FHA Loan Guide

The Federal Housing Administration will launch a program on September 7th that will allow underwater homeowners who are current on a non-FHA loan to refinance into an FHA-backed loan when their lender agrees to write off at least 10 percent of their principal.  The FHA Short Refinance program, originally announced in March, is designed to help homeowners in markets that have seen large declines in home values refinance into “a safer, more secure” mortgage, FHA Commissioner David Stevens said in a statement

HUD recently announced changes to the FHA mortgage loan program to assist homeowners with mortgage loans that exceed the value of their home. The changes are part of broader efforts to assist homeowners that were announced by the Obama Administration.  Previously, Obama’s mortgage relief team had announced that by the Fall, they planned to revise FHA guidelines with additional changes to the FHA loan programs.  Their goal is to offer a FHA refinance loan option for borrowers who have made their loan payments on time but owe more than their home is worth.

In Mortgage Letter 2010-23 HUD sets forth the details regarding the FHA short refinance alternative. The option will be available for loans with case numbers issued on or after September 7, 2010 and closed on or before December 31, 2012. However, HUD advises that the loss coverage that will be part of the refinance option will use funds under the Emergency Economic Stabilization Act of 2008 (EESA), and that if availability of the loss coverage is delayed beyond September 7, 2010 the implementation of the loss coverage also will be delayed. Supplemental Directive 10-08, issued under the Making Home Affordable (MHA) Program in conjunction with Mortgagee Letter 2010-23, provides additional guidance for investors and servicers. The Supplemental Directive notes that the FHA refinancing is not yet effective and a subsequent Supplemental Directive will be issued when the program is operational and servicers can executed a Commitment to Purchase Financial Instrument and Servicer Participation Agreement (SPA) or a Service Schedule to the SPA, as applicable, with the U.S. Department of Treasury.

FHA Short Refinance Eligibility- The refinance option is available for homeowners with a non-FHA mortgage only if the following conditions are satisfied:

• The homeowner must be in a negative equity position. (mortgage balance must be greater than the property value)
• Borrower must be current on their current home mortgage loan.
• The homeowner must occupies the home as their primary residence and the home consists of one to four units.
• Borrower must qualify under standard FHA underwriting requirements and have a “FICO based” decision credit score of at least 500.
• The existing first lien mortgage loan holder must write off at least 10% of the unpaid principal balance.
• The FHA refinance loan may have a maximum loan-to-value ratio (LTV) of 97.75%.
• Second mortgage loans that are not extinguished must be re-subordinated and the combined LTV (CLTV) with the FHA refinance loan may not exceed 115% LTV.
• For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) or that are manually underwritten, the homeowner’s total monthly mortgage payment for the FHA refinance loan and any subordinate mortgage loans may not exceed 31 percent of the homeowner’s gross monthly income, and the total monthly debt payments of the homeowner may not exceed 50% of such income.
• Premium pricing may not be used to pay off existing debt obligations to qualify the homeowner for the FHA mortgage.
• The mortgagee may not make mortgage loan payments on behalf of the homeowner or otherwise bring the existing loan current to make the homeowner eligible for the refinance option.
• The existing home  loan holder may not have brought the existing loan current, other than through an acceptable permanent loan modification.
• For a homeowner with a loan that was permanently modified under the Making Home Affordable Program (HAMP), the FHA refinance loan may not close before the month that follows the month in which the modification became permanent. For a homeowner with a non-HAMP permanent modification, the homeowner must make at least three monthly payments on time and the modified loan must be current for the month due. If a homeowner is in a temporary or trial modification period, the homeowner is not eligible for an FHA refinance loan under the program.

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It looks like finally the government is tightening the FHA credit guidelines for home loans and refinancing.  The Federal Housing Administration has always been a great proponent of homeownership and fair lending, but FHA loan defaults are sucking up the FHA reserves. FHA announced they were considering a proposal to no longer approve FHA mortgage loans to borrowers with credit scores below 500.  After Congress left the 2010 FHA loan limits at high levels FHA mortgage companies knew that the mortgage news can’t always be good.  Let’s be honest — For the most part, FHA mortgage refinance programs have been pretty aggressive with subprime borrowers.

The results of these FHA lending changes are starting to be realized as the FHA loan portfolio is starting to perform better with less delinquencies and defaults.  Stevens continued, “These are the latest in a series of modifications to allow the FHA to manage its risk better while continuing to support the recovery for the U.S. housing sectors.”  HUD reported that in May, FHA loans that were seriously delinquent rose almost 9%.  That was up from 7.93% at this time in the previous year.  The good news is that FHA loan defaults have declined since January, when they rose to 9.16% which was a record high.  The effects of the foreclosures have been drastic as they have nearly drained the once healthy, FHA reserves.  Congress requires that FHA keep the reserves above a minimum of 2%.  

