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FHA Loans Whittling Away at MGIC Market Share?

Karen Lawson
February 26th, 2010

FHA has increased its market share of US home loans from about 4% to approximately one third of US mortgage loans since the housing boom ended in 2006. The rapid increase in FHA insured mortgage loans is evidently perceived as a threat to MGIC, the nation;s largest insurer of conventional mortgage loans; the company has unveiled a plan for charging lower premium costs based on borrower credit scores. The increase in FHA mortgages is widely considered the result of under served communities turning to FHA when sub prime lenders disappeared.

From Subprime to FHA: The Great Migration

FHA guidelines require mortgage lenders to verify income and employment and will soon require lenders to charge down payments of 10% for borrowers with FICO credit scores lower than 580; conventional lenders typically require credit scores in the mid 700′s for getting the best mortgage rates. MGIC insures mortgage lenders against defaults on conventional mortgage loans made for greater than 80% loan-to-value (LTV). Conventional mortgage lenders, wary of the fallout from high delinquency and foreclosure rates, are typically requiring 20% down payments. Mortgage loans with 80% or less LTV ratios don’t require mortgage insurance. If anything is cutting into MGIC’s business, it’s likely fewer conventional mortgage loans being made at more than 80% LTV.

FHA and MGIC: Meeting at the Crossroads, or Not?

FHA currently offers the only alternative to high cost subprime lending to borrowers wishing to buy or refinance homes with a low downpayment and compromised credit. FHA offers more lenient approval guidelines that accommodates the needs of borrowers with less than stellar credit scores and who have steady income, but can’t afford large down payments. Conventional lenders, wary of foreclosure losses, are upping the ante by requiring higher credit scores and increasing fees for borrowers perceived to be high risk. On the other hand, well qualified conventional borrowers may choose an FHA loan to avoid paying 10 to 20% down. FHA guidelines permit as little as a 3.5% down payment for qualified borrowers with credit scores of 580 and above. As conventional lenders tightent their underwriting requirements, FHA loan programs offer a bit more breathing room for borrowers who have moderate incomes and/or credit issues.

When shopping for a new home or refinance mortgage, I recommend getting mortgage quotes for  both FHA and conventional home loans; FHA’s higher LTV allowances can also be helpful for refinancing in situations where your home value has declined.  FHA approved mortgage lenders can answer questions and  help you find FHA home loans  compatible with your home financing needs.

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Refinancing an Underwater FHA Mortgage

Gina Pogol
February 25th, 2010

FHA has a simple solution to the my-house-is-under-water-but-I-wanna-refinance problem. They’ve always had it. It’s called a streamline refinance, and you probably qualify to get one. It’s not a slam dunk — before some changes in November 2009, you could pretty much get a streamlined refi if you could fog a mirror, but today you have to have a decent payment history on your loan. read more

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Assumable FHA Loan Can Help You Sell Your Property

Gina Pogol
February 25th, 2010

Everyone and their dog (of course my dog talks; doesn’t yours?) these days is predicting that mortgage interest rates will be increasing in the next year, especially once the government stops buying mortgage-backed securities in March 2010. And that’s a big enough reason to refinance to an FHA loan now if you haven’t already. read more

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FHA Reports Mortgage Loan Volume Slipping

Karen Lawson
February 24th, 2010

While we’ve often mentioned FHA’s growing pains resulting from astronomical growth in its market share over the past couple of years, the January 2010 FHA Outlook report indicates wavering volume in FHA home loans in general, and FHA reverse mortgage loans, also called Home Equity Conversion (HECM) loans, in particular. Applications for HECM loans were down 16.2% from December 2009, and declined by 54.2% compared to one year ago. The agency cites likely causes as severe winter weather and stricter requirements for FHA to FHA refinance requirements under the streamline refinance program. I believe larger influences are at work here.

Fewer FHA Reverse Mortgage Loans: Depressed Home Values a Factor?

Falling home values have diminished home equity levels; this would logically cause fewer borrowers to take out FHA HECM mortgages, which provide borrowers age 62 and above to draw on home equity without making mortgage payments. The “reverse” mortgage is paid off when borrowers sell or otherwise vacate their homes. Borrowers taking out HECM mortgages may count on the monthly income provided by these loans for meeting living expenses; if they don’t have enough home equity to provide the needed supplemental income, they would likely pass on a HECM loan. Losses in investment and retirement accounts also narrows options for homeowners with fixed incomes. With real estate markets remaining depressed in many areas, it makes sense that concerns over home equity would reduce interest in HECM home loans.

