About Loans

FHA may not be “the next subprime mortgage product,” according to remarks prepared for presentation to congress this morning by HUD. Secretary Shaun Donovan said that FHA loan reserves will remain positive “under all but highly severe economic scenarios.”  He said that HUD had learned from recent history, “that the market is fragile, and we have to plan for the unexpected.  Donovan informed members of the House Committee on Financial Services that FHA, in spite of actuarial reports that its secondary reserve level has fallen below the required 2% to 0.53% of its total insurance-in-force, is capable of withstanding the current economic downturn.  That economic uncertainty is complicated by an organization we inherited that, to be honest, was simply not properly managing or monitoring its risk.  Credit and risk controls were antiquated.  Enforcement was weak.  And our personnel resources and IT systems were inadequate.  “Little of this may have been obvious when FHA’s market share was 3% as recently as 2006.  But when our mortgage loan markets collapsed last fall, and homebuyers increasingly turned to the FHA for help, the potential consequences of these lapses in risk management became very clear.  His department, he said, is in the process of drafting new policies to address the quality of FHA’s current loan portfolio, improve the performance of future FHA mortgage loans, and restore the capital reserve above its mandated levels. 

The government loan agency is looking at several measures to improve the quality of its portfolio going forward.  It plans to reduce the maximum permissible seller concession from 6% to 3% because the current level exposes the FHA to excessive risk by creating incentives to inflate appraised values.  The change, he said, will bring FHA into line with industry norms and even further reductions may be considered.   The minimum borrower FICO score will be raised although the final number has not yet been determined.  The agency is studying whether new FICO minimums should be accompanied by changes in other underwriting criteria for lower down payment loans.  The up-front cash that a borrower will be required to bring to the table for an FHA loan will also be increased to make sure that borrowers have “skin in the game.”  The exact way this will be accomplished is still under study.

These proposed changes, Donovan said, only require administrative decisions on the part of HUD, however, Congress will be asked to pass legislation to increase premiums.  The current up-front premium of 1.75% is below the statutory cap of 3% but the annual premium is at the maximum.  Raising premiums, he said, is the most effective means of raising capital for the reserve fund with the least impact per borrower.  Donovan said that more than 7% of the future losses the FHA is anticipating will come from loans already on its books, so, as Mortgage News Daily reported on Monday, the agency is taking steps to enforce lender accountability.  Donovan said that, in addition to holding FHA lenders responsible for their origination quality and compliance and increasing reviews of that compliance, lenders will be required to indemnify the FHA for losses resulting from their failures to meet FHA loan requirements and will be sanctioned nationally for any improper activities rather than through the FHA’s current policy of sanctioning individual branches.  The secretary reported that the anticipated changes are merely the latest in a series of improvements FHA has made to shore up its lending activities. 

In 2008, Congress put an end to the practices that led to the most troubled mortgage loans in FHA’s portfolio – so-called “seller-financed down-payment assistance” loans. Without these FHA home loans, Donovan said, the actuary reported that secondary reserves would have remained above the two percent threshold. “This year, we’ve taken several additional steps. We’ve steeply increased enforcement efforts, having suspended seven lenders, including Taylor, Bean and Whitaker and withdrawn FHA-approval for 270 others, including Lend America just this week.”

Credit and risk controls have been tightened. Requirements for the Streamlined Refinance program have been toughened with several improvements to the appraisal process and proposing a rule to increase net worth requirements for all FHA lenders. The latter has just entered the notice and comment period.  The agency has hired a permanent Chief Risk Officer to provide a comprehensive and thorough risk assessment and ensure that the assumptions going into the agency’s modeling reflect the most current economic conditions.

FHA is working to increase staffing and technical capacity and upgrade our technology systems and delivered FHA’s first comprehensive technology transformation plan to Congress in September.  The Secretary detailed the active role that FHA is taking in the current housing market, insuring almost 30% of purchases and 20% of refinance loans in the housing market, and financing the majority of minority home purchases.  But, he said, “as important as the FHA is at this moment, I want to emphasize that the elevated role it is playing is temporary – a bridge to economic recovery helping to ensure that mortgage finance remains available until private capital returns.”  Article was written by Jann Swanson  .