Earlier this year, FHA proposed a measure to implement a minimum Fico score system to the FHA mortgage programs.  Jerry Mlnar of Woodfield Planning, who is a trusted Illinois mortgage company said,  “FHA has to protect the government home finance program to promote affordable home financing and credit score resquirements for FHA mortgages makes sense.”

The initiative is being considered as a pro-active measure to reduce delinquencies and FHA loan defaults.  Congress considered raising the minimum down-payment requirements to 5% and 10% for borrowers with Fico scores that fell below 580.  For the most part, home buyers are only required to come up with a 3.5% down-payment when financing with FHA home loans.  However FHA direct endorsed underwriters have the discretion to require higher down-payments for candidates that pose a higher risk.

In a recent article, CNNMoney evaluated the FHA lending policies that are being considered in the reform circles of the lending community.  stage. Before going into effect, the department is soliciting public comment on the matters for 30 days. Then, it will evaluate the comments before implementing any changes.

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The recent FHA Mortgagee Letter from HUD all have the underline toned of increased responsibilities for approved FHA lenders.  HUD is driving home the tone of responsible lending in each of the FHA letters in 2010.   FHA outlined key provisions of HUD’s recently issued final rule, and guidance to mortgagees on HUD’s implementation of this final rule. The recent FHA requirements have been changed again as the new rule calls for increased the net worth requirements for FHA approved lenders.  The letter eliminates FHA approval of loan correspondents, FHA requirements of the Helping Families Save Their Homes Act of 2009 and made minor modifications to other aspects of FHA’s regulations for FHA lenders. Increased Net Worth Requirements As stated in the final rule referenced above, FHA is implementing increases to its net worth requirements and is offering additional incentives for existing FHA-approved lenders and mortgagees.

FHA Requrements Change Again with FHA Lenders Needing Higher a Net-Worth

Effective May 20, 2010, all new applicants for FHA approved lenders, irrespective of size, must possess a net worth of at least $1,000,000, of which no less than 20% must be liquid assets consisting of cash or its equivalent acceptable to the Secretary. FHA Lender Approval Application that is available at: http://www.hud.gov/offices/adm/hudclips/.  Effective May 20, 2011, each FHA approved lender or mortgagee with FHA approval as of May 20, 2010, that exceeds the size standards for a small business as defined by the Small Business Administration, must possess a net worth of at least $1,000,000, of which no less than 20% must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

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Over the last few months many FHA loan companies have been struggling to submit new loans into process because the loan application volumes were down for FHA refinancing and new home buying.  There were a few good weeks here an there, but overall, morale was down for loan officers according to several FHA lenders.  The Mortgage Bankers Association published its weekly home loan application report for the week that ended on June 11th.  Home refinancing and purchase mortgage applications rose and that is good news for mortgage brokers and lenders across the country. 

There was also good news the government mortgage programs as both FHA and VA loan applications increased significantly.  refinance loan guidelines have seen some tightening of one of the most popular programs, the FHA streamline in which borrowers are no longer allowed to finance the closing costs.  Borrowers must pay for the closing costs themselves outside of the loan.  Many FHA lenders have said that this had hurt their FHA refinance business, but it appears the borrowers are still using FHA for refinancing transactions.  FHA first time home buying loans could become fashionable again as more people look to become homeowners this summer.

The MBA’s index measures the volume of home mortgage applications and the report indicated an increase of 17.7% from the week prior. The Unadjusted Index spiked 29.7%, when compared to the prior week but the Memorial Day holiday shortened that week.

Michael Fratantoni who is MBA’s Vice President of Research and Economics, released a statement saying, “Mortgage loan applications for home buying rose last week, the first increase in over a month.  Mortgage refinance applications also roseup dramatically over the week.” He further went on to state that, “While it is clear that home loan applications in May dropped sharply as a result of the tax credit induced increase in applications in April, it is unclear whether we are seeing the beginnings of a rebound now.” The Weekly Home Loan Applications Survey contains over a dozen indices that covers mortgage-related application activity for fixed and adjustment rate, as well as conventional and government loans for home purchase and refinances. 

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Yes FHA mortgage rates are low, but the FHA loan program as a whole may be in jeopardy of existence.  Many FHA blogs have posed the reality that the FHA loan product is at serious risk to be shut down.  In this political climate it becomes obvious that anything is possible because Congress must pass bill to continue to fund the FHA finance programs. FHA FHA first time home buyer loans have been promoting home ownership since the great depression.  Even as we discuss their recent failures, the argument could be made that FHA is one of the most successful government initiative in the last century.  