Unemployment, Financial Security Worries Concern Home Loan Borrowers

FHA HECM loans are only part of a trend of falling market share for the agency’s mortgage loan programs. FHA home loan applications declined by 51.8% from 243,511 in January 2009 to 126,043 applications during January 2010. I see national unemployment figures lingering near the 10% benchmark as a major obstacle for homebuyers. Potential buyers are holding fast until conditions improve and their confidence increases. Loss of home equity, stricter FHA guidelines, and increased FHA MI premiums don’t bode well for inspiring borrower confidence in taking out FHA home loans.

Changing Economy Requires Innovative Home Loans

It’s worthwhile to compare the times when homeowners could reasonably expect to get and keep a job for many years; moving up in company ranks provided comfortable raises and eventually led to retirement with a company pension. Today, we cannot count on any aspect of financial security, let alone secure retirement. With layoffs, downsizing, reduced benefits, and disappearing investments, it’s not surprising that fewer Americans feel comfortable committing to 30 year mortgage loans.

The challenge for FHA is creating home loan programs that mirror the changing economy and meet the needs of borrowers facing increasing levels of financial uncertainty.

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FHA Foreclosure Rate On Par For Times

Peter G. Miller
February 23rd, 2010

The Mortgage Bankers Association has come out with their quarterly delinquency and foreclosure statistics for the fourth quarter of 2009 and the results reflect exactly and precisely what we have been saying here: FHA mortgage foreclosure levels are consistent with the marketplace and not outsized, over-done or evidence of incompetence or malfeasance.

Specifically, the MBA had this to say:

First, the delinquency rate for all types of loans was 9.47 percent in the fourth quarter — that compares with 7.88 percent a year earlier.

Second, the overall foreclosure start rate was 1.20 percent — that’s up from 1.08 percent in the fourth quarter of 2009.

Now let’s break down the numbers:

In terms of delinquencies, the MBA reports that for the fourth quarter the delinquency rate for prime loans was 6.73 percent, 25.26 percent for subprime financing, 13.57 percent for FHA mortgages and 7.41 percent for VA financing.

The delinquency rate tells us that a lot of folks are in trouble. However, from a lending perspective, the more important question is how many delinquent loans actually resulted in a foreclosure action. In other words, how good are the efforts to “cure” delinquent loans.
read more

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FHA Loans: Critics Fear Lending Standards Still Too Lenient

Karen Lawson
February 22nd, 2010

With FHA home loan delinquency rates rising and its mortgage insurance fund shrinking, critics question whether FHA guidelines need further tightening. Housing and mortgage industry officials cite the agency’s need for reducing its losses while maintaining its unique role in supporting US housing markets.

FHA Home Loans: Growing Market Share, Growing Risk

Since 2006, FHA mortgage loans have grown from about 4% of US market share to approximately 33% of US homebuyers. This rapid increase has created excessive exposure to potential losses:

  • Many homebuyers depend on FHA for mortgage loans: As conventional lenders have raised credit score requirements and minimum down payments, moderate income and credit challenged borrowers rely on FHA for home loans and refinancing. When the sub-prime lending industry collapsed, FHA quickly became the only source of mortgage loans for many homebuyers and homeowners. Its unique role in providing home loans to borrowers with fewer assets and less credit puts the agency at increased risk.
  • Too many mortgage loans, too fast: When sub prime loans became scarce, FHA experienced exponential growth in its market share, and was unable to monitor mortgage lenders for adherence to its lending requirements. some lenders played fast and loose with FHA guidelines, which resulted in increasing delinquency and foreclosure rates. FHA has cracked down on lenders and has publicized its suspension of several lenders and its plans for monitoring FHA approved lenders for compliance.
  • Low mortgage rates: With mortgage rates remaining near 5%, more moderate income borrowers can qualify for home loans through FHA programs.
  • Federal homebuyer tax credit: This program provides incentives for potential buyers to buy homes. Along with low mortgage rates, and accessible FHA home loans, the tax credit is encouraging many first time and moderate income buyers to buy homes using FHA programs.
  • FHA refinancing and declining home values: Homeowners facing losses of home value may have no choice but turning to FHA for refinancing to current low mortgage rates; FHA refinance options allow for higher loan to value ratios and can accommodate refinance loans that wouldn’t e approved by conventional mortgage lenders.

