FHA Loans

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

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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.

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When it was passed last year as part of the FHA reform package, the Hope for Homeowners program was a federal mortgage refinancing plan designed to help some 400,000 people who now have toxic loans. In fact, the program has been a complete bust. As of January 31st, HUD figures show that there have been 465 Hope for Homeowners applications — and not one approval from the government.  Hope for Homeowners has gone nowhere because it’s complex. It requires FHA mortgage lenders to take a loss and borrowers to share profits and make big payments to Uncle Sam. While the intention is good, the program is just too complex to succeed.

Now we find an effort to revamp the Hope for Homeowners program and the betting here is that few FHA loans will result.

Under H.R. 1106: The Helping Families Save Their Homes Act of 2009, the program will become MORE restrictive if the legislation passes as it is now written. Huh? How can that help anyone?

Once again, the intention is good but the result is doomed to failure. For instance, the legislation requires that a borrower does not “intentionally defaulted on the existing FHA mortgage loans.”   Translation: If you’re stuck in an over-priced house you can’t buy a replacement home and then default on house #1. This seems logical, except that when someone applies to buy that second home they have not yet defaulted on the first house. If default comes at all, it will come later.

Get more Jason Cardiff Tips online>  Read more of the  article >  Is the FHA Planning to Penalize Borrowers?

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In a recent article, FHA Loan Pro’s weighed in on the HUD counseling mess as homeowners with FHA loans now have new counseling choices to consider. If you are a homeowner in default HUD counselors are not supposed to charge you. It seems that recent reports suggest something else is going on. 

In a letter to FHA mortgage lenders dated February 19th, HUD says:  “HUD had previously sent guidance to HUD approved counseling agencies indicating that fees may not be charged for clients needing homeless counseling or default counseling.   “It has come to HUD’s attention that some Housing Counseling agencies have been asking the real estate broker or agent on a short sale to provide their agency a part of the Real Estate Brokers sales commission to pay for the clients foreclosure counseling session.   “Please be advised that splitting the Real Estate Brokers fee is not a permissible funding source for foreclosure counseling, and may be a violation of RESPA as well as the conflict of interest provisions of 24 CFR Part 214. It may also be grounds for termination from HUD’s Housing Counseling program.  “HUD approved Housing Counseling agencies, their affiliates, and branches that are collecting fees from real estate agents for the referral of clients and to assist with the costs of foreclosure counseling must terminate this practice immediately.”

In 2007 HUD, under the Bush Administration, announced that “funding for housing counseling is a major concern among participating agencies. In a change in this final rule, HUD is clarifying that it will allow for participating agencies to accept funding from lenders, as long as the relationship does not create a conflict of interest and that the relationship is disclosed to the client.”

FHA Loan Pros complained about this rule loud and often and in the summer of 2008 Congress banned lender-paid counseling. In October of 2008, HUD complied with the new law and announced that “lenders can no longer pay HUD-approved counseling agencies, directly or indirectly, for counseling services through either a lump-sum payment or on a case-by-case basis.”  Read the complete article at FHA Mortgage Programs

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Tax liens may remain unpaid provided the mortgage company subordinates the tax lien to the FHA insured home loan. If any regular payments are made, they must be included in the qualifying ratios.  Since the IRS routinely takes a second mortgage position without the necessity of independent documentation, eligibility for FHA mortgage insurance will not be jeopardized by outstanding IRS tax liens remaining on the property unless the FHA mortgage lender has information that the IRS has demanded a 1st mortgage position.  Read the complete article >Tax Lien Issues with FHA Mortgage Loans.

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To get a mortgage now, you’ll have to make a down payment and document that you have the income and reserves to make your mortgage payment, run your household and still handle unexpected expenses.  Subprime mortgage loans that were offered to borrowers with questionable qualifications during the housing boom have dried up because lenders — and the investment firms that bought the mortgages — can no longer count on appreciating home prices to bail out bad loans. Now FHA mortgage lenders and brokers must play by the rules of Freddie Mac and Fannie Mae, which guaranteemortgages that meet their criteria so that home financing investors will want to buy them in the secondary market.

Mortgage Lending Guidelines Tighten! 

