The past year has been a wonder of low mortgages rates. The weekly reports from Freddie Mac have generally shown that rates for 30-year fixed-rate loans have hovered at or below 5 percent. In fact, in December mortgage rates actually reached 4.71 percent with .7 points — an interest level that ought to make a lot of people very happy.

The catch is that we don’t know if similar rates will be available in 2010. The view here — for what it’s worth — is that not only will rates be higher, they must increase. Here’s why:
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An FHA reverse mortgage loan, also known as a Home Equity Conversion Mortgage (HECM), can provide cash for living expenses, home improvements, and other needs. Before getting a reverse mortgage loan, it’s important to understand how these loans work.

During the past few days there have been interesting — if somewhat conflicting reports — which suggest that home prices in some areas have begun to stabilize and perhaps even rise.

First up, we have the National Association of Realtors which reports that “the national median existing-home price4 for all housing types was $172,600 in November, which is 4.3 percent below November 2008. Distressed properties, which accounted for 33 percent of sales in November, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes in the same area.”

Next, the Federal Housing Finance Agency tells us that “U.S. house prices rose 0.6 percent on a seasonally adjusted basis from September to October.” As well, says the agency, “the previously reported 0.0 (zero) percent change in September was revised to a 0.4 percent decline. For the 12 months ending in October, U.S. prices fell 1.9 percent. The U.S. index is 10.8 percent below its April 2007 peak.”

Lastly, we have an NAR report which says that “during the third quarter, 123 out of 153 metropolitan statistical areas2 reported lower median existing single-family home prices in comparison with the third quarter of 2008, while 30 areas had price gains.”
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Among the many bills passed recently has been the Secure and Fair Enforcement Mortgage Licensing Act of 2008, also known as the SAFE Act. This dandy little piece of legislation is the starting point of something new, an effort to raise the quality of loan officers nationwide.

The SAFE Act, says HUD, “is designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators. SAFE also mandates the creation of a Nationwide Mortgage Licensing System and Registry (NMLSR), and encourages all states to provide for a licensing and regulatory regime for all residential mortgage loan originators.”
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The US Department of Housing and Urban Development (HUD), under pressure from Congress and taxpayer watchdogs to shore up dwindling FHA cash reserves, is attempting to further minimize risk associated with defaulted FHA mortgage loans. In its Mortgagee Letter 09-52 dated December 16, HUD clarified FHA policy for insuring FHA loans for borrowers who have sold a home through a short sale. A short sale, sometimes called a pre-foreclosure sale, involves selling a home for its current market value when that value is less than the mortgage amount.

FHA Loan Guidelines on Short Sales

Here are some FHA loan guidelines concerning potential borrowers undertaking short sales:

• * Taking advantage of market conditions. Borrowers who use a short sale to take advantage of declining market conditions, for buying a similar or larger home within a reasonable commuting distance, are ineligible for FHA loans. In general, these are borrowers who could afford to make mortgage payments but who pursued a short sale for moving to a more desirable home.
• * Delinquency on mortgage payments. Borrowers who are delinquent on mortgage payments when their short sale is completed must wait three years after completion of the short sale to be eligible for FHA loans. This is consistent with FHA guidelines which delay eligibility for three years after a mortgage foreclosure. Exceptions can be made by FHA lenders on a case-by-case basis for borrowers whose mortgage defaults were due to circumstances beyond their control. Examples of this include the death of the primary borrower or inability to work. FHA will also insure new mortgages for homeowners whose lenders write off a portion of the existing mortgage they cannot refinance to loss of property value or borrower income.

Does New FHA Policy Help Struggling Homeowners?

The answer is yes and no. Although I agree with FHA policy not to accommodate “flippers” and those playing the distressed market solely for their own gain, I question whether it’s necessary to delay FHA financing for delinquent borrowers with documented hardship–for example, someone who’s had to sell a home with a short sale after long-term unemployment, illness, or loss of income due to death or divorce. Allowing a caveat for lenders to review such circumstances and approve FHA loans individually can help borrowers and the housing market recover.

With the new year approaching, FHA’s primary challenge remains balancing its own financial well being with its commitment to assist low- and moderate-income borrowers with buying and refinancing homes.

