Last week, New York University and the Federal Reserve Bank of New York released a study critical of FHA audit results indicating that the agency won’t need a taxpayer bailout due to high mortgage default and foreclosure rates. Professor Andrew Caplin of NYU and a co-author of the study, asserts that the FHA audit failed to consider the risks created by FHA borrowers who owed more on their mortgages than their homes were worth, and who were allowed to refinance to new FHA loans.  This is likely a reference to the FHA streamline refinance program, which provides FHA to FHA refinancing, and permits  unlimited combined loan-to-value ratios (CLTV) for new financing when secondary mortgage lenders remain in place with subordination agreements.  The combined effect of home equity financing and dramatic losses in home value have left FHA with little choice but to take on high CLTV refinance mortgages, or risk acquiring more properties through foreclosure.

FHA Mortgage Loans:  To Foreclose, or Not to Foreclose…

The streamline refinance program assists borrowers who cannot otherwise refinance their mortgage loans due to loss of home value; the FHA streamline refinancing program is only available to borrowers who have existing FHA loans. Which would be better–taking a risk on streamline refinancing to prevent foreclosure or just saying “no” and letting borrowers walk away? The consequences of foreclosing mortgage loans go far beyond ruining homeowner credit ratings:

Foreclosed homes lose value, and bring down neighborhood home values

Vacant foreclosed homes add blight and can attract crime

Too many foreclosures in one area can cause increased vacancies and lost tax revenue

Bearing this vicious cycle in mind, FHA efforts to prevent foreclosures through streamline refinancing is not a bad idea. As far as the study is concerned, it’s not possible to compare refinancing results for underwater  FHA loans to similar non-FHA loans, as conventional lenders don’t refinance underwater mortgages at all; conventional borrowers typically need to have at least 10 to 20% home equity to qualify for refinancing.

While its true that FHA borrowers generally have less invested in their homes due to low down payments, the housing crisis has seen home values  in some areas tumble to the extent that conventional borrowers who started off with 20% home equity have seen it disappear. Although bailout weary legislators and taxpayers are watching falling FHA reserves closely, it’s likely that the wave of foreclosures resulting from tightening streamline refinance CLTV requirements would cause an outcry in neighborhoods impacted by higher foreclosure rates.  Providing refinancing to distressed homeowners at current fha mortgage rates may make the difference between keeping a home or becoming a foreclosure statistic.

It’s undeniable that taxpayers include underwater homeowners, their neighbors and communities. FHA is performing yet while managing risk and accommodating the needs of homeowners and their communities through reducing foreclosures.

The FHA numbers for February have been released and the program continues to look remarkably strong.

The FHA mortgage program is on track to do more than 2 million loans in 2010. That’s a huge number but down 29.5 percent from 2009.

Given about 5 million existing home sales and perhaps 350,000 new home transactions during the coming year, it means that FHA market share will decline, something that should elate program critics. The reason for the lower market share, of course, is that not all FHA home loans are used to purchase real estate, many are instead originated to refinance existing loans.

Credit Scores

Average credit scores in February were are at 693. This is a very credible figure given that the FHA program is generally associated with entry-level borrowers. A year-ago the average score was 663, suggesting a considerable tightening of FHA loan guidelines.
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In Trouble? FHA Loss Mitigation May Be Able to Help

HUD requires lenders to take whatever measures are practicable to prevent mortgage foreclosures on FHA mortgages. If you are behind on your FHA mortgage payments, you may be able to use one or more forms of mortgage assistance.

1. Assumption
2. Partial Claim
3. Special Forbearance
4. Extension of Time
5. Deed in Lieu of Foreclosure
6. FHA HAMP

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Immigrants: Real Estate Market Saviors?

A study of home ownership in mid-size American cities conducted by the University of Southern California’s Lusk Center for Real Estate found that immigrants have a lower home ownership rate than native-born Americans with the same income and education levels.  The results suggested that areas with declining home values could see prices stabilize thanks to a wave of first-time home buyers who speak English as a second language, if local governments made a point of supporting immigrant communities and real estate companies and mortgage lenders brought in representatives of those groups as employees. read more

FHA Commissioner David Stevens indicates that the agency has no plans for increasing minimum credit scores from 580 to an estimated minimum of 620), and will not engage in risk based pricing, which would charge riskier borrowers more for getting an FHA mortgage loan.