FHA mortgage loans are backed by the Federal Housing Administration have also regained favor as an option, not just for credit-challenged borrowers for good credit borrowers looking for low down payments.  The FHA loan programs gave Kyle and Tracy Spear of Swampscott, Massachusetts, north of Boston, an opportunity to buy a larger home with less of a down-payment. Last summer, the couple had planned to subdivide their property in Boston and sell the home plus a separate lot. But the city and their neighborhood nixed the subdivision, and they ended up netting just $15,000 on the sale. For two months, Kyle, 38, Tracy, 37, and their three boys — Kyle, 4; Tyler, 2; and Jack, 11 months — lived with friends and family to save money until they found their next home, a 2,800-square-foot house with four bedrooms that cost $540,000. They qualified for a thirty-year jumbo mortgage loans with a fixed rate of 6.875% backed by the FHA. And because the FHA required a down payment of only 3%, they had to put down just $16,000.

Prove it. The days of “Take my word for it” are over, and stated-income loans, are very difficult to find. Lenders will ask you for at least two months of financial account statements, two years of tax returns and even verification from employers that overtime, commission or bonus income will continue.

FHA mortgage lenders are also scrutinizing more carefully the ratio of your debt to income. Beginning February 1, 2009, Freddie Mac is imposing a limit of 45% of all pretax income for all debt; borrowers with a credit score of 740 or better will get the best rates. The FHA refinance guidelines are even tighter: Mortgage debt may not exceed 31% of your income, and total debt can’t top 43%. The FHA doesn’t impose a credit-score threshold.

Home loans with no down payment, or those that combine first and second mortgages, such as the 80-20, are also gone. Home mortgages backed by Fannie and Freddie require a minimum down payment of 3% to 5%. The bigger your down payment and the better your credit score, the better your interest rate. If you put less than 20% down, you’ll pay private mortgage insurance, or PMI.  But here is something to consider; If home prices have been falling in your area, you may not be able to get PMI, and if you can, you’ll have to ante up 10% to 15% for a down payment.

Congress has authorized the FHA, which relies on its own program of mortgage insurance, to take up the slack in declining markets, says Meg Burns, director of the FHA’s Office of Single-Family Program Development. The FHA can insure loans up to the same amount as Fannie and Freddie. Beginning January 1, the limit is 115% of a metro area’s median home price, up to $625,500, and the minimum down payment is 3.5%, up from 3% in 2008. FHA mortgage loans have become reasonabbly affordable.

According to HSH Associates, at the beginning of November the national average rate on a 30-year fixed-rate loan was 6.4%. FHA home loans had a 6.7% mortgage rate; the expanded jumbo interest rate was 6.8%, and the traditional jumbo mortgage rate was 7.9%. Adjustable interest rate FHA home loans didn’t offer much of an advantage: The interest rate on a 5/1 ARM was 6.4%, and on a one-year ARM it was 5.8%.  Read the complete article >.  

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During the subprime mortgage boom, the Federal Housing Administration, created in 1934 to help lower-income and 1st-time buyers purchase homes, all but sat out the party.  Borrowers abandoned the FHA in favor of conventional home mortgages that were both easier to qualify for and less expensive. The agency does not itself issue mortgages but it insures lenders that do, and its insurance pool is financed by premiums paid by homeowners who use its programs.

Now, as credit tightens, FHA is the sudden star of the nation’s housing market. In September alone, it endorsed over 96,000 new home loans, more than triple the number it approved in the same month last year, federal data shows. But some housing industry experts worry that FHA may soon be hit by a wave of mortgage-related fraud and abuse that it is ill prepared to deal with.  Over the years, the Department of Housing and Urban Development, which oversees FHA, has been slow to weed out mortgage lenders that abuse or defraud the agency and profit through means like certifying unqualified borrowers. There are also growing concerns that subprime fraud artists have set their sights on FHA. “It looks like an incoming tsunami,” said HUD’s inspector general, Kenneth M. Donohue

The fallout for both homeowners and taxpayers could be substantial if FHA becomes the next housing domino to teeter.In 1991, Congress was forced to increase the premiums that FHA homeowners pay to the agency’s insurance fund when it was overwhelmed by claims from bad mortgages. And a HUD audit released this month suggests that fund may soon face trouble again; over the fiscal year, its capital ratio dropped to 3 percent, from 6.4 percent, reflecting a sharp increase in claims. By statute, that capital ratio must be at least 2 percent.

In addition, principal and interest on mortgage-backed securities containing FHA-insured loans are guaranteed through the Government National Mortgage Association, known as Ginnie Mae. That means the taxpayer is responsible if the mortgages underlying those securities fail.Howard Glaser, a onetime HUD official who is a mortgage industry consultant in Washington, said that FHA had largely been treated as a stepchild. Over the last five years, for instance, the agency’s staffing levels have remained essentially flat. “If we don’t have the capacity to monitor systemic risk in FHA, then we are in real trouble,” he said.