The FHA (Federal Housing Administration) a division of HUD (U.S. Department of Housing & Urban Development) has loan programs that help Americans own homes. They also have a new FHA loan program that has been created as a home repair and rehabilitation loan. It’s actually a mortgage to purchase a property that is for more than the property is currently worth leaving funds to fix up the purchase. The home rehabilitation loans for home rehabilitation help a community by helping the homeowners maintain the properties they buy which can revitalize an older area.

FHA 203k loans for home rehabilitation can work in a few ways for an existing property consisting of one to four units. The property can be purchased (dwelling & land) and the FHA 203k loan can be used to repair and/or rehabilitate the purchased property. Another way in which the loan can be used is for a dwelling to be purchased and then moved to a new foundation on mortgaged property where the 203k loan will help rehabilitate the property on its new location. The 203k FHA loan can also be used to refinance mortgages while providing cash out to repair a dwelling. In all cases it gives people an outlet to be able to buy “fixer-upper’s.”

This type of loan is not a new concept; however, most people did not have any use for them and used home equity loans instead. When home prices were rising many home owners had enough equity in their homes to obtain an equity loan for home repairs. In the last couple of years as home prices decreased home equity loans have not been an option. For homeowners that want to fix up their home but cannot due to not having the extra money and not being able to fit the guidelines of a home equity loan anymore, the FHA 203k has become the answer. In our time of an economic crisis these 203k FHA loans for home rehabilitation work great for buying a foreclosure and being able to fix it up.

The amount of money that a FHA 203k loan user obtains depends on the repairs that are being done. The total of the loan will be based on the value of the property after the repairs and rehabilitation work has been completed. The amount allowed will come from an appraiser and/or home inspector and cannot exceed $35,000 for the repairs portion. The seller benefits from the government refinancing loan for home rehabilitation because they do not have to spend money for home repairs and the buyer benefits by getting a good buy on a property and then immediately having the money to fix it up.

Few mortgage executives would dispute that FHA home loans provide stellar options for home-buying and refinancing. The story of the collapsed of mortgage markets has been told.  Unfortunately, the effects are still hindering the housing recovery for most of the nation.  This organization’s mission is to bundle and sell home mortgages insured by the Federal Housing Administration (FHA). These mortgage-backed securities are backed by federally insured or guaranteed loans. FHA’s spectacular growth means the organization now insures $560 billion in mortgages.  FHA loan forecasts predict that by year’s end, Ginnie Mae’s mortgage exposure will top $1 Trillion. Along with Fannie Mae and Freddie Mac, Ginnie Mae provides some federal taxpayer guarantee for nearly 9 out of 10 new mortgages in the US. Moreover, the scope of the federal guarantees is the heart of the problem.

What are some of the characteristics of the FHA mortgage insurance program? The FHA loan program features low down payment loans to homeowners of below average to poor credit ratings. The profile of such a lender should be familiar to all and we came to know these loans as sub-prime home loans. The very type of loan that toppled Fannie Mae, Freddie Mac, and Countrywide Financial is back in vogue! Statistically, 7% of FHA’s loans are in default and 13% are delinquent by more than 30 days. The reserve fund backing the insured loans is now 3% implying a leverage ratio of 33%, which is dangerous territory. Refinancing programs approved by Congress add to these woes as hundreds of thousands of borrowers presently unable to pay mortgages move to FHA loan programs. This includes loans in the sub-prime and other exotic realms. Part of the refinancing program includes mortgage reductions of up to 30% to mitigate imminent home foreclosures. Naturally, the 30% home loan forgiveness must be taxpayer financed. There are cases of borrowers with 25% negative equity qualifying for FHA home refinancing under this program. The latter case is especially troubling since one has to ask how many banks would willingly offer FHA refinance terms to a borrower when their collateral is 25% less than the loan amount? Is it even a smart proposition for a borrower to enter into such a loan? How many of these borrowers will default even with new mortgage terms?  In the story, a former Fannie Mae executive noted the FHA might require a bailout (a familiar term lately) due to potential losses of $54 billion.  So consider that one of the pillars of the US mortgage industry is essentially bankrupt.

