FHS Loan Pros

I keep reading allegedly-helpful articles and blogs which compare FHA loans to subprime lending, as if the two were the same.

FHA and subprime loans are not the same, not even close.

Part of the thinking, such as it is, behind the comparisons is political and philosophical — some folks are opposed to the FHA for the very simple reason that it’s a government mortgage insurance program which competes with mortgage insurance companies in the private sector. This is the moment when you hear talk, oh my, regarding socialism when the more important issue is that the FHA program has helped insure some 34 million loans since 1934.

Subprime Loans

Subprime real estate lending is generally defined as mortgages for individuals with weak credit. If we think of real estate loans in terms of prime financing for those with great credit and ALT-A financing for those with lesser credit or who want to borrow more than prime programs generally allow, then subprime loans are for folks with credit so weak that they cannot get either prime or ALT-A mortgages.

To make up for their poor credit standing, subprime borrowers pay higher interest rates. The irony, of course, is that the people who can least-afford big monthly expenses are the very people most likely to pay such high costs.

One idea is to make NO loans available for subprime borrowers, thus solving the problem of undue lender risk. However, if we have no subprime borrowers we also have fewer home sales. Less demand equals lower home prices, something very few owners favor….

We ought to have subprime loans because over time people can improve their credit standing. That means there is the potential to refinance from subprime into something better, say an Alt-A or even a prime loan.

No Credit Score

FHA loans are different than subprime loans. In basic terms, to get an FHA loan you must have verified employment, income, and assets. Savings are great. You must be able to show that you can pay your mortgage and that you’re financially responsible. As the FHA explains:

“Generally,” says HUD, “to be eligible for an FHA loan, you must have a valid social security number and have lawful residency in the United States and be of a legal age to sign on a mortgage in your state. Lenders will verify income, assets, liabilities, and credit history for all parties on the loan. With an FHA loan, you cannot take an ownership interest in a property without qualifying for the loan. FHA’s mortgage programs do not typically have maximum income limits for qualifying, although you must have sufficient income to qualify for the mortgage payment and other debts. Income limits may be present when qualifying for down payment assistance or other secondary financing programs (including those funded by HUD) that may be used in conjunction with an FHA loan. FHA does not have minimum credit score requirements, although past credit performance serves as the most useful guide in determining a borrower’s attitude toward credit obligations and predicting a borrower’s future actions.”

Once you qualify for an FHA-insured loan you’re getting a better loan product than the typical subprime or ALT-A mortgage. With the FHA there’s no prepayment penalty allowed and no surprise interest-rate hike. Interest rates are generally much lower. You’ll need 3.5 percent down from your own pocket or in the form of a gift and you’ll also need closing costs, but these are reasonable hurdles.

We have been pointing out for some time that all the clamor and commotion regarding the FHA reserve fund is largely nonsense.

It’s true that the FHA reserve fund has fallen in the face of larger claims, but it’s also true that the FHA has given away billions of dollars to the Treasury Department, money that comes from borrower insurance premiums. If anyone believes that the reserve fund should be enlarged then surely they must also believe that the FHA should not be forced to give away premium dollars.
read more

A lot has been made of the $8,000 tax credit and how it can be combined with FHA financing to buy a home with nothing down.

If you would dearly like such an arrangement to be widely available, that just isn’t the case today and won’t be the case tomorrow.

To understand why, you have to look at several realities.

First, the FHA is insistent that homebuyers purchase with 3.5 percent down, money which must come from either their own pocket or in the form of a gift.

Second, you can only use the tax credit for a downpayment when the money is advanced to you by a state housing agency or an approved nonprofit. Otherwise the tax credit will go into your bank account sometime after your purchase.
read more

The announcement that the Securities & Exchange Commission has charged former Countrywide CEO Angelo Mozilo with securities fraud is hardly surprising. Whether fair or unfair, Mr. Mozilo has become the public face of the mortgage meltdown, a position he will now get to defend in court.

The Securities and Exchange Commission alleges that Mozilo and two other former executives had engaged in “securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.”
read more

FHA loans with no money down? You have to admit that HUD has an interesting idea.

On May 11th HUD posted an official notice for lenders saying that first-time borrowers could apply their $8,000 tax credit toward downpayments. This sounds good at first, but if you look closely at the policy it raises some complex questions.

read more

With the signing of the Helping Families Save Their Homes Act is it now possible that the FHA’s Hope for Homeowners program will come to life?

The original HOPE program was intended to help people facing foreclosure by refinancing homes with lower-cost loans. That’s sounds great, but to get such new
mortgages it was first necessary to have lenders accept a partial pay-off of their original loan, not much of an incentive.

read more

For several years there has been a big battle in Washington regarding the way in which new homes are financed. Basically, builders often give “incentives” if only you will use their lender. Their lender, of course, is unlikely to be the world’s cheapest source of financing, thus you may get upfront benefits but may also pay extra over time.

HUD tried to stop the practice with a new rule banned the “required use” of the builder’s mortgage lender, was promptly sued by the home building industry and has now withdrawn its proposal altogether, meaning that new home buyers will continue to have the opportunity to pay more than they should for real estate financing.
read more

It’s time to dump FHA’s Hope for Homeowners program.

