FHA Mortgage Guide

What should you do if you have an FHA loan and face foreclosure?

HUD has come out with a new letter for lenders which explains how to handle situations where a property owner cannot make their payments.
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Rising foreclosure rates have been plaguing homeowners around the nation and even FHA borrowers have not been immune. In response, HUD has recently issued a letter to all FHA mortgagees and mortgage lenders regarding the FHA Pre-Foreclosure Sale [PFS] Program. 

The PFS program has been available nationally since 1994, and has since aided thousands of borrowers in trouble of foreclosure. Essentially, the PFS program allows a borrower in default to sell his or her home to satisfy their existing mortgage debt if the sale proceeds are less than the amount owed. In conventional loan standards, and as known more commonly, the PFS program is similar to the short-sale of a home. As foreclosure rates rise and home equity continues to decline, many homeowners have been left with negative equity and are forced to sell their homes for less than they owe.

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After December 31st the FHASecure program will be no more.

The official explanation for the closure looks like this:

“While FHA will retain its standard rate-and-term refinance program for borrowers who are current on their existing mortgages, the FHASecure program under which FHA was able to insure refinance transactions for borrows delinquent on their mortgages, will terminate on December 31, 2008, as per FHA’s initial guidance. Maintaining the program past the original termination date would have a negative financial impact on the MMI Fund that would have to be offset by either substantial across-the-board single family program premium increases or the suspension of FHA’s single family insurance programs altogether.”
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HUD has just come out with a new requirement for FHA mortgages that’s good for both borrowers and the government.

In a just-issued notice to Lenders, HUD says that “all FHA-approved lenders must use state certified appraisers for FHA-insured mortgages.”

At first this may not seem like a big deal, but in fact this notice is very important for several reasons.
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HUD has just released their biweekly FHA Outlook summary report for November 16-30, 2008. In this latest report, we see that FHA purchases and refinances slowed a bit when compared to the record breaking numbers posted in October. But, with respect to the year over year change, the FHA still shows significant growth and strength in both sectors of home financing. As for the Hope for Homeowners program, the FHA Outlook report also detailed many of its expected shortcomings. 

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Back in September, FDA Commission Brian Montgomery told Congress that HUD was going to spend $29.5 million to get the Hope for Homeowners program in gear. Specifically, said Montgomery, the money would be spent for “the Program’s start-up costs associated with outreach, personnel, contracting, and systems upgrades.”

Here’s what you got for your money.

Nothing. Nada. Zip. Zero. Goose Egg.

Hope for Homeowners was the program passed this summer that was supposed to help as many as 400,000 homeowners get FHA mortgages. The goals of the program’s supporters were pure, but the H4H program was a lousy concept from day one. That said, if you had the choice between a foreclosure and a less rotten loan, which would you take?
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Is fraud a big FHA problem? Is fraud a bigger problem with FHA loans than with other forms of mortgage financing?

I ask because according to the New York Times, “as credit tightens, F.H.A. is the sudden star of the nation’s housing market. In September alone, it endorsed over 96,000 new home loans, more than triple the number it approved in the same month last year, federal data shows. But some housing industry experts worry that F.H.A. may soon be hit by a wave of mortgage-related fraud and abuse that it is ill prepared to deal with.”

In addition to ending a sentence with a preposition, the logic behind this statement is not well developed.

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The Washington Post reports that “the Federal Housing Administration’s fund to cover losses on the mortgages it insures is shrinking, but remains above the point where taxpayers would need to kick in money to cover defaults, according to an independent audit of the agency’s financial soundness.”

“As of Sept. 30,” says the paper, “that fund had an estimated $12.9 billion, a 39 percent drop from $21.2 billion a year ago, according to the audit by Integrated Financial Engineering of Rockville.” (For the full story, see: FHA Insurance Fund Has Fallen 39 Percent,” December 3, 2008)

Okay, there’s less money in the fund. Anyone care to ask why?
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Just a few months ago in October, rates for 30 year fixed mortgages hovered right around 6.5 percent. As the Federal Reserve continues to invest in mortgage backed securities from Fannie and Freddie, interest rates on these conventional loans have been expected to fall well below the current 5.5 percent marker. Many have even been speculating mortgage rates as low as 4 and 4.5 percent.

Consumers Waiting in Anticipation
While interest rates for FHA are based differently, increased mortgage activity would still spill over to FHA given the tight equity requirements of Fannie and Freddie. But while lower mortgage rates have been expected to stir up mortgage activity, one of the recent twists has been an actual decline in activity. According to the Mortgage Bankers Association and FHA’s recent Outlook report, the numbers of FHA purchases have declined slightly since the beginning of this month.  

Although speculation of lower interest rates has sparked consumer curiosity, it’s been a fair assessment that the anticipation has put many consumers’ mortgage plans in a type of holding pattern.

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It’s no secret that many homeowners are relying on the FHA to fund their mortgage needs as other lenders continue to tighten up their guidelines. In September for example, the FHA issued three times as many loans as it did in the previous year. 

Unfortunately, homeowners haven’t been the only ones turning towards FHA for “help”. With fewer channels for fraudsters to operate, you can imagine how the FHAs risk of fraud increases as it becomes the major source of mortgage funding.

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The news on the foreclosure front is woeful — or is it?

The latest numbers from the Mortgage Bankers Association have been front-page news for the past few days. The figures getting the most play have concerned delinquencies and foreclosures, but as we shall see there is some good news on the FHA front that has largely gone unreported.
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The latest FHA Outlook report has been released for the first two weeks of November, and the data showed a decline in overall FHA transactions. FHA applications fell by 12.9%, purchases declined by 28.1%, and refinances declined by 13.4%. In total, the number of FHA endorsements fell by 23.6% when compared to the last two weeks of October.