The FHA Home Loan Refinancing blog reported that the FHA reserves have covered $6 billion over the last 6 months. Yet HUD had predicted the FHA agency would pay $8.7 billion for loan defaults.  This FHA blog poses the question, “should we cheer because the FHA home loans are preforming better than anticipated or be critical of a federal loan program that is failing in a failing economy?”  Read the original FHA loan article online > Is FHA Mortgage Financing in Trouble?

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Over the last few years, FHA loan policies have been different for condominiums.  Recent changes in the way the Federal Housing Administration approves home loans for condominiums have left many would-be homeowners out in the cold, at least temporarily. That’s because the FHA will no longer approve a mortgage for a unit in a community that does not comply with new, stringent standards that went into effect on February 1st. In order to be certified as a compliant community, the condo association must apply to the FHA become certified as meeting all the standards. An FHA mortgage lender can also apply on the condominium community’s behalf to get this certification.  The FHA doesn’t make loans itself, but it does ensure home loans made to people with small down payments or less than perfect credit. This is why among first-time buyers, FHA mortgage loans are often the only option for buying a home.

Lemar Wooley, an FHA spokesman, said the new regulations were put into place because Congress changed the law, allowing FHA guidelines to make approvals of loans to condominium buyers more similar to single-family home-loan approvals. “The “Housing and Economic Recovery Act of 2008′ (HERA), moved the condominium authority from Section 234 to Section 203 to allow for more flexible condominium policy guidance,” Wooley said. “”Because of this change in law, the Federal Housing Administration (FHA) is implementing a new approval process for condominium projects and insurance requirements for mortgages on individual units, as authorized under Section 203(b) of the National Housing Act.”Wooley explained that Section 234 was a special section dealing specifically with condominiums. Section 203 provides general guidance for single-family homes.

Announced in November, the new regulations fall into three broad categories, according to Orest Tomaselli, the president of National Condo Advisors, a consulting company that works with condominium associations to help them meet the regulations.  First, he said, the community must demonstrate it has a budget reserve that is equal to 10 % of its annual budget. The reserve exists for repairs and maintenance of the common property and plant – the sidewalks, roofing, siding, windows, swimming pool, tennis courts, clubhouse or other facilities. If a community does not have or want such a large reserve, Tomaselli said it can hire an engineer to study the community’s needs and recommend a lower amount. If the FHA accepts the engineer’s study, a lower reserve amount can be set for that community

Second, the condominium community must meet new flood-plain requirements set forth by the Federal Emergency Management Agency. If the community is not in a flood plain, this is not an issue. However, when FEMA redrew its flood maps recently, it expanded the areas it believes will flood. Within those areas, buildings can still comply if the community has flood insurance and the highest living space is 10 feet or more above the flood plain. Or, the community can hire an engineer to file a “Letter of Loan Amendment,’ which, in effect, demonstrates that the FEMA guidance needs adjusting in their case. If FHA accepts this amendment, the community can be certified.

Third, the community must meet certain ownership requirements. At least half of all the units in the community must be owner-occupied, and no one investor can own more than 10 % of all the units. In the case of a community that is still being built, a certain %age of units must be presold.  Tomaselli said that the requirements aren’t really bad. Having sufficient capital reserves to meet maintenance needs is wise. Having most of the units occupied by the owners also ensures that the community will be well looked after. And flooding in some areas has been more frequent in recent years. But that doesn’t change the fact that these regulations have hit hardest those with the least ability to pay for engineering studies or increased budget reserves.

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Once again 1st-time home buyers made up almost half of the homes purchased in April.  New home buyers have been inspired by historically low interest rates and low down-payment requirements with FHA loans.  Many mortgage executives privately feared rate hikes once the Federal Reserve allowed $1.25 trillion mortgage-securities purchase program to officially expire, but conforming and FHA loan rates remain at record lows. 

The flexible FHA guidelines and aggressive lending standards set forth by the Federal Housing Administration have encourages FHA lenders to finance new home buying if the borrower can document their income.  In 2010, government home financing has taken the market-share for mortgage loans as, through Freddie Mac, Fannie Mae and the FHA, have seized almost 97% of the home financing market.  

According to FHA commissioner David Stevens “This is a mortgage market surviving purely on life support and sustained by the federal government.” Stevens spoke with passion at the Mortgage Bankers Association conference yesterday. He reached out to FHA lenders to start thinking more about the borrower and helping the mortgage industry recover rather than focusing on maxing out loan commissions.  HUD has tightened FHA loan requirements with stricter FHA guidelines that have made qualifying with FHA for challenging for borrower than it was in the past few years.

