Welcome to FHA Mortgage Guide.

The FHA has delayed requiring prospective borrowers to either pay off or make a minimum of three payments on their accounts referred for collection. The decision to delay this requirement’s effective date until July 1 came after FHA-approved mortgage lenders complained that the new rule would result in many potential FHA borrowers being disqualified.

Columnist Kathleen Pender wrote recently in the San Francisco Chronicle that approving FHA mortgage loans for borrowers who have outstanding debts in collection could increase taxpayer risk if these loans default and FHA doesn’t have enough in its reserve fund for reimbursing lenders’ losses. On the surface this makes sense, but several factors beyond would-be borrowers’ control can contribute to unpaid collection accounts:

• No or limited health insurance coverage: With hospitals billing at thousands of dollars per day, uninsured patients can easily accumulate insurmountable debt.


• Long periods of unemployment/underemployment: The economic downturn is causing many people with formerly spotless credit histories to default on their debts.


• Failure of creditors to remove derogatory credit information from credit reports: Creditors may fail to remove debts discharged through bankruptcy or those repaid long after the original default.

If you’re considering an FHA loan, review your credit reports before applying and address incorrect information through the three credit reporting bureaus. If you have unpaid debts due to a hardship, such as a long-term illness, serious injury or unemployment, the FHA has reportedly indicated that it may be willing to waive the coming debt requirements if the hardship is well documented.

There is a difference between someone who charges a luxury vacation and doesn’t pay their credit card bill and a person who suffers a serious injury or illness while uninsured, unemployed or both. So if you’ve faced a situation in which a hardship led you into debt, be sure to make this distinction to your potential lender before you apply for an FHA loan.

The Los Angeles Times reported last week that FHA’s latest version of its streamline refinance program sounds sweet, but when you crunch the numbers, a lot of homeowners with FHA loans are ineligible for the program. Here are the qualifying criteria and their potential implications for would-be FHA refinancing candidates:

• Home loans being refinanced must be insured by FHA. This makes sense, as eligible refinancing homeowners have met FHA lending criteria in the past, and allows the agency to forgo traditional reams of underwriting paperwork.
• FHA loans owned by Fannie Mae, Freddie Mac, private investors or loans guaranteed by the Veterans Administration are not eligible for streamline refinancing.
• FHA loans otherwise eligible must have been endorsed for FHA insurance no later than May 31,2009. This policy is intended to protect FHA from losses related to high default rates traditionally associated with mortgage loans less than three years old. Skeptics also note that FHA could save additional money, as it offers a partial refund of FHA mortgage insurance premiums for home loans refinanced within the first three years of the loan term. Estimates suggest that 145,000 households financed with FHA loans with interest rates above 5 percent are being denied refinances due to this requirement.
• Homeowners must have made the past 12 consecutive mortgage payments on time.
• Refinance terms must reduce the new mortgage payment by 5 percent of the original mortgage’s monthly principle, interest and mortgage insurance payment.

Cleared the streamline FHA qualification hurdle? Here’s the good news

Qualified homeowners will likely breathe sighs of relief as the “streamline” part of the FHA streamline refinance program kicks in:

• No new verifications of employment or income required
• Up front mortgage insurance premiums (UFMIP) will be reduced to .01 percent of the refinanced loan amount, and the annual mortgage insurance premium (MIP) will be reduced to .55 percent.
• No new credit underwriting required. This means no new credit reports, credit scores or meeting current FHA credit criteria.
• No new physical appraisal of the property securing the refinance mortgage.
• Refinance terms must reduce the new mortgage payment by 5 percent of the original mortgage’s monthly principle, interest and mortgage insurance amount.

These requirements become effective for streamline refinance loans with FHA case numbers assigned on or after June 11, 2012.

Citigroup recently agreed to pay $158 million to settle charges that it improperly processed roughly 1,000 FHA loans over the past decade. More than 30 percent of the FHA loans made by Citi since 2004 have defaulted, and the complaint in the case alleged that Citi failed in many cases to verify the borrower’s ability to meet the loan payments.