FHA Plays “Counter-Cyclical Role” in Mortgage Market

The commissioner described FHA as playing a counter cyclical role in US housing and mortgage markets. FHA provides loans when private lenders have pulled back due to concerns over credit and potential risks. In a recent address to a group of Colorado mortgage brokers, Stevens suggested  that without government underwriting in the current difficult credit environment, mortgage lending could disappear. Fannie Mae, Freddie Mac, and FHA  account for 95% or more of new home loans in the US. Of particular concern to FHA is its commitment to serving communities and borrowers who cannot qualify for conventional mortgage financing. FHA provides borrowers with marginal and non traditional credit, and those with moderate income their only viable opportunity for qualifying for mortgage loans in today’s tight credit environment. Stevens cited the stabilizing influence of the government’s participation in mortgage lending as central to the nation’s housing recovery.

FHA also plays a critical role in assisting borrowers wishing to refinance to lower mortgage rates, but who cannot qualify through conventional lending due to loss in property value. Reducing mortgage rates provides lower monthly payment and can help struggling families stabilize their finances.

FHA and Public Policy: Who Gets to Own a Home

FHA is facing the “next wave” of mortgage foreclosures in 2010-2011; this is the result of its rapid growth and inability  to effectively monitor mortgage lenders in the wake of the collapse of sub prime lending.  Coupled with less than mandatory reserves for paying claims for defaulted mortgage loans, this is causing legislators to question whether FHA should up the ante on its lending requirements at the expense of potential borrowers who cannot meet higher underwriting standards. Although it’s true that many people aren’t financially prepared for owning a home, should we eliminate hard working Americans who cannot afford a 10 or 20% down payment, but who have decent credit and steady employment  from owning homes?

The FHA Commissioner reaffirms the agency’s role in helping under served buyers and homeowners seeking refinance mortgage loans, and claimed that risk based pricing is not an option for FHA mortgage loan programs, as it would adversely impact under served communities.

Cyclical Trends: When Conditions Improve, Will FHA Role Decrease?

As real estate markets and employment levels improve, the theory goes that conventional  mortgage lenders will be exposed to less risk, and therefore may loosen credit criteria as default levels fall. Unfortunately, we have no guarantees, and it seems likely that FHA loan programs will continue providing a safety net for borrowers who otherwise cannot qualify for mortgage loans and refinancing options.

Those who have been worrying FHA mortgages and falling home prices might want to take a look at the congressional testimony given last week by FHA Commissioner David H. Stevens.

Stevens had some surprising remarks regarding home values, numbers not seen previously.

“As measured by the widely referenced FHFA index, home prices have been rising more or less steadily since last April. As recently as January of 2009 house prices had been projected to decline by as much as 5 percent in 2009 by leading major macro-economic forecasters. This is all the more surprising since most forecasters had underestimated the rise in unemployment that has occurred over the past year.

“Homeowner equity started to grow again — increasing by over $900 billion by the end of September, or $12,000 on average for the nation’s nearly 78 million homeowners, and helping our economy grow at the fastest rate in six years in the fourth quarter of last year.

“And mortgage rates which have been at or near historic lows over the past eleven months have spurred a refinancing boom that has helped nearly 4 million borrowers to save an average of $1,500 per year on housing costs — pumping an additional $7 billion annually into local economies and businesses, generating additional revenues for our nation’s cities, suburbs, and rural communities.”