FHA lenders continue to be blessed with affordable FHA loan rates. The Mortgage Bankers Association mentions that FHA rates should remain relatively low in the short term because of concerns in Europe financial woes with debt burdens. Lower FHA rates help to reinforce demand. Despite average thirty-year FHA interest rates dipping below the 5% illustrious threshold, the MBA noted last week that the number of people seeking purchase loan applications has declined by over 27%, the most dramatic drop since May of 1997.   Read the original FHA loan article online at CNN Money >

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Last week, the House Financial Services Committee approved a request by the Federal Housing Administration to increase the ceiling on annual FHA mortgage insurance premiums from its current level of 0.55%.  FHA had requested the increase as one part of a plan aimed at shoring up its capital reserves which have dropped below the 2% required by law.  HUD already raised the up-front premium charged to borrowers closing that became effective on April 9th.  FHA says it intends to gradually raise the annual premium for FHA loans to 1.5%. 

FHA revealed late last year that its current reserves are at .53%, but officials have said that their tightened lending requirements as well as the increase in premiums would allow them to restore the levels by collecting an additional $5.8 billion over the next few years.  The Congressional Budget Office has put the number at a much more conservative $1.9 billion.  While approving the increase, the Committee defeated a proposal sponsored by Scott Garrett which would have increased the minimum down payment for insured FHA loans from 3.5% to 5%.  It also would have prohibited sellers from participating in the buyer’s closing costs and prohibited the inclusion of any initial services charges such as appraisal, inspections, and other fees in the principal amount of an FHA mortgage loan. 

The FHA has already reduced the amount that a seller can contribute to the buyer’s closing costs from 6 % of the loan amount to 3 %.  Garrett has also submitted separate legislation which would prohibit the home buyer from rolling the upfront lending cost into the mortgage which would essentially raise the money required of a borrower at closing.  Had the Garrett Amendment survived the Committee vote it could have had a considerable negative effect on the housing market.  FHA guaranteed loans have historically been a minor factor in mortgage financing, but in the last few years, as credit tightened, the FHA was forced to increase its funding efforts up to 25% of all home loans and an even high proportion of loans to first time home buyers. 

In 2010 FHA refinance loans were hindered by tighter credit guidelines and a dysfunctional appraisal process.  FHA refinance application volume has dropped significantly from the previous year, mostly because millions of borrowers have already been turned down.

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In an effort to minimize lending risks, the government wants to toughen standards for lenders who offer FHA home loans. At first this may not seem like much of a concern for borrowers, but in fact if you need a loan you may well be impacted.  In a recent article, FHA Commission David H. Stevens explained how the federal government is moving towards requiring more capital to be a FHA-approved lender. “Since 1993,” says Stevens, the “FHA has required approved lenders to have a net worth of at least $250,000. To ensure that FHA mortgage lenders are sufficiently capitalized to meet potential need, effective immediately, all new lender applicants for FHA loan programs must now possess a minimum net worth of $1 million.” There will be an exception for current FHA-approved small business lenders, they’ll need a minimum net worth of $500,000.

This means that FHA lenders will pay a price if they don’t make FHA loans that don’t perform well.  It also means that FHA brokers will pay a high price for making mistakes on the loan documents. Under the new FHA guidelines, HUD can force lenders to buy back government mortgages which are not properly underwritten. If you are a small lender and the FHA wants you to buy back a few loans at $250,000, you might be out of business.

FHA Lenders in such situations face some difficult choices. If they don’t buy back the loans they’re out of the FHA loan program and that greatly limits their ability to compete for borrowers. Alternatively, smaller firms with that $250,000 in capital may not have the cash to buy back the mortgages, meaning they’re out of business.  HUD is forcing lenders to take on more risk if they are serious about originating FHA loans. Stevens says “approved lenders and applicants to FHA single-family programs must have a net worth of $1 million plus 1% of total loan volume in excess of $25 million.”  These FHA loan requirements signal that the FHA is intent on decreasing the loan default ratios and that they plan to be around for the next decade.  Read the original FHA article >

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FHA seeks to empower struggling neighborhoods with help from FHA loan program that promote home ownership and affordable mortgage payments. FHA lenders have been pushed to the limit with loan defaults and high foreclosure rates. HUD continues to increase FHA loan requirements and tighten FHA guidelines yet they say they want to assist distressed neighborhoods with better FHA loan products.  First time home buyer loans are still available with only a 3.5% down-payment.  Some states will allow borrowers to use credit from the first time home buyers tax credit towards their deposit as down payment assistance.  FHA lenders don’t expect that to last and most FHA loan programs will not approve these types of FHA mortgages.