In a move to limit down-side profit-taking, new FHA guidelines have been announced to prevent short-seller sellers from buying replacement properties with an FHA mortgage.

In basic terms, what the new FHA guidelines are getting at is this: Smith buys a home and finances with a $300,000 loan. The value of the property falls to $200,000. Smith sells the property with a short sale, meaning that the property sells for less than the $300,000 loan balance. The lender takes a loss while Smith buys a $200,000 home across the street and cuts his monthly costs by a third.

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As its reserves verge on disappearing, FHA must weigh solutions for reducing risk with its purpose of providing affordable home loans to low and moderate income borrowers.

In 2006, FHA loans accounted for about 3% of the US mortgage market; today, the FHA market share is approximately 30%. In the interim, FHA reserves have fallen below the mandatory level of 2%. Critics argue that FHA has taken over the role of sub-prime lender in the wake of the wave of foreclosures caused by uninformed and perhaps unqualified borrowers taking out home loans with non-conforming terms that they didn’t understand and couldn’t afford. FHA denounces such criticism, pointing out that the average credit scores of borrowers of FHA loans have increased from the low 600′s to the 690′s in the last two years. Lawmakers and HUD officials are considering three primary remedies for raising HUD’s rapidly decreasing reserves:

• Raise minimum down payment from 3.5% to 5%: Supporters point out that FHA guidelines allow borrowers to add the up-front mortgage insurance premium (UFMIP) and some closing costs to their loan amounts; with minimum down payments, this leaves the homeowner with very little equity in his or her property.
• Increase mortgage insurance premiums: There is talk of increasing the monthly portion of the FHA mortgage insurance premium, but this would increase borrowers’ monthly payments. It seems logical to assume that raising payments places more of a financial burden on borrowers during tough economic times.
• Adopt risk-based pricing on mortgage rates: Conventional mortgage lenders determine mortgage rates based on borrowers’ credit worthiness, down payment amount, and other factors. HUD secretary Shaun Donovan is reluctant to adopt this option. stating that “it could make it harder for borrowers to pay off their loans.”

Founded in 1934, the Federal Housing Administration (FHA) became part of the US Department of Housing and Urban Development (HUD) in 1965. By insuring mortgages for single and multi-family homes, FHA has provided an alternative to strict credit guidelines and hefty down payments required for conventional mortgages. Although FHA is self-funded, watchdogs worry that another taxpayer bailout could be needed if HUD’s reserves aren’t replenished.

Raising Down Payments and Mortgage Insurance: Impact on Housing Recovery?

Raising down payment requirements and mortgage insurance premiums may disqualify some borrowers otherwise capable of making their mortgage payments. FHA is also cracking down on its approved lenders that don’t follow FHA guidelines. It seems more effective to weed out negligent lenders than to drive away home buyers depending on FHA mortgage loans when US housing markets are only starting to show signs of recovery.

As FHA reserves for paying claims against home loan defaults dwindle to near zero, policymakers are considering changes to FHA’s mortgage insurance program. Proposed changes could affect millions of homebuyers and homeowners depending on FHA loans and refinance transactions.

FHA, the primary provider of US home loans to moderate income borrowers, is expected to tighten lending requirements and net worth requirements for its approved lenders. These moves could increase the cost of FHA purchase and refinance loans.

After news of its reserves falling below mandatory levels, FHA is moving to reduce risk associated with insuring mortgages. Shaun Donovan, HUD Secretary, notes that FHA currently insures about 30% of home purchase mortgages and 20% of refinance mortgages in the US. HUD, which oversees the FHA, is considering measures for reducing risk associated with its mortgage programs. Proposals include:

• Increasing up-front cash requirements: FHA currently allows as little as 3.5% borrower down payment. About 31% of FHA borrowers made the minimum down payment during the first 8 months of 2009, with another 55% contributing 3.5% to 5% down payments. These figures support the significant role of FHA in providing mortgage and refinance loans to moderate-income borrowers.
• Increasing mortgage insurance premiums: FHA requires borrowers to pay an up-front mortgage insurance premium of 1.75% of the loan amount at closing and to continue paying annual premiums that are pro-rated on a monthly basis and added to monthly mortgage payments. Raising annual premiums may be more affordable for homeowners, but FHA mortgage insurance is already problematic for cash-challenged borrowers.
• Raising minimum required FICO credit scores: FHA currently allows borrowers with little credit to qualify for FHA insured loans, but deep losses caused by legions of FHA foreclosures is causing FHA to review its credit criteria. Although no minimum credit score has been announced, HUD is expected to require higher credit scores.