NAR Numbers Down

The Stevens figures contrast mightily with the numbers released by the National Association of Realtors last month.
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In a statement prepared for a hearing before the House Financial Services Subcommittee, FHA Commissioner David H. Stevens asserts that raising the minimum down payment required for FHA loans would be harmful to the housing market. FHA determined that mortgage loans guaranteed by FHA would be reduced by 40%, or approximately 300,000 loans if the minimum down payment is increased. Increasing the minimum down payment from 3.5% to 5% would contribute an estimated $500,000 to FHA’s lagging reserves, but the Commissioner cautions that larger down payments would largely impact first time homebuyers “potentially forestalling the recovery of the housing market, and potentially leading to a double-dip in housing prices by significantly curtailing demand.” More than 75% of FHA purchase money mortgages were made to first time buyers during the past year, while nearly half of all first time buyers received FHA mortgage loans during the second quarter of 2009.  This sheds light on what would occur if a significant number of first time buyers are priced out of housing markets, especially in moderately priced neighborhoods. More than 800,000 FHA refinances assisted borrowers in converting their mortgage loans to fixed rates. Without the more lenient FHA underwriting guidelines, many homeowners may have been stuck with rapidly rising mortgage payments or mortgages that they couldn’t refinance due to loss of home value.

FHA isn’t Practicing  Sub-prime Lending

Although FHA has made a large number of mortgages in the wake of the sub-prime crisis, its lending practices are stricter and far less risky. FHA requires documentation of income and ability to make mortgage payment, and doesn’t provide “no documentation” mortgages, or home and refinance loans with risky features. 

 Some analysts are predicting a wave of foreclosures during 2010-2011, as historical data indicates that mortgage loans are most likely to fail during their second and third years, but FHA doesn’t expect higher than normal foreclosures under current guidelines. In addition to its standard mortgage loan programs, FHA also provides rehab loans for those buying and rehabilitating homes. This and other FHA home loan programs play a role in helping distressed communities recover from excessive foreclosures and depressed housing markets.

With mortgage rates remaining low, many families can afford to buy first homes using FHA mortgage loans. If FHA raises down payment requirements, it could well be a disservice to deserving borrowers, their communities, and the overall housing recovery.

In further defense of current FHA guidelines, Commissioner Stevens refutes the belief that borrowers who don’t have large down payments are at higher risk of defaulting on their mortgage loans; he suggests that a combination of a higher down payment and FICO score provides a more accurate prediction of loan performance than either factor alone.

As FHA continues to explore options for reducing risk while accommodating moderate income buyers and homeowners, it appears that cutting a large number of potential homeowners out of the housing market is not a sensible option.

FHA Commission David H. Stevens was asked why with so many recent changes the FHA mortgage program has not increased down payment requirements. His March message included this exchange:

Q: Why didn’t you just impose an across-the-board increase in required down payment?

A: There are a range of factors that determine how risky a loan can be, not just the down payment level. The data clearly show that the greatest problems are created by a combination of a low down payment and other factors, like low credit scores, higher back-end ratios, or other debt characteristics. Indeed, loans with lower down payments and higher credit scores perform better on average than some sets of higher down payment, lower credit score loans. So in addressing risk, we need to take a focused approach to ensure that we are targeting our measures appropriately. Our change enables a broader selection of credit-worthy borrowers than would be afforded by an across the board increase in the down payment requirement, while avoiding the significant, disproportionate impact on minorities that such an overbroad measure would have.

Translation: If we raise the down payment requirement for FHA loans we’ll make fewer mortgages and that won’t be good for the marketplace.

In fact, it’s virtually impossible for the FHA to raise down payment requirements, something which is likely to be true for some time. Here’s why:
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A study conducted by economists from New York University asserts that FHA may be understating its risk associated with home loan delinquencies. This risk, if not managed appropriately, could lead to the FHA needing a taxpayer bailout. Concerns have been mounting since FHA reserves fell below the legally mandated level a few months ago. If FHA is forced to request additional funds from Congress, it will be the first time in its 75 year history.

Depressed Housing Markets, Unemployment Adding to FHA Risk

Although FHA contends that it would not need a bailout if housing markets were to sink to catastrophic lows. Anyone owing more on their mortgage loans than their homes are worth might wonder if we aren’t already near the bottom of the housing market barrel; with unemployment rates hovering near 10% and many workers accepting part time positions or jobs that they’re over qualified for, the ongoing risk of mortgage defaults continues to be at the forefront of critics’ concerns.

