODIO: So I think the thing for just the average consumer to know is that the lending environment has gotten a lot more restrictive in the last what year, eighteen months. And a conventional loan the standards are much higher. For example, you used to go do a 100% financing now it’s harder you typically have to do 95%. And a lot of that is because when you sell the loan the person who’s buying it, the institution that’s buying it has some requirements that you have to fulfill that are more rigorous now then they were. But with FHA loans since it’s the government who’s buying those loans they can afford to extend a bit more credit to consumers. Like for example, 3% down, but that 3% could be a seller credit or a gift. Accurate?

MF: Absolutely. And you know the other thing with FHA is there is security features set up in those loans for the government, which is up front mortgage insurance. So you would actually finance 1 ½% of your loan amount into the loan, very minimal payment to the client, to the buyer and that actually, you know, is an insurance policy too, insuring that loan further for the government so they can go ahead and back it. So it’s very little risk for the government and actually the default rate on FHA to a regular conventional financing, it’s amazing the difference in how low the defaults are on government loans.

DRODIO: Now there’s been a lot of talk about raising these conforming loan limits. The conforming loan limit right now is $417,000 in change I believe. What’s happening with that and what might happen in the next six months? And why is that number so important?

MF: Well it’s very important, because obviously the, you know, currently right now, just like you said, the conforming loan limit, meaning the difference between jumbo and non-jumbo loans is $417,000. Now Fannie Mae will buy anything underneath 417 and that’s one of the major differences between the two banks Fannie and Freddy. So what happens is right now is that they look every year or two at what the HUD median sales price is for a specific area. Now it works well for our area, negative and positive, because the Washing Metro area if we’re going to associate this region, is considered an MSA, which means that we’re all grouped together. So even Stafford County is the same as inside the beltway. And so that HUD median sales price currently right now is riding about 421 somewhere around there if you take that whole area, the whole region and average it out over 2007. Now that’s above that limit of 417, which means that financing is very difficult for people, especially focused on first time homebuyers, which is the big focus right now on the affordability of homes. Obviously interest rates are a lot lower on a 417 and under loan versus anything above that. So we need to keep in line with, obviously the inflation of the actual home values and keep that number moving up. Just like everyone’s income goes up prices of goods go up and the houses go up. So we need to keep that in check and right now somewhere between March 7th and March 14th of this year we’ll see that number rise when they determine what the new HUD median sales price is. And we anticipate a number that’s going to be about 125% higher than that number to be the new jumbo loan limit. And what that will do is actually allow people that are on that bubble, especially in a more high cost area to be able to afford a home with a, you know, hopefully with a lower interest rate and with little down payment.

DRODIO: To make sure that it’s super clear, this $417,000 right now is the magic number, because when Countrywide tries to sell these loans to other institutions after they’ve closed the property the, you know, Fannie Mae’s of the world don’t want or won’t buy anything above 417 and so somebody who is buying a property where they have to finance more than $417,000 they need to get a jumbo loan which costs more, the rates are usually higher. You’re saying…

MF: Well what I was going to add was that right now with the problems going on with the credit markets no one wants to issue credit to anybody right now including, you know, companies to each other. So the…when Fannie Mae is not buying or can’t buy anything over 417 it’s got to go out to the open market, either Freddy Mac, and they require a big down payment and great credit or one of the bigger banks out there like Bank of New York or Bank of China. I mean these things can go anywhere and package them out. But that credit risk right now on the market with the current state of the economy has driven the price up so much that the difference today and we’re talking March 6th, first week of March right now 30 year fixed mortgage between 6 and a quarter percent on a 417 loan and a 9% rate on a 418 loan. I mean you could see…

DRODIO: Difference.

MF: You can see the problems. You know, like I said we go back to the high cost areas, you know, even inside the beltway, Fairfax County and even in the more higher cost, even Loudon County as expensive as it is, it makes it very, very hard for people to buy homes and finance them when there’s that big of a difference.

DRODIO: And so you’re expecting in the next couple of weeks when that conforming loan limit is raised it’s obviously going to provide a lot of relief for buyers, because now they can finance five or six hundred thousand, whatever the amount is and Fannie Mae will buy that loan on the back end, meaning they can get the better rate.

MF: Exactly. And you know we anticipate that, you know, this area, the Washington Metro area, you know, the loan limit will increase to about for the country the max will be 729, 750 approximately, but in our area, because we’re that MSA, we’re going to be subject to a 125% of the HUD median sale price. So we anticipate that number to come in over the next few weeks of around 538 somewhere around there would be a good average. You know, people that are right now on the bubble over the next few weeks are really going to be looking at that number.

DRODIO: Very carefully I’m sure.

MF: For affordability, yeah. And FHA will be right behind that. So government loans, going back to that, will actually, you know, move up as well. The goal will be, is to have them come up to where the Fannie Mae conforming loan limit will be, but normally they would stay underneath that a little bit.

DRODIO: Okay. Well thanks for the info Mike. I have to ask this question, because I’m everyone’s thinking of it. Countrywide has been in the news a lot lately. If you had a message to give people about Countrywide what would you want them to know?

MF: Well that, you know, Countrywide has obviously been in the media and it’s always been the, you know, I guess the way the U.S. media has always worked is, you know, the biggest companies always get the biggest scrutinization. Countrywide is still and remains the largest U.S. lender in the United States. You know, we currently service one out of every four home loans in the country right now. You know, back in August when the market was shifting a little bit Countrywide being in the news a lot, rumors of bankruptcy. First of all nothing has ever happened with that. We’ve never missed a settlement due to not funding. You know, coincidentally it presented a great opportunity for Banc of America, you know, the second largest U.S. bank in the country to come in and purchase us right now. However, Countrywide’s modo, Countrywide’s philosophy in the way we do mortgage banking and keep in mind we only do residential mortgage banking. So when the residential market, mortgage market or the housing market is doing bad in the country that means that’s bad news for us as well. So, but we’ve been given a lifeline so to speak. Banc of America has purchased us for four billion dollars, there is no name change and in fact their mortgage company will be actually falling underneath our model. So it’s business as usual and you know, we’re excited about it.

DRODIO: Can you give everybody your contact information if people would like to call you, a number they could call you on or email?

MF: Absolutely. Yeah, my direct phone number is 703-779-7043 and I’m always available on email and it’s Michael, M-I-C-H-A-E-L, underscore, Farrell, F as in Frank, A-R-R-E-L-L @Countrywide.com.

DRODIO: Well Mike thank you very much for the education and I hope you get a few phone calls with people that want to follow up with questions.

MF: Sounds good, I’m here.

DRODIO: Okay. Take care. Bye, bye.

MF: Okay, bye.

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This entry was posted on Friday, March 7th, 2008 at 11:02 pm and was filed under All About Home Financing & Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.