Banks offering mortgages with only 5% down payments

Good news for homebuyers who don't have a lot of cash on hand: Banks are offering loans with down payments of just 5%.

After the housing bubble burst, buyers needed to come to the table with as much as 20% down or they had to turn to the Federal Housing Administration for a low down-payment loan.

But now banks like TD Bank, Bank of America (BAC,Fortune 500), and Wells Fargo (WFC, Fortune 500)are loosening the purse strings, offering loans with down payments that are as low as 5%.

TD Bank's "Right Step" mortgage, for example, allows borrowers to secure a loan with a 5% down payment. It also allows them to receive as much as 2% of the sale price as a gift from a relative or other third party, so they would really only need 3% down.

Why the change of heart? Market opportunity for one thing.

FHA dominated the market for low down payment loans during the housing bust. Taking on all those risky loans, however, depleted the agency's reserves and has forced it to increase costs.

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Over the past couple of years, the FHA has been raising premiums. And this year, it started requiring borrowers to buy private mortgage insurance for the life of the loan -- an expensive proposition that has sent many prospective borrowers looking elsewhere.

While the loans were far too risky for private lenders to take on before, rising home priceshave made them less of a gamble. Plus, the banks think they can offer a better deal than FHA.

"As the FHA selectively reduced market share by increasing premiums, we introduced a substitute for FHA loans," said Malcom Hollensteiner, the director of retail lending sales for TD Bank.

While the private lenders that are offering the 5%-down loans are also requiring borrowers to buy private mortgage insurance, they are only requiring them to do so until they build up 20% equity in the home.

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The difference can really add up. Paying an insurance premium over the life of a $200,000, 30-year fixed-rate loan from FHA that carries an effective mortgage rate of 4.4% (5.75% when you tack on the insurance premium), can add up to nearly $60,000 over the life of the loan.

Of course, homeowners can always refinance to end their FHA insurance, but rates are so low that by the time an FHA borrower is able to refinance to a lower rate, it may not be worth it. 

Superstorm Sandy victims still struggling to rebuild

Josette Lata and Ed O'Kinsky

Many victims of Superstorm Sandy have still not recovered financially -- and for some, the damage will be permanent.

One major issue Sandy victims have: Their dealings with FEMA, the Federal Emergency Management Agency.

One year after the storm, Josette Lata and her husband Ed O'Kinsky have spent about $70,000 working on their property in Pine Beach, N.J.

Water damage accounted for most of the couple's costs, but their insurance covered only wind damage and provided just $3,500.

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The couple also received a $31,000 grant from FEMA. Much of that, however, went toward rent on a house where they lived while working on their property.

And the FEMA money came with strings attached, requiring them to buy flood insurancethrough the National Flood Insurance Program (NFIP). That insurance, though justifiable, could eventually cost $30,000 a year, according to Lata, a producer of photo and video shoots.

Not only that, but Lata and O'Kinsky feel that FEMA's guidance after the storm was costly.

First, the agency told them to make repairs quickly. The goal, says FEMA now, was to get people out of pricey temporary housing as soon as possible.

But then FEMA released new flood zone maps that put their home into the highest risk zone, requiring them to raise the house. Now, some of the early repairs have to be redone.

They've kept repair costs as low as possible with O'Kinsky doing much of the work himself. They also got help from volunteers with Waves for Water. O'Kinsky, a firefighter, has also helped other Sandy victims rebuild.

Related: Ravaged by Sandy but back in business

Timothy and Michelle Kelly had similar issues with FEMA, and still have not returned to their Long Beach, Long Island house.

The couple -- she's a teacher and he runs a pottery store -- got $74,000 from their flood insurance claim.

They then followed the FEMA playbook, and got going right away on repairs. They dealt with the electrical and hired a company to clean and sanitize the house.

But in January, their insurer notified them that the new flood zone risk calculations meant that they also had to raise the house. They found it was cheaper to knock it down and rebuild. The money spent on initial repairs was wasted.

"I'm glad all we did was clean the house and put in the new electricity," said Michelle.

The cost to rebuild will be around $300,000, and the couple is looking for help.

They were selected to receive donations rung up by ultra-endurance athlete Jason Lester, who ran 3,500 miles across America and raised about $20,000 for them.

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George Morafetis owns a bungalow in Staten Island, N.Y., that took on six feet of water during the storm, causing interior damage. And the weight of the surge shifted the house on its foundation.

"It's not a total loss," said Morafetis, an actor who has appeared in movies and on a couple of episodes of "Law & Order." "My framing is tight and held up pretty well."

But he also is being hit with expensive changes because of new flood insurance rules.

For example, his street is being widened to help lessen the impact of future storms, and that means he will have to chop four feet off the front of his bungalow.

But to qualify for a FEMA grant of $20,000, he will also have to raise his house. That effort brings with it costs, such as a soil sample analysis to determine whether it can support a new foundation and getting an elevation certificate to determine his insurance rate.

"I'll spend [$20,000] before I can even request the grant," he said. 

Job growth drives mortgage rate jump

NEW YORK (CNNMoney)

Mortgage rates jumped this week on stronger-than-expected economic reports, according to Freddie Mac's weekly survey.