Pull the Rug out from Under US Housing Markets? No Way

While FHA must carefully craft its risk management strategies for minimizing losses, it cannot revise its lending guidelines to a point where many home loan borrowers can no longer qualify for FHA loans. If buyers and homeowners depending on FHA mortgages become ineligible for purchase and refinance mortgage loans, home prices could further decline and delinquencies and foreclosures may well increase.

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FHA Mortgages & Assumptions

Peter G. Miller
February 22nd, 2010

Writing in the Washington Post, Jack Gutentag says that “the assumability of FHA mortgages could have significant value to borrowers today, in some cases equaling or exceeding the cost of FHA mortgage insurance.”

However, says Gutentag, a professor of finance emeritus at the Wharton School of the University of Pennsylvania, “the borrowers for whom assumability has the greatest potential value are those who expect to sell their house within three to seven years. Short of three years, it is not clear that interest rates will be significantly higher than they are today, and after seven years, it is not clear that assumability will have significant value to home buyers.” (See: Assumability: A hidden potential value to FHA loans, February 20, 2010)

I happen to be an admirer of Gutentag, but I’m not convinced about this one. To understand why, let’s look at the premise:
read more

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Getting a Home Loan When You Have No Credit

Gina Pogol
February 19th, 2010

It’s a catch-22: once you have a nice credit score, you can easily get approved for credit — but how do you get the nice credit score in the first place? Um, how about with a mortgage? read more

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Funding Your Down Payment with a Gift

Gina Pogol
February 18th, 2010

Some of you lucky dogs have people who want to give you money for your down payment. That’s cool as long as the money is transferred and documented carefully — being too casual with your gift funds could get your loan bounced.

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Should FHA Consider Mortgage Writedowns?

Karen Lawson
February 17th, 2010

Although FHA has not announced plans to incorporate principle reductions, or mortgage writedowns, in its foreclosure prevention programs, the subject is worthy of debate. Critics of existing government sponsored mortgage relief programs note that unemployment and severely declining home values have made it impossible for many homeowners to make payments even after their mortgage rates are reduced and converted to stable fixed rates. Let’s consider the pros and cons of writing down principle balances on delinquent FHA loans.

FHA Actions Can Impact Communities-for Better or Worse

FHA is the primary source of mortgage loans for buyers and homeowners who don’t have enough cash or credit to qualify for conventional mortgage loans; FHA insures lenders making loans under its programs against losses caused by mortgage defaults and foreclosure. FHA is expecting the tide of foreclosures to increase due to findings that mortgage loans are most at risk of foreclosure during the second and third year of their terms. If such projections prove true, FHA is facing a critical situation, as it insured a large number of loans during 2007 and 2008, which increased its market share from about 2% to nearly 30% of US home loans.

Failing to reduce FHA mortgage foreclosures could be devastating to affected communities. Foreclosed homes blight neighborhoods, encourage crime, reduce home values, and cause losses of local property tax revenue. Some reasons that mortgage write downs could work:

  • Providing affordable payments: Writing down mortgage balances to below current appraised home values in addition to reducing mortgage rates, extending loan repayment terms, and converting adjustable rates and exotic mortgage features to fixed rates provides homeowners with affordable payments and allow them to see light at the end of the tunnel of high payments, negative equity, and unpredictable changes in mortgage features and rates.
  • Reducing foreclosures reduces community problems: Occupied homes are preferable to blocks of vacant and vandalized homes, which can prompt remaining homeowners to flee in fear for their safety and further losses in home value.

Again, FHA guidelines don’t currently allow mortgage writedowns, but if they did, what are the consequences?

FHA Guidelines Must Protect Taxpayers

  • FHA reserves falling far below legally required levels highlights the potential for FHA policies to impact taxpayers. FHA home loan programs are self-sustaining, but a wave of foreclosures could put FHA in bailout territory.
  • How would FHA handle losses resulting from mortgage writedowns? There is a chance for “double jeopardy” if mortgages with reduced balances are foreclosed.
  • Mortgage relief efforts are seen as a government handout by many; failure of foreclosure prevention efforts would create issues with public perception and could threaten FHA home loan programs.

