The Federal Housing Administrations Hope for Homeowners program went into effect last week, but as of right now, there still isn’t a list of participating lenders yet.  While the program sounds great in theory, without any lender participation the legislation is almost meaningless.  

Why the cold feet?
When we covered this new program earlier this month, we predicted this “less-than-thrilled” response from lenders.  The program aims to help those with troubled mortgages and convert them into cheaper fixed rate traditional FHA mortgages, granted these participating lenders must be willing to write off part of the loan and suffer the initial loss. Specifically, the new FHA mortgages can be no more than 90 percent of the property’s new appraised value. 

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The Mortgage Bankers Association has come out with a new study which tells us a lot about FHA mortgages.

FHA loans have been getting bigger. The 2008 MBA Cost Study shows that a typical FHA mortgage originated in 2003 has an initial balance of $162,454 — a figure that rose to $195,227 in 2007.

That’s quite a jump, especially when you consider what’s happened to household income: Between 2000 and 2007 household income as expressed in buying power has fallen by $324 according to economist Jared Bernstein.

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In August 2007 HUD began allowing borrowers to get FHA adjustable loans based on the LIBOR index.

Given the events of the past week a lot of FHA borrowers with LIBOR indexes may wonder about their choice. As Canada’s Financial Post reported last Tuesday “the London Interbank Offered Rate, or LIBOR, which is set by 16 banks, rose the most ever, jumping 431 basis points.”

Translation: The rate for overnight loans among banks rose 4.31 percent in a day to 6.88 percent. That’s right — the rate more than doubled.

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If you are 62 or older and have been considering a reverse mortgage, the FHA and HUD just approved a new national limit of $417,000 for HECMs. The new limit is not set in stone yet as there are no set deadlines yet; but their target effective date is November 1^st. There was some debate over this increase, and some interpretations of HR 3221 led some to argue that the limit could have been increased up to $625,000. However, after much debate, the final decision was a national limit set at $417,000.

Want to know more about Reverse Mortgages and the FHA HECM Program? Check out our Introduction to FHA Reverse Mortgages.

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With FHA stepping up to the plate recently, people are beginning to question whether they are ready to take on such a responsibility. In this current liquidity crisis, if you have less than a 20% down payment your options become quite limited. There aren’t many private investors willing to touch these loans, and Fannie and Freddie couldn’t even help you if they wanted to. That leaves many home owners with the only option of FHA loans and it is expected to be the growing trend as credit continues to tighten.

Bloomberg estimates that by the end of this year, “FHA will guarantee 3 in 10 U.S. borrowers, many of whom have bad credit or loans that required no verification of income.” In addition, Congress wants FHA to do even more. In the past week, the Hope for Homeowners program authorized the agency to guarantee an additional $300 billion worth of struggling mortgages. But with FHA employing less than a thousand people nationwide, FHA is letting Congress know it needs upgraded technology and at least 150 workers immediately.

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HUD has released the general standards for the newly-minted “Hope for Homeowners” program created under the FHA reform bill passed by Congress during the summer.

For those with an interest in FHA mortgages — and for those who now have toxic loans — the program has great potential, enough funding to underwrite 400,000 borrowers.

That’s the good news. The bad news is this: To participate in the program your lender must be willing to write off part of the loan and pay money to Uncle Sam. You can pretty much guess that a lot of lenders will not be thrilled with this notion, especially holders of second liens who are likely to lose much or all of their investment.

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