Deficits in FHA cash reserves are thought to be caused by losses connected to irresponsible borrowing and falling home values. FHA is reviewing its lender approval policies in efforts to reduce loan fraud and substandard lending practices leading to foreclosure.

FHA-approved Mortgage Lenders Held to Account

FHA relies on its approved mortgage lenders for underwriting and approving FHA mortgages. Proposed program changes affecting mortgage lenders include:

• Holding lenders accountable for foreclosure losses resulting from loans not meeting FHA criteria.
• Increasing net worth requirements for FHA lenders. Proposed increases would be from $250,000 to one $1 million for the first year, and to $2.5 million within the first three years.
• Requiring lenders to assume responsibility for FHA loans originated through mortgage brokers. Brokers would no longer be individually approved for originating FHA loans.

Although critics quickly place blame on financially ill-prepared borrowers, HUD has suspended 8 lenders and rejected 270 others this year as of December 8. A combined emphasis on improving loan eligibility requirements and weeding out rogue lenders may help FHA’s bottom line, but pricing low- to moderate-income homeowners out of housing markets could prevent market recovery in areas where borrowers largely depend on FHA loans for buying and refinancing their homes.

An outside auditor has now has a chance to look at the FHA’s books for fiscal 2008 and fiscal 2009 and the verdict looks like this: The FHA needs to re-think how it figures loan losses.

The report from the independent certified CPA firm of Urbach Kahn & Werlin LLP may sound like the dullest nonsense in the world, but it actually gets to a very important issue: Is the FHA charging enough for the loan insurance it provides? Should FHA premiums be higher? Or maybe even lower?
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The rumor mill in Washington is rife with claims that the HUD will soon allow lenders to charge as much of an origination fee as the marketplace will allow instead of the 1 percent fee to which lenders are now limited.

The argument here is the old, discredited junk we’ve heard before: Smart consumers will gravitate to the lenders who charge the least and competition will force lenders to keep origination costs low.
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The FHA has made temporary and permanent changes to rules governing condominium complexes. These changes are intended to help more buyers qualify for FHA loans for buying condo units, and could help sagging condo sales.

With all the mooing and carping about FHA reserves, most of it wrong, there still remains the issue that the FHA mortgage program, like all loan insurance efforts, needs to be reinforced.

HUD Secretary Shaun Donovan offered an interesting insight in how the FHA mortgage program can be made more secure and less risky in testimony last week before Congress.

To start, Donovan noted that HUD has dumped 270 FHA lenders. This is a little-discussed matter, but you have to wonder what losses have been sustained as a result of lenders who did not meet program standards for one reason or another. You can bet with absolute certainty that HUD is going to make lenders get loan applications right — and pay the price when they don’t.
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Back in June the Mortgage Bankers Association came out in favor of tougher standards for FHA mortgage lenders. The MBA said:

“Currently, FHA requires mortgagees to have a minimum net worth of $250,000 in order to be qualified to underwrite FHA loans. Brokers must have a net worth of $63,000. MBA believes that both standards should be increased to make these industries more accountable.

“Specifically, we recommend that mortgage bankers should have a minimum corporate net worth of the greater of $500,000 or 1 percent of FHA loan volume up to a maximum of $1.5 million. Mortgage brokers should have a minimum corporate net worth of the greater of $150,000 or half of one percent of FHA loan volume up to the minimum for mortgage bankers. MBA supports mortgage bankers and brokers maintaining a bond sufficient to provide reasonable protection to consumers and taxpayers.”

HUD has now responded with proposals read more

Homeowners struggling with mortgage payments due to financial hardship, property devaluation, or other circumstances beyond their control may qualify for an FHA refinance mortgage under the Hope for Homeowners (H4H) program.