While FHA estimates that about 6% of its home loans may be at 115% or more of home value, the recently released economic study suggests that this rate may be as high as 14% of FHA home loans. The economists cite areas where high rates of unemployment prevail; homeowners who have little home equity are generally believed to be less likely to work at keeping homes they cannot afford. Concerns about underwater mortgage loans are even more pressing with FHA streamline refinancing, a program that allows borrowers to refinance existing FHA mortgage loans using new FHA refinance mortgage loans. The study estimates that about one third of streamline refinance mortgages during 2009 were underwater, but FHA calculates the number of underwater streamline refinance mortgage loans at about 1.5%. Whatever the actual number of underwater loans, the potential risk associated with them likely cannot be accurately measured due to variable factors including homeowner motivation, modification and loss mitigation programs, and changing housing markets.

Mortgage Lenders Slow Response Increases FHA Exposure

A major issue for homeowners who are underwater on their mortgage loans is their inability to sell their homes unless mortgage lenders are willing to accept the proceeds of a short sale. Homeowners are complaining about mortgage companies’ slow response to their requests for help. Caught between lawmakers’ concerns, meeting the needs of struggling homeowners, and mortgage loan servicing companies overwhelmed with requests for help. FHA must find a way to minimize its current and future risk exposure without significantly reducing access to home loans for borrowers depending on FHA mortgage loans.

According to New York magazine, the Wall Street Journal and related properties were bought for $5 billion in 2007 and already the News Corporation, the new owner, has written off $3 billion.

That’s a 60 percent loss in three short years, a matter I bring up for two reasons. First, rich people are not immune from marketplace forces. Second, the Journal’s continuing complaints regarding the FHA mortgage program should be seen for what they are: provocative, sensational and over-blown.
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FHA’s mandate, combined with today’s economic conditions, makes conducting its business a lot tougher than it used to be. On one hand, its job is to keep home ownership a viable dream for many less affluent American residents — who are under more pressure than ever. On the other, FHA has been self-supporting since its inception — until recently, and it needs to get on its own feet and off taxpayers’ backs as soon as it can. Finally, it must balance its books but not at the expense of those most deserving its help — credit-worthy people whose modest incomes makes saving a large down payment extremely difficult. FHA’s proposed changes, some which will go into effect very soon, are intended to do just that. read more

With fluctuating mortgage rates, concerns about the economy and job security, and stricter lending requirements, it can be difficult to decide when to buy a home. Recent reports indicate that sales of existing homes have fallen, and that unemployment rates, although stable, remains near 10%. These factors  promote favorable opportunities for buyers as sellers face more competition with fewer buyers shopping for homes.

FHA Loans Helpful for First Time Buyers

Buying your first home is a big decision, and typically requires significant cash outlay for a down payment and closing costs. The Federal Housing Administration (FHA) is the major source of mortgage loans for borrowers with little cash. FHA Loans offer first time buyers several benefits:

Low down payment requirements: As conventional mortgage lenders have tightened credit requirements and increased down payment requirements to 20 to 20%, first time buyers are more frequently priced out of the market. FHA provides buyers a minimum down payment of 3.5% and can also assist with closing costs by allowing up to 3% of your closing costs to be paid by the seller, or by allowing your lender to pay closing costs in exchange for a higher mortgage rate.

Flexible credit requirements: FHA guidelines for approving mortgage loans are largely based on proving that borrowers have the capacity to make mortgage payments. Although recent changes to FHA requirements will soon require a minimum FICO score of 580 to qualify for the minimum down payment, FHA does not focus on credit scores alone. If you’re facing credit challenges, FHA mortgage loans can help.

Specialized home loan programs: Contact approved FHA mortgage lenders to learn more about specialized programs for certain public service workers, and for those wishing to buy and rehab homes. FHA works with state and local housing agencies and community development programs to provide incentives for buying and rehabilitating homes.

Refinance Your Mortgage with an FHA Loan

FHA loans are also available for homeowners seeking refinancing. Homeowners struggling to refinances after their home value declined may find a solution with an FHA mortgage refinance. FHA offers higher loan-to-value refinance terms than conventional lenders, and may also help with rolling home equity loans into a new mortgage loan.  Your mortgage balance(s), current home value, and other factors impact how much you can borrow with an FHA mortgage loan, but in general, FHA offers a bit more “wiggle room” with its higher loan-to-value (LTV) allowances. Getting several mortgage quotes can help you identify refinancing options matchng  your circumstances.

Mortgage Loans: Ready, or Not?