In the last two years, FHA introduced several loan modification plans and mortgage relief programs, like FHASecure and Hope for Homeowners and today they announced a third attempt with a new FHA loan modification program.  These past FHA home loan modification performed well because they never really got off the ground with the participating FHA mortgage lenders.  At press time, FHA mortgage rates remained at record low levels.

Most of you will remember how FHASecure was pushed out by the Bush Administration in an effort to salvage homeowners stuck in an ARM that was about to reset to a higher interest rate.  This FHA loan program was intended to enable delinquent borrowers a mortgage refinancing option with low fixed FHA rates. FHA Loan Pros discussed it in a recent article; HUD claims that “FHASecure has helped more than 100,000 borrowers remain in their property, but the reality was only 3,800 delinquent homeowners received specific aid from the FHASecure program in 2008.

Then late last year, FHA announced the lending savior, Hope for Homeowners that was designed to do what FHASecure was not able to accomplish.  The press ate it up and FHA was the home financing talk on airwaves for months. Unfortunately as of June 30th for the Hope for Homeowners program could account for 949 mortgage applications but only 1 Hope for Homeowner loan could be documented.   FHA remains determined to extend a loan modification to distressed homeowners, so hopefully this new FHA initiative will succeed.

The New FHA Loan Modification Program

o    FHA announced their new mortgage relief program to help distressed FHA borrowers.

o    The FHA home loan is refinanced and 30% of the FHA mortgage is placed into an interest-free second mortgage that must be paid back when the home is sold or refinanced.

o    Borrowers can qualify with ratios of 31/55. The first ratio says that up to 31% of the individual’s monthly income can be used for housing costs and that 55% can be used for housing costs plus other monthly debts.

o    The homeowners must be able to document a hardship (ie. an income change, loss of employment etc.) and it must be deemed as a long term hardship.

FHA home loan programs have supported lenders and mortgage brokers nationwide for purchase, refinance and rehabilitation.  For several years there has been a big battle in Washington regarding the way in which new homes are financed. Basically, builders often give “incentives” if only you will use their lender. Their FHA lender, of course, is unlikely to be the world’s cheapest source of financing, thus you may get upfront benefits but may also pay extra over time. 

The Department of Housing and Urban Development has tried to stop the practice with a new rule banned the “required use” of the builder’s mortgage lender, was promptly sued by the home building industry and has now withdrawn its proposal altogether, meaning that new home buyers will continue to have the opportunity to pay more than they should for real estate financing.  It may seem improbable, but the HUD notice in the Federal Register is fascinating reading. For instance, it says that: “It is HUD’s view that, especially given the attention focused on HUD’s concerns through this rulemaking, the prior definition of ‘‘required use’’ can be used to address some deceptive referral arrangements, even though it does not achieve the enhanced consumer protections that FHA sought with respect to mortgages involving affiliated business arrangements. HUD will continue to seek consumer protections, especially as mortgage products continue to change, often becoming more complex and challenging buyers’ understanding of the costs and nature of mortgage transactions. HUD is not abandoning its goal of providing greater protections to consumers in real estate settlement transactions, but remains open to different means of achieving this goal.”

According to the FHA Mortgage Guide, HUD says that it “reiterates its commitment to fair real estate settlement practices that are not misleading, prevent abuse, offer proper disclosures to homebuyers, and promote choice and competition. HUD’s intent in revising the definition of “required use” was to clarify its interpretation of RESPA’s loan disclosure requirements with respect to transactions involving affiliated businesses in order to promote more competition among settlement service providers. After further evaluation and consideration of the concerns voiced by consumers and industry participants from various fields about the application of the revised definition of “required use,” HUD has concluded that all would benefit by HUD withdrawing the revised definition and addressing “required use” through new rulemaking.”