You may be able to buy a foreclosure home from your town or county; the program helps local governments purchase vacant or abandoned properties and resell them to qualified home buyers. Home buyers do not receive assistance directly from HUD. However, NSP money can be used to help home buyers purchase primary resident real estate. Interested buyers must contact an NSP grantee for application details.  FHA loan limits will vary from county to county so check the FHA loan limits in your area or talk to a loan officer.

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FHA credit guidelines have always been more flexible than traditional conventional mortgage loans.  HUD has announced several times that they have revised the FHA guidelines in recent months.  The FHA appraisal policy has been changed a bit and the FHA streamline refinance program has been hacked at as well. 

In addition, FHA credit guidelines were revised.  Many government loan skeptics believe that FHA should require credit scores; something HUD has instituted in the past FHA loan programs. Traditional lenders mandate credit score minimums that prevent borrowers with low credit scores from qualifying.  Most FHA lenders have implemented their own credit score minimums because they don’t want to be on the hook for FHA defaults. 

HUD is cracking down on FHA lenders that violate disclosure laws and incur high default rates. HUD did announce a new loan program that required a more significant down-payment and higher insurance premium for borrowers with credit scores as low as 580.  That was nice of HUD, but let’s see if any FHA mortgage companies actually offer this low fico FHA loan.

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FHA officials recently expressed new reasons to be optimistic. The FHA home loans made in 2009 tended to go to borrowers with higher credit scores than in previous years. These borrowers turned to the FHA when the mortgage market collapsed and other lending sources dried up. By then, reputable lenders doing business with the agency were already imposing tougher restrictions on FHA borrowers, further boosting the credit profile of those FHA loans. The average credit score of an FHA borrower is now 690, up from 630 only two years ago, agency officials said.  Are credit repair efforts working or are loan officers doing a better job qualifying loan applicants? Nonetheless, these higher fico mortgages are expected to result in lower losses, so FHA should make money on mortgage loans issued this year and over the next few years, according to an independent audit designed to gauge the agency’s health.

The November audit, found that the cash the FHA set aside to pay for unexpected losses had dipped to historic lows, well below the level required by law. As of Sept. 30, those reserves were estimated at $3.6 billion, down from nearly $13 billion a year earlier. The most recent figure represents 0.53% of the value of all FHA 1-family home loans far lower than the 2% required by Congress.   But Ann Schnare, a former Freddie Mac official, said the situation could be even worse. She said the audit underestimates future losses because it does not take into account all loans that are now overdue, only those that the FHA has paid claims on.  Stevens said his agency has pored over its data to analyze risk and is taking steps to shore up its financial health. “You have a limited set of options under these circumstances: Raise fees [for borrowers] or make policy changes,” Stevens said in an interview. “We’ve done both.”

The agency banned 268 FHA lenders from making FHA mortgage loans last year, more than double the total terminated in the previous eight years. The FHA suspended six other firms. Among them were some of the largest FHA mortgage lenders –Taylor, Bean & Whitaker and Lend America, both of which shut their doors soon thereafter.   The agency also proposed a rule that would require banks to hold up to $2.5 million in capital that they can use to repay the agency for losses if they were involved in fraud. Banks are now required to hold only $250,000.

Borrowers are also facing tougher scrutiny from the agency. People taking out FHA mortgage loans will have to pay higher upfront fees, perhaps as early as this spring. Those with especially weak credit scores will also have to put down at least 10% instead of the usual 3.5% down-payment. The amount of money sellers can kick in toward closing costs and other fees will also be limited.

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It’s about to get more difficult to qualify for a FHA home loan, often considered the replacement loan for the collapsed subprime market.  Moving to head off the financial impact of defaulting borrowers, the FHA is adding more-stringent lending requirements and higher fees borrowers must pay to get the federally-insured loans.  The announcement comes on the heels of an investigation into 15 FHA lenders with high incidences of FHA mortgage insurance claims. The same companies have reached out for government assistance money from taxpayers.

Mortgage insurance is paid by borrowers, typically when the down payment is lower than 20%. FHA Borrowers pay, but the coverage protects lenders with cash benefits should the borrower default. When lenders foreclose against homeowners with the coverage, it triggers mortgage insurance benefits for lenders to help pay off the mortgage.