Although friends and family may pressure you to jump into buying your first home, it’s important to be comfortable with your finances and reasonably confident of your ability to make mortgage payments. if you’re planning to stay put for a few years and want to own your own place, FHA mortgage loan programs can help with achieving your goals. Discussing your plans with an FHA housing counselor and a financial advisor can help with determining when to buy a home.

FHA mortgages are more popular than ever, so of course everyone wants to originate them. But only FHA-approved lenders can fund FHA mortgages. Anyone else has to send your application to a firm approved to originate and fund FHA loans — this adds an extra layer between you and your mortgage, plus the person you’re working with has absolutely no control over the process, plus there’s an extra person in there who is not, after all, working for free. And finally, you don’t know or interact with the actual lender that funds your mortgage. Why deal with all this? read more

There are a lot of suggestions that the FHA program is on the cusp of failure, including the latest thoughts from Forbes Magazine:

“It’s not hard to imagine,” says Forbes, “how the FHA’s finances could deteriorate. The recently extended first-time home buyer credit gives buyers a subsidy of 10% of the home’s purchase price, up to $8,000, in the form of a refundable credit (meaning people too poor to pay income taxes get a check from the government). The FHA allows buyers to put down as little as 3.5%. The difference could be more than enough to cover closing costs, says Garth Rieman, a director at the National Council of State Housing Agencies. In short, the government will pay a family money to move out of a rental and into a home.” (See: FHA: The Feds’ Next Housing Debacle, March 15, 2010)

This is a really good example of something which is true in a small number of cases and grossly untrue in most.
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Changes to FHA guidelines are scheduled to become effective with FHA case numbers issued on April 5 and after. These changes are expected to reduce FHA risk and will likely make it more difficult for some borrowers to qualify for FHA home loans. Here are the changes impacting borrowers depending on FHA mortgage loans for buying and refinancing their homes:

• Seller contributions reduced from 6% to 3%: This reduces the amount of buyer closing costs eligible for payment by sellers by half, and will require borrowers to contribute more cash at closing.
• Up front mortgage insurance premium (UFMIP) raised: The UFMIP will increase from 1.75% of base mortgage loan amount to 2.25%.
• FHA seeking Congressional approval to raise annual mortgaeg insurance premium: The annual mortgage insurance premium  (MIP) is pro-rated monthly and added to the monthly mortgage payment. FHA is seeking approval for raising the annual MIP so that it can transfer some of the UFMIP to the MIP, which would reduce the cash contributed  by borrowers at closing.
• Borrowers with FICO credit scores below 580 required to make 10% down payment: In response to legislative pressure to raise down payment requirements, FHA conceded by focusing on borrowers with little or poor credit. The majority of FHA borrowers have credit scores in the mid 600’s and above, so this development is not viewed as critical for most FHA loan applicants.

FHA Guidelines: Lenders Playing by Whose Rules?

In addition to tighter FHA requirements, borrowers may face a phenomenon called “investor overlay.” Think of the relationship between federal law and state law; states have some leeway in legislating according to their particular needs. Although FHA establishes guidelines, some mortgage lenders may “overlay” their own requirements when approving mortgage loans. Some FHA approved lenders are requiring  higher credit scores for approving FHA loans. Such prudent underwriting practices may be a result of FHA pulling licensing from a number of lenders with high mortgage default rates, and lenders wanting to cover their backsides against poorly underwritten loans.  On the other hand, I question why mortgage lenders should be allowed to play by their own rules when participating in FHA home loan programs.

Bending FHA Requirements Could Lead to Trouble

As with failing to underwrite mortgage loans for creditworthiness, the idea of mortgage lenders imposing their own rules over FHA guidelines sounds like a recipe for trouble. Although FHA is reining in “rogue”lenders who increased the agency’s risk during  the subprime debacle, things could go the opposite way when lenders ”overlay” stricter underwriting criteria over FHA requirements.  The practice of arbitrarily mandating higher credit scores for FHA loans than FHA home loan programs require could set the stage for potential abuses of fair housing protections; let’s hope that any mortgage lender’s decision to require higher credit scores is based on its own uniform lending criteria, solid risk management principles, and not anything else.