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Key FHA Mortgage Loan Facts for Homebuyers

July 22nd, 2010
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BankRate published a helpful article for new homebuyers that outlined important facts about FHA home loans.  In the wake of the housing bubble’s collapse, FHA loans have taken on renewed importance for today’s mortgage borrowers. Simply stated, an FHA mortgage is a home loan insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.  Because of that insurance, lenders can — and do — offer FHA home mortgages at attractive mortgage rates and with less stringent and more flexible qualification requirements.

The FHA doesn’t mandate a minimum credit score, according to Vicki Bott, HUD deputy assistant secretary for single-family housing. Instead, each borrower’s creditworthiness is considered in context.  However, FHA lenders can overlay their own requirements on top of the FHA guidelines. Some lenders might require a minimum credit score. Ask the loan officer about such a requirement if you have bad credit.  “Lenders underwrite FHA home loans to ensure that the customer has the willingness and capability to repay the loan, but we do have flexibility beyond pure credit score to look at the borrower’s financial situation,” Bott says.

The FHA requires a down payment of just 3.5% of the purchase price of the home. That’s a fraction of the %age typically required on most other loans and a “huge attraction,” says Dennis Geist, vice president of government programs at Wells Fargo Home Mortgage in Carlsbad, California.  Borrowers can use their own savings to make the down payment. But other allowed sources of cash include a gift from a family member, or a grant from a state or local government down payment assistance program.

The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an inducement for the borrower to buy a new home.  FHA mortgage lenders typically charge a higher interest rate on the loan if they agree to pay closing costs. Borrowers can use the good faith estimate of closing costs — commonly known as the GFE — to compare interest rates and closing costs on different loans and figure out which option makes the most sense.

Because the FHA is not a lender, but rather an insurance fund, borrowers need to get their loan through an FHA-approved lender. Not all FHA-approved lenders offer the same interest rate and costs — even on the same FHA loan. That’s another reason Bott says borrowers should shop around.  “We encourage consumers — from a cost, service and underwriting standard — to shop around many lenders or mortgage brokers to make sure they understand what the best fit is for their particular situation,” she says. 

Two mortgage insurance premiums are required on all FHA home loans: The upfront premium is 2.25 % of the loan amount, and the annual premium is 0.55% of the loan amount. The upfront premium must be paid when the borrower gets the loan but can be financed as part of the loan amount. The annual premium is paid in chunks of 1/12th of the total along with each month’s mortgage payment.  “The perception is that that sounds expensive,” Geist says. However, he adds, borrowers need to compare the FHA-insured loan to a loan that’s not FHA-insured (and consequently requires a much larger down payment). In many cases, the FHA loan is still the best choice, he says.

The FHA has a special loan product for borrowers who need extra cash to make repairs to their homes. The chief advantage of this type of loan, called a 203k, is that the loan amount is based not on the current appraised value of the home but on the projected value after the repairs are completed. The FHA 203k loan allows the borrower to finance up to $3,500 in nonstructural repairs, such as painting and replacing cabinets or fixtures, Geist says.

FHA insurance isn’t intended to be an easy out for borrowers who feel unhappy about their mortgage payments. But loan servicers can offer some relief to borrowers who have an FHA-insured loan, have suffered a serious financial hardship and are struggling to make their payments. That relief might be a temporary period of forbearance, a loan modification that would lower the interest rate or extend the payback period, or a deferral of part of the loan balance at no interest.

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As FHA’s Loans Expand, So Does the Fraud Risk

December 12th, 2008
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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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