Rick Sharga Vice President of ReatyTrac says foreclosures were up 21 % from a year ago and 120 % from two years ago and it could get worse.  The FHA is more exposed to defaults than ever. By some estimates, as much as 50 % of all purchase loans in some areas are FHA insured. Before the housing collapse, FHA wrote only 3 % of all home loans. After notice and comment periods, but beginning this spring, the FHA will raise mortgage insurance fees that borrowers must pay, cap the amount of cash that sellers can contribute for closing costs and require higher down payments for the borrowers with poor credit scores.

• The new upfront FHA loan premium will cost borrowers 2.25 % of the loan amount, up from the current 1.75 % and the second increase in the past two years. The upfront premium can be rolled into the loan. Later, some of the cost increase could be added to a borrower’s additional annual mortgage insurance premium which is paid monthly.  “Increasing the insurance premium on FHA loans is simply a reflection of the substantial risk the administration has taken on in recent years,” says Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.

• New borrowers must have a minimum FICO credit score of 580 to qualify for FHA’s 3.5 % down payment loan, otherwise the borrower must put 10 % down. Most lenders require a minimum credit score of about 620. A credit score is a numerical rendition of a borrower’s creditworthiness. The higher the score, the better the credit and the better likelihood of qualifying for the least expensive loan.   “The absence of equity in their home has become a key predictor of a borrower defaulting on their mortgage payment in this distressed market. Requiring a greater down payment should be the first step towards more prudent underwriting and lending practices,” Osborne added.

• Sellers will only be able to contribute closing costs that amount to 3 % of the sale price, half the current 6 %. Experts say the higher maximum encouraged borrowers to mark up the price to compensate for their concession.

The value of the FHA’s reserves, $3.6 billion is down from 3 % a year ago and an amount that’s far below the amount required by Congress.  Late last year FHA proposed stiffer rules for lenders to also reduce its risk — that lenders to have a net worth of at least $1 million in the first year and $2.5 million within three years, up from the original requirement of $250,000. The federal agency also wants tighter approval requirements and greater liability for lenders and mortgage brokers who want to originate, underwrite or service FHA.  Even with the higher fees, tougher underwriting, and lender crackdown, it’s not going to be easy rebuilding reserves in a hung over housing market.  The FHA’s move could further exacerbate conditions for the housing market, by removing some low-down payment loans that were allowing new buyers to buy and others to refinance their way out of foreclosure.

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Americans have grown accustomed to FHA loans for purchasing and mortgage refinancing.  A recent Bloomberg article highlighted new obstacles for Homebuyers seeking mortgage refinancing to take advantage of FHA loan program.   Borrowers will now have to put down additional funds in some cases as officials look for ways to shore up finances at the Federal Housing Administration.  FHA loan defaults have sky-rocketed over the last few years because of the economy and lack of mortgage loan products.

HUD secretary Shaun Donovan told reporters “Down payment is one of the elements we’re looking at.” Donovan continued, “A second is the upcoming mortgage insurance premium and then additional money that needs to be brought to the table.”

The FHA is also considering cutting the amount of home seller concessions a buyer can receive by half to 3% of the purchase price to combat inflated appraised home values.  The minimum credit scores required for borrowers may also be raised, and the guarantee fees charged to lenders may increase, Donovan said.   “We have made the decision to exercise our authority to increase the up-front cash that a borrower has to bring to the table in an FHA-backed loan, to make sure that FHA borrowers have more ‘skin in the game,’” Donovan told the committee.

HUD, which oversees FHA, will provide details in January, he said. Some FHA guideline changes may take affect in the first quarter while others, like raising annual insurance premiums, need congressional approval and will take more time, he said.

The National Association of Realtors said FHA must be careful not to raise costs too high for borrowers and constrict access to credit. “Requiring a larger down payment will make homeownership out of reach for many families and for others could deplete their cash reserves for home and other emergencies,” said Vicki Cox Golder, an Arizona Realtor and president of the National Association of Realtors, which represents the industry from Washington.

The FHA mortgage lending continues to struggle as mortgage insurance reserves fell to the lowest level in history last fiscal year and the government said more steps are needed to shore up the agency that guarantees one of every 5 single-family loans. The insurance fund tripled in size last year and has taken on more risk as private industry sources for lenders to finance and insure home loans dried up and mortgage default rates rose to record highs.

FHA’s net capital ratio, or reserves after accounting for projected losses, fell to its lowest level on record, 0.53%, in the year ended in September, from 3% in fiscal 2008 and 6.4 % in 2007, according to an annual review released last month.

FHA, along with federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, accounted for more than 90% of all U.S. mortgage loans in the first half of this year.

