FHA Mortgage Guide

Every few years and with grim determination, HUD announces that it will act against such programs as the one offered through Nehemiah. Every few years, in the face of congressional opposition and public complaints, the idea vanishes.

HUD’s worry is not unreasonable. The federal department is concerned that third party downpayment plans often result in artificially inflated home values. These higher values, in turn, make mortgage lending more risky — and that’s a problem for an insurance program such as the FHA.

Under the Nehemiah plan, for example, a seller might provide a charitable contribution to the organization equal to 3 percent of the sale price plus $499. Nehemiah then provides a grant to the borrower equal to 3 percent of the sale price. A grant of course does not have to be repaid.

What concerns HUD is that when a third-party nonprofit organization is involved a seller might simply increase the price of the property to cover the cost of the charitable contribution. However, such a worry should not be a major worry because every FHA loan can only be originated when there is also a full-blown, on-site, FHA appraisal by an actual, licensed, independent appraiser.

From a political perspective, it seems strange that HUD would seek to push through such a contentious idea when it’s on the verge of getting legislation which would effectively eliminate the need for third party charitable programs. The proposed FHA modernization bill if passed by the House would allow HUD have FHA mortgages with no downpayment while the Senate version requires a 1.5 percent downpayment. Either bill would allow borrowers to buy homes with less than the 3 percent up-front which is now required.

Meanwhile, the Mortgage Bankers Association (MBA) said it “expressed concerns with the final rule on Downpayment Assistance Programs released today by the U.S. Department of Housing and Urban Development (HUD). The final rule, originally published in May, addresses standards governing a borrower’s investment or downpayment in Federal Housing Administration (FHA) insured mortgages. Specifically, the rule deals with the practice of allowing gifts by family members and certain organizations.

“MBA believes that downpayment assistance can play an important role in supporting FHA’s mission,” said Steve O’Connor, MBA Senior Vice President of Public Policy. “Indeed, seller-funded downpayment assistance programs comprise approximately 30 percent of FHA’s total volume, providing important assistance to cash-strapped borrowers. While there is a need for stronger quality control measures, we shouldn’t throw the baby out with the bathwater and end the program.”

“We believe that legislation to modernize FHA remains the most effective way to improve the program,” continued O’Connor. “Legislation would empower the Secretary to address the housing needs of underserved borrowers by allowing FHA to keep pace with market changes and industry standards.”

According to the MBA, “the final rule prohibits downpayment assistance consisting, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale: (1) the seller, or any other person or entity that financially benefits from the transaction; or (2) any third party or entity that is reimbursed directly or indirectly by a person or entity that financially benefits from the transaction.”

If borrowers can write off mortgage insurance premiums how much will they reduce their tax bills?
This is not a minor matter, it turns out that a typical borrower will save $350, according to the Mortgage Insurance Companies of America (MICA).
“When this measure is ratified by the full House and Senate and signed into law by […] read more

On a voice vote, the House Ways & Means Committee has passed H.R. 3648. This bill, which must now cleared by the full House and the Senate, is important for two reasons.
First, those who purchased homes with financing that required FHA, VA or private mortgage insurance were able, for the first time, to deduct insurance […] read more

For all the talk of FHA modernization, it seems as though most FHA standards will remain in place should a new bill pass on Capitol Hill.
This is good news because the FHA program is fundamentally an insurance plan. When there are claims against the FHA program, money needed to buy homes and pay off lenders […] read more

Are FHA and conventional loans the same in terms of borrower benefits? Not at all, says Larry K Cragun.
Cragun, writing on a Seattle Post-Intelligencer blog, explains a number of areas where conventional and FHA loans differ. Edited for space and style, here are Cragun’s core points:
*With FHA there is no minimum FICO score requirement whereas […] read more

FHA loan applications on a seasonally adjusted basis now top one million, a huge increase when compared a total of 625,000 last year.
During the last half of August, the FHA endorsed 27,791 mortgages, including 14,994 purchase money mortgages, 8,272 refinances and 4,525 HECM’s (reverse mortgages).
*Purchase mortgages accounted for 54 percent of the total while refi’s […] read more