The settlement comes as the FHA continues to face challenges regarding the agency’s financial reserves, which remain below government-mandated minimums. High rates of default on FHA loans, as was seen among the Citibank loans, have been a drain on the agency’s insurance reserves, which exist to compensate lenders who suffer defaults under the program.
FHA reserves: The bad news and the good news

FHA reserves for reimbursing lenders for losses from defaulted FHA loans remain below the legally required minimum level of 2 percent of its mortgage insurance liability. The FHA reserve fund for paying mortgage insurance claims is self-funded by premiums paid by FHA mortgage borrowers, but due to the unprecedented drain on its reserves, FHA could be forced to seek other funding sources for maintaining its required levels.

The good news is that FHA is slated to receive $1 billion from a recent settlement with four loan servicing organizations. This settlement is separate from the Citigroup settlement.
FHA seeking approval for raising loan limits in high cost areas

In a move that appears counter-intuitive at least and suicidal at worst, the FHA also wants to raise loan limits in high priced areas such as Hawaii and California. The plan involves providing upside-down borrowers in these areas with opportunities for refinancing to FHA loans.

Taking on the additional risk of insuring larger loans when home values continue declining may seem foolhardy, but if approved, time will tell whether this plan stems the tide of foreclosures or further sinks FHA mortgage insurance reserves.

Acting FHA Commissioner Carole J. Galante recently announced that FHA will extend its waiver of anti-flipping regulations throughout 2012. This move is intended to stimulate slack housing markets while offering a solution to long-standing vacant properties and resulting neighborhood blight.

Real estate investors no longer inhibited by FHA rules against flipping, a practice where investors buy homes, repair them and quickly resell them, can take advantage of incentives offered by banks and other institutional lenders attempting to sell off foreclosed homes.

Buyers of homes offered for sale by so-called “flippers” may then apply for FHA mortgage loans. The FHA decision to extend the anti-flipping waiver may instill confidence in investor sellers who don’t want to deal with arbitrary delays in selling homes they’ve renovated to buyers using FHA mortgage loans.

By waiving its anti-flipping rules for another year, FHA can insure FHA loans for first time buyers with little cash to put down. FHA insures mortgages for up to 97.5 percent of a home’s current appraised value. The combination of FHA mortgage loans and availability of renovated homes in moderately priced neighborhoods can potentially increase home ownership and stabilize crime and home devaluation frequently associated with vacant foreclosed and abandoned homes.

Prior to issuing the initial waiver in February 2010, FHA required property owners to hold their properties for a minimum of 90 days before selling them. The key to successful flipping relies on buying homes, quickly renovating them and turning them over. Artificial time constraints can reduce profits when investors are forced to “sit on” renovated properties while awaiting the 90-day waiting period to expire. FHA outlined specific conditions associated with its 2012 waiver of anti-flipping regulations:

• Arm’s-length transactions: Buyers, sellers and others involved in a flipping transaction cannot have an ” identity of interest” between each other.
• Limited seller profit: In cases where the sales price of a flipped property is 20 percent or more than the seller’s acquisition price, the seller is required to provide documentation justifying the selling price.
• No HECM loans: FHA does not allow buyers to purchase flipped homes through its Home Equity Conversion Mortgage (HECM) program. Also known as reverse mortgages, HECM loans provide borrowers with cash drawn from home equity.

Since the inception of its waiver of anti-flipping rules, FHA cites the approximate value of 42,000 FHA mortgages arising from sales by sellers holding properties less than 90 days at $7 billion. These figures suggest that FHA may be on to something, and depending on how the extension of the anti-flipping waiver works in 2012, it could be time to scrap the anti-flipping rules altogether.

The battle of October 1st is over and financial sanity won out. The FHA has new and lower loan limits and now we need to get ready for Round 2.

The fact is that the loan limits that took effect at the beginning of this month might end on December 31st. That’s because the new loan limit formula is only designed to last three months.

