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

What’s New in Single-Family Housing Finance

NALHFA Spring Conference

San Francisco, CA

May 20, 2011

Agenda

FHA and Rural Housing Program Updates

Tightened Credit Standards / Overlays

Mortgage Credit Certificates – Now More Than Ever?

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THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES.

Bank of America: Proprietary

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.

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Effective October 4, 2010The annual mortgage insurance premium (MIP) was increased by 35 bps. (Mortgagee Letter 10-28).

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


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

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

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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 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

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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

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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

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Sacquana Leathers

Anne Midgley5/10/2011LTV is a very well known acronym, but should QRM be spelled out before abbreviation?

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

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Sacquana Leathers

Anne Midgley5/10/2011Should MRB be spelled out in the first bullet, then abbreviated? Also suggest that PAB be spelled out

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.

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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%

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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

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MRB and MCC Comparisons

Example *:

No Tax MRB MCC

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 Rate 5.75% 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 $2,000

12 THIS INFORMATION IS INTENDED FOR MORTGAGE PROFESSIONALS ONLY AND SHOULD NOT BE DISTRIBUTED OR SHOWN TO CONSUMERS OR THIRD PARTIES.



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.

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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.

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15 Bank of America: ProprietaryTHIS 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.

Documents

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