The agency may raise the up-front insurance premiums of 1.75% that it charges FHA lenders to guarantee the loans, Donovan said. The agency is seeking permission from Congress to increase its annual insurance rates as well, which will raise FHA home loan costs for consumers, Donovan said.

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You would think that the housing sector rebounding would be good news for FHA loan programs, but think again. Yesterday HUD reported that the FHA reserve fund is dangerously low and today Zillow is reported that home prices seem to be stabilizing. “The percent of American single-family homes with home mortgages in negative equity fell to 21% in the third quarter, down from 23% in the second, as home values stabilized in the short term and more underwater homeowners lost their homes to foreclosure, according to the third quarter Zillow Real Estate Market Reports.  “Year-over-year home values in the United States declined for the 11th consecutive quarter, falling 6.9 percent to a Zillow Home Value Index of $190,400,” says the company. “However, the rate of year-over-year decline shrank for the third quarter in a row, meaning home values did not decline as dramatically year-over-year in the third quarter as they did in the second or the first.”

In addition to Zillow, the S&P/Case-Shiller report reaches the same conclusion:  Data through August 2009, says S&P/Case-Shiller, shows that “approximately seven months of improved readings in these statistics, beginning in early 2009.”  “While many of the markets remain down versus this time last year, the relative rate of decline has shown some real improvement,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “California, in particular, has seen some real positive prints in recent months. We see this general trend whether you look at the as-reported data or the seasonally adjusted figures.”

For FHA mortgage products and FHA lenders the ideal scenario would be for FHA loan defaults to decrease. FHA loan guidelines will tighten significantly if the FHA loan defaults continue.  For the FHA, more equity translates into lower claims against its reserves. Foreclosure is not actually a problem for insurance programs if the value of the home is greater than the outstanding mortgage lien and the default costs. Thus, for the FHA, the more equity the better.  Read the original article.

FHA Loan Updates, FHA News

The existing mortgage loan limits for FHA loans have been extended through the end of 2010. This move is expected to help ailing US housing markets by extending the availability of FHA home loans to homebuyers and homeowners in higher priced markets. FHA home loan limits are based on 125% of local median home value, and vary by location. With the crash of subprime mortgage lending, FHA plays a significant role in providing home loans for borrowers who cannot meet conventional mortgage lending requirements. Challenges can include:

          Bad credit: FHA guidelines allow borrowers to carry more debt than conventional lenders, and also qualify borrowers with bankruptcy filings a minimum of two years prior to applying for an FHA loan and foreclosure occurring a minimum of three years prior to applying. FHA does not require a minimum credit scores, but instead focuses on borrowers’ demonstrated ability to make mortgage payments.

          Low down payment: FHA loans require as little as 3.5 percent down for home purchases, and down payment funds can be provided by family members, employers and housing assistance programs. The source of down payment funds is subject to verification, but FHA loan requirements are “friendly” toward first time buyers and others with low cash reserves. FHA guidelines allow for closing costs and the up-front mortgage insurance premium to be added to the home loan amount; borrowers may also elect to pay higher mortgage rates and have their lenders pay closing costs.

          FHA 203k Loans – These Rehabilitation mortgages available to qualified borrowers: FHA can provide mortgage loans based on a home’s potential value after it has been refurbished; this provides up front funding for renovation expenses. Ask FHA lenders for details and review the updated FHA guidelines for this program.

When getting quotes for home loans, consider the APR and closing costs, in addition to FHA mortgage rates. This can help you find savings on closing costs. The APR includes the mortgage rate and closing costs, so if you have two quotes offering the same mortgage rate, the lower APR indicates lower closing costs.

FHA Loan Updates, FHA News, Mortgage News

The head of the Federal Housing Administration warned that raising down payment requirements or taking similar steps to limit the pool of bad credit home loans that lead to increased loan defaults and foreclosures.

Rep. Scott Garrett (R., N.J.) introduced a measure in Congress earlier this month that would require minimum down payments of 5%, up from 3.5%, on loans backed by the FHA. But Mr. Stevens warned against “jumping to conclusions” and making credit standards tighter just as some signs show that housing is beginning to stabilize in certain housing markets. “When I see members of Congress move a bill out that says raise it to 5%…I get very concerned,” he said. “It isn’t the down payment on its own that causes a default.”  Mr. Stevens’ strong defense of the FHA’s current role in the marketplace drew applause from the otherwise muted audience of mortgage bankers, brokers and other industry personnel during the trade association’s annual meeting.

The FHA has seen its market share balloon since the subprime mortgage market collapsed more than two years ago and led most private investors to exit the mortgage market. The New Deal-era agency’s standards were seen as too strict during the heyday of subprime lending because it required borrowers to document their incomes and pay minimum down payments, but today it remains one of the last sources of low down-payment loans.  FHA home loans continue to gain market-share in the absence of alternative home financing programs. 