No matter how FHA handles mortgage relief efforts, it’s walking a tightrope high above the court of pubic opinion.

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An FHA Tale of Two Cities

Peter G. Miller
February 17th, 2010

The Moscow Times reports that interest rates for fixed-rate ruble mortgages have now dropped to 15.8 percent — that’s down from 20 percent last June.

Alternatively, Zillow says the rate for thirty-year fixed mortgage rate fell to 4.79 percent this week. Zillow also says “the rate for 15-year fixed home loans is currently 4.22 percent, while the rate for 5-1 adjustable rate mortgages is 3.61 percent.”

Think of the financing you can get in Moscow and compare it with New York or Los Angeles, Chicago, Dallas, etc.

These contrasting reports tell us several things.
read more

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New FHA Appraisal Standards Take Effect

Peter G. Miller
February 16th, 2010

Here it is the 16th of February and the world has not ended.

This is likely a surprise to some folks because yesterday the dreaded and new FHA mortgage appraisal rules went into effect, rules which will merely allow borrowers to get a better shot at a fair valuation of their property.
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Unemployment, 9.7% FHA Default, 9.12% Coincidence?

Gina Pogol
February 11th, 2010

It doesn’t take a genius to see that unemployment and mortgage foreclosure go hand in hand, and today’s FHA default ratio and the unemployment rate bear this out. In addition, it stands to reason that homeowners who have insufficient resources to save up big down payments probably don’t have the funds to ride out months of drastically-reduced income. However, if you have an FHA mortgage, you do have access to help if you lose your job. read more

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Buying FHA Foreclosures: What You Need to Know

Gina Pogol
February 11th, 2010

Not every foreclosure or short sale is a screaming bargain; in fact, many are more like screaming headaches. But FHA foreclosures — homes owned by the U.S. Department of Housing and Urban Development (HUD) — are shrieking “Steal Me!” at the tops of their lungs (or they would be if houses had lungs). There is mucho opportunity there — as long as you are aware that the process of acquiring such a property can be a little um, quirky. read more

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FHA Guidelines: Avoiding Foreclosure and its Consequences

Karen Lawson
February 11th, 2010

The federal tax credit for buying a home is slated to expire on June 30th, with a deadline of April 30th for signing a contract on purchasing a home. A Federal Reserve Program for keeping mortgage rates low will expire March 31st, and changes to FHA guidelines are expected to become effective in April. Although these programs have promoted home sales, it remains to be seen how they will affect U.S. housing markets. As far as FHA mortgages are concerned, I believe that implementing changes to reduce risk can only help the agency and housing markets.

FHA guidelines: Perception is reality

Bailout-weary taxpayers aren’t likely to favor any moves to bail out FHA reserves, which have fallen below legally mandated levels. The reserves in question are used for reimbursing mortgage lenders for losses associated with mortgage defaults and foreclosures. Although the FHA mortgage insurance program is self sustaining, a glut of foreclosures associated with the demise of the sub-prime market has strained the reserves to near rock-bottom.

Although FHA was caught unawares by a tremendous increase in its market share when subprime lending went south, it has made important strides in monitoring mortgage lenders and enforcing FHA guidelines for underwriting mortgage loans. Several high profile lender suspensions and increased auditing of FHA approved lenders are sending a message to mortgage lenders and the public that FHA is fiscally responsible and won’t bear unnecessary risks due to lax lending practices.

A common misconception about FHA loan programs is that they serve only financially challenged borrowers and borrowers with poor credit. The average FHA borrower has a FICO credit score in the mid 600′s, so the new requirement for a minimum credit score of 580 to qualify for the minimum down payment rate of 3.5 percent is not likely to impact large numbers of FHA mortgage loan applicants.

The second and third years of a mortgage loan term are said to be the riskiest in terms of mortgage loans going into default. The explosion of FHA mortgage loans made during 2007 and 2008 have entered and will enter that period during 2009-2010. With its reserves disappearing, FHA must move to reduce potential losses.

FHA mortgage loans support communities

HUD, the parent agency of FHA, is dedicated to rehabilitating communities and promoting home ownership in underserved communities. FHA loan programs make it possible for moderate income buyers to purchase and renovate blighted and foreclosed homes. FHA must strike a delicate balance between reducing risks and continuing to provide qualified buyers and homeowners the mortgage and refinance loans they need to keep and maintain their homes.

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