Here are the numbers as reported by HUD for November 1-15 2008:
 

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A Self-Sufficient FHA
Since 1934, the FHA has managed to support itself without relying on public money to cover any of its mortgage losses. So far, the FHA has been able to rely on the insurance premiums paid by FHA borrowers to cover the costs of loan defaults and foreclosures. 

Unfortunately, the FHA insurance fund has been estimated to be at $12.9 billion - a 39% decrease from last year’s estimate of $21.2 billion. One of the most serious concerns is that taxpayers money may used if this insurance fund continues to drop. Currently, the $12.9 billion roughly represents about 3 percent of total mortgages insured by the FHA. If the insurance fund fails to cover the required 2 percent by law, taxpayers could be the ones footing the bill for the insurance fund deficiency.

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Swooning interest rates in the past few weeks have caused lender phone lines to light up nationwide. If you haven’t refinanced in the past few years, today’s rates are incredibly attractive and reason enough to speak with lenders.

What’s not generally recognized is that today’s interest levels are astonishing low by historic standards. Last week, for example, Freddie Mac reported that you could get a crisp, new 30-year fixed-rate mortgage for 5.53 percent with .7 points.
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Business Week has an interesting story which suggests that FHA mortgages are becoming the new subprime.

“For generations,” says the magazine, “these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there’s a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what’s happening — or incapable of stopping it. They’re giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.”

My concern about this report is that it may be both right and incomplete. That is, do we know that the situation with the FHA is any better or worse than with private-sector loan programs?
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For a number of years HUD has attempted to prevent illegal flipping by limiting the ability of buyers to purchase properties with FHA loans which were recently re-sold.

In basic terms, HUD began its “Prohibition of Property Flipping in HUD’s Single-Family Mortgage Insurance Program” in 2003. A key element of the program is that HUD will generally not insure FHA mortgages for any property which has been re-sold during the past 90 days.
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With the enormous increase in FHA activity one has to ask: Should this be a cause of worry?

Home prices, after all, are falling nationwide. Financing homes with declining values means the lender — or lender’s insurance plan — has less security than one might wish. Indeed, figures from the latest S&P/Case-Shiller Home Price show that home values in 20 major metro areas have dropped 17.4 percent in the past year.

Combine plummeting home values along with the latest report from the Mortgage Bankers Association showing that government-insured loans, meaning mostly FHA mortgages, now represent about a third of the market and a little worry is not unreasonable.
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Earlier this morning at the Austin Chamber of Commerce, Fed Chairman Ben Bernanke commented that “there’s no comparison in terms of severity” between our economy and the previous Great Depression. As growing concerns surround our fragile economy, Bernanke noted that we have social programs and government policies set in place to protect us from such devastating results. While it may not be as severe as The Great Depression, the current forecast still has individuals worrying and concerned for our weakening economy. 

As FHA continues to be one of the major sources of mortgage lending in this housing market, it may be helpful to note the correlation between today’s FHA and our previous Great Depression. Despite our own Fed Chairman’s statement, and his decorated Great Depression studies merit, the correlation between the two issues can give individuals further insight into today’s economy and today’s FHA program.

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One of the most beneficial features of an FHA loan is the allowance of gift sourced funds-often used towards a borrower’s down payment. Compared to conventional loans, FHA loans are still quite a bargain as down payment requirements are only 3% (soon to be 3.5%). For conventional loans, many lenders will require anywhere from 5% to 10% down in order to qualify. And although FHA recently disposed of down payment assistance programs, borrowers can still utlize these gift funds towards their down payments. 

Gift funds are great for parents looking to help their children, relatives helping out family members, or even close friends helping out each other. In addition to down payments, gift funds can also be used for a variety of sources during the FHA mortgage transaction. While gift funds remain great affordable housing alternatives, there are a few warnings and reminders FHA borrowers should first be aware of. Through these allowed gift funds, FHA borrowers will have yet another advantage to close their loan during this tough mortgage lending period. 

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FHA figures for the first half of November are out and you just have to say, wow.

The country, for those who may have missed the news, is in the midst of a foreclosure meltdown and HUD has hurried help with all the immediacy and urgency of FEMA after Hurricane Katrina.

In the first 15 days of the month, 69 people nationwide applied for financing under the Hope of Homeowners program. H4H, you will recall, was supposed to help as many as 400,000 borrowers avoid foreclosure and poverty. HUD is maintaining its perfect record in this category and — even though more liberal standards have been approved. To date it has yet to approve a single Hope for Homeowners mortgage application. Not one. So far a total of 180 H4H applications have been received since October 1st.

Meanwhile, on the oh-damn-I’m-facing-foreclosure front, HUD has permitted 39 delinquent conventional borrowers to refinance with FHA mortgages in the first half of November. Since October 1st HUD has allowed 142 borrowers nationwide to dump toxic loans in favor of FHA financing.

HUD did approve 67,818 FHA loans during the first half of November, that’s up 126.6% when compared with last year. It’s apparently getting either borrowers with better credit or making standards tougher because average credit scores now stand at 683 versus 650 last year.

These numbers plainly say that FHA financing is in demand, which is as it should be. The numbers also suggest that the FHA program is evolving into something which best serves well-qualified middle-class borrowers with solid credit scores.

The conflict, of course, is that many people would have better credit if they did not have toxic loans and soaring payments. If they could refinance with an FHA loan they would have lower and more predictable payments, and thus their credit scores would likely rise.

The original idea behind the FHA program, of course, was to take on riskier borrowers and make them less risky by allowing them to borrow on a sane basis. That was the thought in the 1930s, and it is a thought worth reconsidering today.