The 30-year, fixed-rate loan, the most popular product for homebuyers, rose to 4.46% from 4.29% last week. The average rate on a 15-year, fixed-rate mortgage, typically used for refinancing higher interest mortgages, also jumped 0.17 percentage point to 3.47%.

This week's rate approached a high for the year. Rates on the 30-year have ranged from a low of 3.34% in the first week of January to a high of 4.58% in August.

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Frank Nothaft, Freddie's chief economist, cited job creation as a prime reason for the rate spike.

"Private companies added 215,000 new jobs in November according to the ADP employment report, well above the consensus," he said. "In addition, revisions added 54,000 jobs in the prior month."

There were also strong reports from home builders. New home sales surged 25% in October.

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Keith Gumbinger, vice president of mortgage information site HSH.com, said that solid showings by manufacturers added to the positive economic climate. Automakers reported that sales are at their highest level since early 2007.

"If the economy is gaining steam, even just a little, mortgage and other interest rates will firm right along with it," he said. 

New mortgage rules may mean less choice

New rules launching early next year designed to make mortgages safer may result in less choice for borrowers.

The problem: small banks may drop out of the business because of the cost of tougher regulations.

Beginning Jan. 10, banks have to ensure that monthly mortgage payments are affordable, a result of the Dodd Frank law passed in 2010. The failure to do so carries strict penalties.

"My concern is that we're going to be in an environment where some lenders are too small to comply," said David Stevens, CEO of the Mortgage Bankers Association.

Related: Million dollar housing markets

During the housing bubble, some banks issued loans without even checking applicants' income or assets.

Under the new rules, lenders must carefully determine that borrowers have the ability to repay their loans. That means, for example, that the "low-documentation" and "exploding" adjustable-rate mortgages that were common before the financial crisis will no longer be allowed and that lenders will generally require that total debt payments of borrowers not exceed 43% of their income. Lenders must carefully examine and double check pay statements, bank records, tax returns and other paperwork provided by borrowers.

Banks will have to make three main changes, according to Anthony Hsieh, CEO of loanDepot, an online mortgage bank.

They will have to update their underwriting policies and procedures, change their technology and retrain staff.

Already, lending had become more complicated.

Five years ago, Total Mortgage, a mid-sized lender in Connecticut, had a single attorney on retainer to handle compliance issues, according to its president John Walsh.

Today, Total Mortgage has three full-time workers who work exclusively on compliance in addition to the outside counsel, even though his business has not grown.

"I expended a lot of effort to stay ahead of the new regulations," Walsh said. "You just can't make mistakes these days."

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Banks large and small are hiring outside companies to handle a share of their mortgage underwriting to ensure the quality, according to Jeff Taylor, co-founder of Digital Risk, a provider of risk, compliance and transaction management services.

Big banks can handle the cost, but small lenders may not be able to afford all the extra manpower.

The changes are coming at an already challenging time. Fewer homeowners have been refinancing their old, high interest mortgages. "Now that the refi boom is over, we'll see a lot of small banks fading away," said Taylor.

It's possible that bankers, never receptive to regulation, may be overstating the impact of the new rules, according to Ellen Schloemer, spokeswoman for the Center for Responsible Lending, a consumer advocacy group.

She points to an October report from CoreLogic that asserted that lenders should be able to meet the requirements. The report was written by Margarita Brose, a consultant on lender risks, and Faith Schwartz, who ran Hope Now, a coalition of lenders, consumer groups and government organizations that fights foreclosure.

Lenders will "figure out a way to deliver . . . mortgages in a way that meets all the regulatory requirements, incorporates sound lending and consumer protections -- and makes a profit," according to the report's authors. 

New-home sales surge 25% in October

New home sales surged in October, according to a government report.

New-home sales are surging, according to a report from the U.S. government on Wednesday.

Sales of new single family homes jumped to a seasonally adjusted annual rate of 444,000 in October, up 25.4% from the previous month's revised rate, according to a report issued by the Commerce Department. The rate was the highest level in six months.

On a year-over-year basis, sales rose nearly 22%.

Keith Gumbinger, vice president of mortgage information site HSH Associates, said that this year's stock market gains could be the prime factor in driving the housing market.

"It may very well be that a lot of folks are feeling better about their prospects and buying a new home," he said.

Another key reason could be easier financing for buyers, as "builders are motivated to get folks into homes," Gumbinger said.

While 30-year fixed mortgage rates are about a percentage point higher than they were in the spring, they are off the recent high of 4.58% set in August, according to Freddie Mac. In the week ended Nov. 27, the rate was 4.29%.

Gumbinger also said that inventories of existing homes are thin in several markets, prompting people to build new homes rather than buy old ones.

Related: New mortgage rules mean less choice

Nationwide, the government said there is enough new home inventory to last for 4.9 months, if the market manages to maintain its October rate of sales for that time.

While the sales jump is impressive, the rate remains less than half that of the peak of the housing bubble; in 2006, the annual sales rate topped 1 million.

The median sales price of a new home was $245,800 in October and the average sales price was $321,700.

The report said the South is the hottest market for new-home sales, while the Northeast is the slowest.