FHA Loans

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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Nancy West, a marketing and outreach specialist at HUD’s Santa Ana, Calif.-based office, said there are companies making solicitations with the claim that non-approved originators can do FHA mortgage loans and get paid for them. “I’m here to tell you [that] you cannot,” she said, adding it creates unfair competition with originators who do things properly.

Among the features of the FHA mortgage program is that no credit score is required and that manual underwriting is permissible. However, Ms. West said, there are FHA mortgage lenders who are imposing stricter guidelines. FHA cannot control that, she said. There are those that do not have stricter requirements. If a correspondent only works with a mortgage lender who only uses automated underwriting, they need to be aware there are FHA loans that the system will never approve. Ms. West suggested having an alternative sponsor who manually underwrites.

While the qualifying ratios for FHA loan programs are normally 31% and 43%, Ms. West said there have been loans approved with a backend ratio as high as 68%. It is important that the originator know what program is best for the customer, not only among the FHA offering but the programs at other federal agencies as well, she said. Among the bogus information being given out by lenders is that the borrower must take the property out o a living trust. That is not true, Ms. West said, noting that taking the property out of trust could trigger legal issues.

FHA loans can also be used on manufactured housing as long as it meets agency requirements. “We are the game in town for manufactured housing,” she said. HUD needs mortgage brokers’ help to get the word out about changes in the program to Realtors, who are not aware of items no longer required to be fixed, such as missing handrails, cracked window glass, minor plumbing leaks, poor workmanship and defective floor coverings.

The temporary loan limit increase expired on Dec. 31. Ms. West suggested that mortgage brokers and loan officers keep on top of sponsors to ensure their loans are approved by the deadline. As for the Hope For Homeowners program, while Ms. West said the parameters make certain that only a small number of borrowers are eligible for, there are some benefits. “It is a tool and we will be able to help some folks with it, but it is not a cure all.” The borrower gets to keep a home he or she can no longer keep. They are not paying to make FHA money, only what they owe. Most of the originators of these loans are servicers. The originator is allowed to charge one point only; no administrative or add-on fees allowed. “I’m not saying don’t do it, but don’t make it your meal ticket,” said Ms. West.  Article Written By Brad Finkelstein.

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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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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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