FHA Loan Guide

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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FHA loan programs continue to support the brunt of the mortgage product that focus on refinancing homeowners facing foreclosure.  The FHA Secure looked great on paper in 2007 when HUD rolled it out, but very few lenders offered the product to the borrowers who needed.  HUD just rolled out the Hope for Homeowners product and hopefully these FHA loans will provide the mortgage relief to the millions of homeowners who need to refinance or get a loan modification that provides an affordable monthly payment.

In a recent Reuters article, a congressionally appointed panel that oversees the Treasury Department’s $700 billion financial rescue fund is expected to release a report on Wednesday highly critical of how it has been handled, The Wall Street Journal reported on Tuesday.  The Journal, citing people familiar with the matter, also said the panel would push the Bush administration to act more aggressively to prevent foreclosures.  The newspaper said the oversight report due on Wednesday is not expected to contain new findings. It said a draft of the report posed 10 questions, pressing officials for a clearer strategy and asking whether there is sufficient accountability and why more has not been done to prevent foreclosures.  Elizabeth Warren, the Harvard University law professor who heads the congressional oversight panel, is scheduled to testify before the U.S. House of Representatives Financial Services Committee on Wednesday and is expected to discuss the report.

Rep. Jeb Hensarling, a Texas Republican who opposed the financial rescue bill and also serves on the oversight panel, said in a statement he could not sign the report. “In my role on the TARP (Troubled Asset Relief Program) panel, my top three goals are to ensure that the program works, to ensure that decisions made are based on merit and not political considerations, and most importantly, to ensure that taxpayers are protected,” Hensarling said.  “I am hopeful that the oversight panel will eventually be an effective vehicle for these goals to be met but thus far the jury is still out on that,” Hensarling said.  Caleb Weaver, a spokesman for the oversight panel declined to comment on the Wall Street Journal’s report.

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Mortgage refinance loan activity has peaked at an all time high over the last six years due to rising home values and low interest rates.  The FHA Refinance program is designed to provide an FHA alternative to the commercial products currently being offered to homeowners with substantial equity in their homes.  The purpose of these FHA home loans is to take out a new mortgage that provides cash left over after the old home loan has been paid off.

The FHA loan requirements demand that the applicant for a cash-out refinance loan has occupied the premises for at least twelve months and that payments on the existing home loan have been on time for at least one year. Cash-out refinancing cannot be more than the FHA loan limit for the area of the house being refinanced.  The other limit to the amount of a refinance loan may come from the mortgage lender.  Many of them limit total indebtedness on a property to 80% of its present appraised value.  That means your new mortgage, plus any other mortgage liens you have against the property, cannot total more than 80% of the home’s worth.

If there is a second mortgage on the home, it must be subordinated to the new FHA mortgage loan.  The homeowner will have to meet the mortgage lender’s requirements for ability to pay on both mortgages; generally that means the loan applicant must meet the lender’s cap on mortgage payments in relation to total monthly debt.  All borrowers must meet certain credit requirements on these loans, and any co-signer on the cash out refinance loan must also be owner occupied on the property.  These FHA mortgage loans are limited to homes with a maximum of two living units. 

The credit requirements are generally those set forth by the FHA mortgage lender.  Because most traditional home loan lenders have tightened up their requirements recently, it is going to be important to shop for a loan with both a decent interest rate and reasonable credit requirements.  A few lenders still allow bad credit mortgage loans with the FHA lending guidelines, but usually they have a significant amount of equity and positive compensating factors.

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