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.