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.

Time may be limited for funding FHA streamline loans with FHA’s new rules.  The FHA-to-FHA Streamline Refinances are effective with case numbers assigned on November 17, 2009. That gives FHA home loan originators only a few weeks to originate loans under the old guidelines. What has changed? Just about everything!

o    New FHA seasoning requirements;

o    Revised requirements for FHA loan payment histories;

o    Required a net tangible benefit to the FHA borrower;

o    FHA now has a maximum CLTV;

o    Required verification of assets and employment

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.

An industry group lowered their forecast for 2009 home loan originations by more than 25% as higher FHA mortgage rates stifle mortgage refinancing activity.  The Mortgage Bankers Association estimates that lenders will make $2.03 trillion in new home loans this year, down by more than $700 billion from its forecast in March.  The Washington-based group attributed $84 billion to reduce mortgage lending on home purchases.  The rest of the decline would be from fewer FHA refinance loans and “very low” volumes on an affordability loan program overseen by mortgage agencies FHA, Fannie Mae and Freddie Mac, MBA said in a statement.

FHA mortgage rates have risen from record lows since the MBA’s prior forecast as have Treasury yields, which spiked amid a flood of debt issuance needed to fund federal rescue programs.

In March, the MBA boosted its forecast of mortgage originations by more than $800 billion but reversed most of that expected increase with Monday’s revision.  Average 30-year loan rates have slipped from recent peaks but at 5.38 % last week remain well above the record low 4.78 % set in April, Freddie Mac reported on Thursday.  The higher mortgage rates have quelled home refinancing demand.  The MBA’s index of mortgage refinancing applications in the week ended June 5 sank to 2,605.7 after hovering between about 5,100 and 6,800 from the March 20 week through the end of April.

Estimates of home loans moving through the Home Affordable Refinance Program, using Fannie and Freddie, have also fallen short.  According to Jay Brinkmann, MBA’s chief economist, “While generally accepted estimates were that around 1.5 to 2 million borrowers might avail themselves of this FHA loan program, with many more potentially eligible, to date only about 13,000 loans have been completed according to press reports.”

Though the FHA home loans created under this program should increase, volume is unlikely to come near forecasts, he said.  FHA home purchase loans are also expected to be less than expected in March. Falling prices mean lower loan sizes, and homes bought in foreclosure and by investors are often done for cash, the trade group said.

The MBA expects total existing home sales in 2009 to drop 1.2 % from last year to 4.8 million units. New home sales will slump about 27 % to 352,000 units, the group said.”Median home prices for new and existing homes will likely continue to fall, dropping by about 10 % from 2008 levels, but leveling off in 2010 as the economy improves,” Brinkmann said.