HUD officials did not respond to repeated requests to be interviewed for this article. But a department spokesman, Lemar C. Wooley, said in a statement that HUD was effectively dealing with F.H.A.-related fraud and abuse. “For decades, the FHA has successfully undertaken measured risks while consistently evolving its programs to protect the integrity” of the insurance fund, Mr. Wooley stated.  In many ways, F.H.A. is far better suited to deal with fraud than lenders that issued subprime loans. FHA borrowers need to have down payments and are expected to meet strict criteria to make sure they are capable of paying their mortgages.

But HUD’s weak point has long been its oversight of the thousands of mortgage lenders and other companies that effectively act as outside contractors in originating and endorsing FHA home loans, studies by the Government Accountability Office and others have found.  To work with the agency, companies must meet financial standards. It can take years to dislodge firms suspected of creating problems for the system, however, according to federal studies and as demonstrated by some recent cases.

In October, for instance, federal prosecutors persuaded a judge in Federal District Court in Brooklyn to block a lender, Madison Home Equities of Carle Place, N.Y., and its owner, Nadine Malone, from approving any more FHA mortgages. In court papers, prosecutors charged that the firm had, among other things, falsified data to certify unqualified borrowers and artificially inflated the prices of homes it sold. It was not the first time that federal officials had tried to rein in Madison. Since 1996, federal records show, HUD, on separate occasions, has imposed sanctions on the firm, fined it, sued it and even debarred it for a time as an approved FHA agent.  Through it all, the firm and Ms. Malone denied they had done anything wrong and, after Madison’s debarment ended in 2005, it worked again with FHA Prosecutors now charge it abused the system, which Ms. Malone denies. Whatever the case, some recent home buyers who got FHA insured loans through Madison face foreclosure because, prosecutors say, the firm overstated their resources.  “We are barely hanging on,” said Julius A. Collins Jr., who bought a house last year in Ellenville, N.Y. He said he was surprised, given his family’s finances, that he qualified for a FHA home loan, adding he was unaware of charges against Madison.

Part of the problem, experts say, is that mortgage companies like Madison and others that act on FHA’s behalf face a conflict. While they must abide by HUD guidelines to qualify borrowers, the more loans they approve, the more money they make.  To track FHA mortgage lenders, HUD monitors how frequently their loans are defaulting, a sign that a firm may be certifying unqualified borrowers or possibly even engaging in fraud. But while officials can take action when a firm’s default rate reaches twice the local average, they often act after it is far too late, said several mortgage industry experts. “You can find lenders with ridiculous default rates,” said Brian Chappelle, a consultant in Washington.

For example, federal officials began to review one lender, Great Country Mortgage Bankers of Coral Gables, Florida five months after its default rate exceeded twice the average, according to Mr. Wooley, the HUD spokesman. But it was not until last month that HUD officials ended the firm’s ability to act as an FHA agent. By then, its default rate was more than 13 times the local average, federal data shows. Mr. Wooley said a HUD inspector general’s review of the firm led to the delay.  Great Country’s situation is by no means unique. About 80 of the 1,800 mortgage companies authorized to endorse FHA loans, including some no longer in business, have default rates from 2 to 11 times the average of local lenders, federal data shows. Madison’s rate was four times as high as the local average, data shows.  Both Mr. Glaser and Mr. Chappelle, the two industry consultants, said they believed HUD needed to find ways to screen out companies issuing bad credit mortgage loans much earlier in the process. 

HUD can take a variety of actions when it suspects a company of abusing FHA, such as referring the most egregious cases to the Justice Department for criminal or civil action. But it can also bring administrative action against lenders and others through a HUD panel, the Mortgagee Review Board, composed of top department officials.  The review board can penalize or debar F.H.A. participants. While its power to impose fines is limited, the panel can take other substantial financial actions. For example, it can require a lender to reimburse the agency’s insurance pool for claims paid out to it on mortgages that the company should not have approved.

In addition, it can require a FHA lender that has violated guidelines in approving loans to indemnify FHA against future losses if those become bad mortgage loans. In the 2008 fiscal year, which ended in September, the review board handled 95 cases, about the same number it looked at during the four-year period from 2004 to 2007, federal data shows. And in recent years, it has handed out some substantial penalties.  But in other cases, the review board accepted fines or penalties smaller than those recommended by HUD auditors. For example, a 2006 HUD inspector general’s audit of a Louisiana-based home loan lender, America’s Mortgage Resource, found that a company official had been involved in a practice by lenders and home builders that was once widespread and is now banned — the use of an unapproved charity to funnel down payments to home buyers so they could qualify for FHA loan products.  Read the complete article >

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