In the usual situation loan limits are announced in November or December, begin in January and then last for a full year. However, since 2008 the loan limit system has been in a shambles and it still is today. The result is that as of January we could see higher limits, lower limits or no change.
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Unless there’s a surprise turn of events on Capitol Hill, the FHA loan limits for high cost areas will be reduced as of October.

Let’s assume that the new and lower limits become the law of the land as scheduled. Just who will be impacted?

“Congress must act now to prevent the loan limits from reverting to lower levels,” Bob Nielsen, chairman of the National Association of Home Builders, said in a statement. “A drop in mortgage loan limits would reduce housing demand, and place downward pressure on home prices in major markets. This would exacerbate the current housing downturn, trigger more foreclosures, impede job growth and endanger the fragile economic recovery.”

Because of these concerns, the NAHB said it’s “engaged in a major grassroots push and association members are being urged to contact their members of Congress and seek their support for immediate efforts to extend the current loan limits.”

Actually, neither home builders nor anyone else has much to worry about regarding real or imagined terrors from reduced loan limits.
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Every few months you read in the paper about a major mortgage modification clinic coming to town. In Washington, this meant that major meeting space was taken over in a downtown hotel, hundreds of counselors set up shop and the line of concerned borrowers hoping for help stretched out the door and waited patiently for their turn.

The group that operates such mass modifications is called the National Assistance Corporation of America or NACA. It must be doing a good job because it provides about 30 percent of the counseling services available to borrowers with money provided by HUD.

Or it did, until the money stopped.
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There’s been a lot of talk regarding a new federal standard for home loans and how it will impact the marketplace. In these discussions, Federal Housing Authority (FHA) mortgages are frequently mentioned as if they had some sort of disease which is tearing at the heart of the national economy.

The new rules under Wall Street reform create a standard for loans. If a loan fits, it is then a qualified residential mortgage (QRM). If it doesn’t fit, then the lender can still make the loan and a borrower can still be dumb enough to accept such financing.

Lenders, of course, are screaming about the new QRMs. They’re telling everyone who will listen that loans under the QRM will require 20 percent, so be very afraid of the new standard.
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There’s no surprise about this one, a lot of people are unhappy with the new mortgage loan limits set to start Oct. 1, 2011–loan limits which are lower than today’s standards.

“The housing market does not need a self-inflicted wound,” said Rep. Gary Ackerman (D-NY), a co-sponsor with Rep. John Campbell (R-CA) of legislation which would keep today’s loan limits in place. “With the economy remaining fragile and the housing sector still struggling to recover, now is not the time to make the cost of mortgages more expensive.”

Under HR 2508, loan limits for FHA and conventional loans would stay where they are until 2013.
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Unemployment just won’t go away.

The latest numbers point to an “official” unemployment rate of 9.2 percent and paltry jobs growth–just 18,000 new jobs in June.

That’s 14.1 million people without a job, not counting that 2.7 million individuals who were “marginally attached” to the labor force.

Now the FHA has decided to do something useful to help the unemployed. It has established an unemployment forbearance program for those FHA borrowers who have lost their jobs.

This is going to be a good deal for several reasons: First, it will help people with real needs, and second, it will set an example the private sector can follow.
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As we have long predicted, the FHA’s short refi program continues to be dead in the water. Despite a big announcement introducing the program last August, the marketplace reaction has been ho-hum.

Is this fair? Is there anything in the short refi program which might redeem the concept?

The latest numbers from Housing and Urban Development (HUD) tell us that since Oct. 1. a total of 535 applications have been submitted for the program and, of these, just 195 have been approved so far. As of May just 65 applications were in the pipeline, suggesting that very large numbers of applications have fallen through.
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The Federal Housing Authority (FHA) is gradually returning to the comfy loan limits of old.

As of Oct. 1, 2011 FHA guidelines will be changed and maximum loan sizes will be reduced. The term “reduced” should not frighten anyone; available loan amounts will still be far above the financing levels required by most FHA borrowers.

Lowering FHA Loan limits

Under the new rules, the maximum FHA loan size will be reduced from $729,750 to $625,500 in high cost areas in the lower 48 states. As recently as 2006 the comparable FHA loan limit was $362,790.
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