Concerns over the agency’s risk to taxpayers has grown in recent months after the FHA said that its estimated capital reserves would drop below federally mandated levels in recent weeks. Mr. Stevens says that there’s no immediate risk of a taxpayer bailout, but critics suggest that a prolonged slump in housing prices could require the agency to ask Congress for money for the first time in its 75-year history.

Mortgage-industry executives also exhorted industry colleagues not to back off of efforts to modify loans given early “glimmers of hope” that housing is reaching a bottom. “It is an awesome task that is in front of us,” said Charles “Ed” Haldeman Jr., the chief executive of Freddie Mac. He warned that there could be “increasing softness” in housing in the coming months. “It would be a real mistake to be too confident about a return to normalcy,” he said

FHA Loan Updates, FHA News, Mortgage News, Published Loan Articles

FHA loan programs continue to soar in popularity. HUD reported that the FHA loans during the first part of August were receiving about 10,000 applications per day.  According to HUD officials, “The Federal Housing Administration was hit by increasing mortgage losses, is in jeopardy of seeing its reserves fall below the level demanded by Congress, in a development that could raise concerns about whether the agency needs a taxpayer bailout.”  Read the original article, FHA Home Loan Programs Driving Mortgage Economy online.

FHA Loan Updates, FHA News, Published Loan Articles

According to FHA Loan Pros, the American Recovery and Reinvestment Act without the legislation would be reverted FHA loan limits back to $417,000. That would have eliminated millions of FHA borrowers, but fortunately Congress was able to include the higher FHA loan limits into their 2010 budget. FHA lending would have been scarce in many of the high-income, high-cost metro areas.  Certainly prohibiting a portion of the country to utilize FHA home financing is the last thing a struggling residential real estate market needs for recovery.

If this Congressional budget is approved, the single-family loan limit will remain $729,750 for high-cost areas in the lower 48 states and as much as $1,094,625 in Alaska, Hawaii, Guam and the Virgin Islands.

FHA Loan Updates, FHA News, Mortgage News

According to a report released yesterday by the Government Accountability Office, the Department of Housing and Urban Development has left senior homeowners vulnerable to abusive FHA lending practices because of shortcomings in programs that offer reverse mortgage loans.  Reverse mortgages, which are usually backed by HUD’s Federal Housing Administration, enable seniors to withdraw equity from their homes. The senior home loan and the accumulated interest do not have to be paid back until the owner dies or sells the home. But the upfront costs are substantial.  While these specialty FHA home loans have become more attractive to seniors as the economy has soured and housing values have dropped, reverse home loans are complex. That is why the FHA has long required that the seniors take part in HUD-approved counseling sessions before these cash out refinance loans are processed. Yesterday’s report concluded that HUD “lacks effective controls” over the counseling programs.

Based on undercover participation in 15 counseling sessions, the GAO found that the counselors conveyed accurate information but none covered all of the mandatory topics and some exaggerated the length of the counseling sessions, which can be conducted by telephone or face-to-face. The report also said that seven of the 15 did not discuss alternatives to reverse mortgages, as required.   The report, requested by Sen. Claire McCaskill, also said that a limited review of reverse mortgage marketing materials found some misleading claims. Federal agencies responsible for protecting borrowers had reported few complaints. Some of the states that the GAO contacted also reported cross-selling, the practice of enticing borrowers to use their mortgage funds to buy insurance or other products that are not suitable for them. Recently enacted federal law aims to curb such practices as do some state laws.  

HUD spokesman Brian Sullivan said the reverse mortgage program has more safeguards, such as required counseling, than do private mortgage loan programs. “These existing consumer protections have contributed greatly to the success of the [reverse mortgage] program, which has provided financial security to several hundred thousand seniors,” he said.  According to the trade publication Inside Mortgage Finance in the first quarter, the FHA backed about $7.8 billion worth of reverse home mortgages, the largest amount in any quarter since the agency launched the program in 1988.

Nearly two months ago, the FHA mortgage lending announced its plans to ask Congress for nearly $800 million in taxpayer money to cover projected losses on reverse mortgages in fiscal 2010.  The losses are not related to fraud but to falling home values, HUD Secretary Shaun Donovan said at the time. That’s because by the time a reverse mortgage needs to be repaid, the value of the house could have dropped and the FHA-insured lender is left with no choice but to recoup less money than it loaned out.  Donovan said the Obama administration is requesting a subsidy instead of raising charges for seniors.

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