The plan was launched last October with high hopes but little sense. The idea was to refinance troubled mortgages with FHA loans, but to participate borrowers had to obtain huge and costly concessions from lenders. Lenders, as you might guess, were not thrilled with the idea and the result was a virtual nationwide boycott of the program. HUD reports that as of April 15th it has received 888 H4H applications — and approved just one.
read more

If you want to get an FHA mortgage then you have to get an FHA appraisal done by an actual human who goes inside the property.

Making sure that a property exists and is in good shape may not seem like much of a standard, but of course our friends in the world of private banking have been working diligently to assure that full appraisals are not required. Why? Appraisals cost money and money paid to properly underwrite a loan is money that could otherwise been used to increase lender profits and executive bonuses.

Substitute Appraisals

Lenders have tried over the years to substitute appraisals with broker price opinions and automated appraisals. In the first case a real estate broker estimates the value of the property, not a bad option in many cases because a good broker can typically give a pretty good valuation. The problem, though, is that brokers are paid to buy and sell homes. There is an inherent conflict in their valuations, no matter how good. If I am a buyer I certainly do not want to rely on the seller’s broker for pricing advice and if I’m an owner I don’t care too much what a buyer broker thinks.
read more

In the world of federal rules and regulations the accounting year begins October 1st. This means that for the FHA half the year ended March 31st, a good marker to see program results to date.

Results

As of the end of March, the FHA had:

___ 1,405,620 mortgage applications — that’s 84.4 percent higher than the 762,266 loan applications made during the first six months of fiscal 2008.

___ 867,716 approved loans — that’s more than double the 2008 total of 406,833 to this point, an increase of 113.3 percent.

___ 85,548 reverse mortgage applications — a figure up 16.1 percent from 2008 for what HUD calls home equity conversion mortgages, HECMs

___ 57,856 reverse mortgage approvals. That’s up just 4.8 percent over last year.
read more

Many years ago I ran into someone who did mortgage audits — that means he went through monthly statements in an effort to find out if the lender actually was charging the right interest rate and credit payments properly. He charged a reasonable fee for his services and sometimes found errors that meant thousands of dollars in loan reductions for borrowers.

I bring this up for several reasons.

FHA Loan Basics

First, if you have an FHA mortgage the odds are overwhelming that your account is being properly credited. Why? Because FHA loans come in two basic flavors, fixed and adjustable. Payments for fixed-rate loans are always the same monthly total for principal and interest, you just have to see that the interest level is declining each month while the principal balance is rising.

read more

It’s called Mortgagee Letter 2009-12, still another note from HUD explaining how FHA loans are to be originated and administered. Usually these letter are astonishingly dull, but this one is a gem. Why? Because HUD is bringing back its SWAT team.

Now you might think, huh? HUD has a SWAT team? Well, actually it used to and now it does again.

Just Checking….

To put this as nicely as possible, HUD obviously thinks that some lenders have not quite lived up to the usual standards of FHA underwriting. That’s a problem because loans that don’t meet FHA standards to the letter are likely to be the very loans which cause FHA losses. So, to combat this problem, HUD says that it “continues to introduce proactive measures to appropriately manage its risk. Recently, FHA reactivated its Special Work Assessment Teams (SWAT) to conduct single-focus on-site reviews of lenders whose originations are exhibiting signs of distress.”

Translation? HUD is going to start once-again to audit FHA lenders to make sure they’re delivering loans that meet government standards.
read more

There are a lot of people out there who just hate FHA loans. What bothers them is the idea that the federal government has been competing with private lenders since 1934. It’s socialism, they scream. And look at how lousy the government is doing — have you noticed that FHA defaults are soaring, they ask?

For some, of course, the real issue is a little different. The government has helped many entry-level borrowers gain home ownership through the FHA program and that’s an affront to those who believe that if you can’t get a downpayment gift from Dad that you have no right to buy a house.

The idea seems to be that the FHA should be held to a perfect standard while lenders in the private-sector should not. After all, if we had an honest accounting of the damage done during the past few years by “affordability” loan products, stated-income mortgage applications and underwriting standards which were apparently non-existent then a lot of folks would spending time in the Madoff suite at some nearby federal jail.
read more

In the world of mortgage lending there’s one thing every lender wants to avoid. That one thing? Quickie defaults.

In other words, if you make a loan you absolutely want the borrower to make at least a few payments. Here’s why:

Imagine that Smith mortgage originates a loan with Mr. Johnson. Smith gets a lot of fees and charges from its work and the loan is promptly re-sold to an investor. If Smith makes all payments for the next 120 days all is well — Smith gets to keep its money. However, if Mr. Johnson defaults during the first 120 days then the buyer of mortgage can demand that Smith buy it back.
read more

HUD has announced that beginning April 1st that it will limit the ability of borrowers to refinance and take cash out of their properties.

“Effective for case number assignments on or after April 1, 2009,” says HUD, “the loan-to-value (LTV) of any cash-out refinance to be insured by FHA may not exceed 85 percent of the appraiser’s estimate of value.
read more