Speaking before the House Committee on Financial Services, Federal Reserve Chairman Ben Bernanke said that risk-based pricing for FHA loans was a good idea:
“In modernizing FHA programs,” said Benanke, ”Congress might wish to be guided by design principles that allow flexibility and risk-based pricing. To alleviate foreclosures, the FHA could be encouraged to collaborate with the […] read more

The idea that FHA reform is a slam-dunk is hardly the case. For one thing, the House and Senate bills differ substantially. Also, the White House — using appropriately coy language — objects to various aspects of both bills.
What does the While House like and dislike? See for yourself in the statement below:
The Administration supports […] read more

According to Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, the FHA bill passed by the House offers the following changes and benefits when compared with the current program.
Lower Down Payments
Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down […] read more

The Senate Banking Committee has now passed its version of FHA reform, a version which does not match the bill passed by the House.
How do the bills differ?
One major distinction is that the House measure would allow individuals to buy with no money down. That compares with the current 3 percent down FHA requirement. The […] read more

Bulletin: The U.S. House of Representatives overwhelmingly passed H.R. 1852, The Expanding American Homeownership Act of 2007. The bill passed by a bipartisan vote of 348-72.
The next step will be to see what the Senate does — and then if the Senate and House versions of the legislation differ to see what comes […] read more

For a long time the FHA loan limit in high-cost housing areas has been limited to 87 percent of the conventional loan limit. Since the 2007 conventional loan limit is $417,000 for a single-family home in the lower-48 states, it follows that the FHA loan limit is $362,790 ($417,000 x .87). The loan limit for […] read more

On the foreclosure front, the news remains awful and worse than anything to date.
New figures released by RealtyTrac.com, the leading source of foreclosure information for investors, reporters and others, shows in its August 2007 U.S. Foreclosure Market Report that “a total of 243,947 foreclosure filings — default notices, auction sale notices and bank repossessions — […] read more

I spent much of last week in Dallas to attend the Five Star Default Servicing Conference. This is a meeting of several thousand people who deal in bulk real estate sales, purchases and REOs — real estate owned by lenders after default.
One of the more interesting comments concerned HUD, the ultimate owner of FHA-financed properties […] read more

The Senate plans to vote on FHA modernization this month, but stay tuned for an exact date.
Patrick Rucker, the very sharp reporter for Reuters who covers such things says the Senate Committee on Banking, Housing, and Urban Affairs will consider FHA modernization on Wednesday, September 19th. This is a change from the committe calendar which […] read more

Speaking at the Five Star Default Servicing Conference in Dallas this week, Amy Crews Cutts, the deputy chief economist with Freddie Mac, gave a terrific presentation looking at the state of the mortgage finance.
Cutts argued that the foreclosure rate was bad today and likely to get worse. She said loans originated even in the first […] read more

The FHA Book has an interesting and thoughtful post:
“I’m going to be honest here. FHA loans are for those who could usually not get a decent loan. If you cannot qualify for an FHA loan you should not be buying a house! Or should at least be buying a cheaper house within the FHA’s limits!!! […] read more

Speaking in Jackson Hole, WY, Fed Chairman Ben Bernanke had some interesting remarks about the FHA and its history.
It’s sometimes forgotten that the FHA program was a by-product of the Depression, one which radically changed real estate financing by popularizing long-term mortgages instead of 5-year terms loans which were then common. As Mr. Bernanke explains:
“The […] read more

It is natural and reasonable to want to know how much a loan costs, whether FHA or not. Savvy borrowers know that the interest rate is not the full cost of the loan — there’s a difference between a loan at 6.75 percent at 6.6 percent plus 2 points — the “higher” rate may actually […] read more

Did you ever think about the differences between FHA loans and conventional financing?
Let’s look at what the conventional market has offered in the past few years. There have been interest-only loans and option ARMs. There have been stated income loan applications and mortgages where you don’t need to show any income.
No doubt about it, conventional […] read more