With the end of the federal tax credit program for homebuyers looming, the Mortgage Bankers Association  President and CEO John Courson recently addressed the Congressional Housing and Finance Committee’s sub mmittee on Housing and Community Opportunity to address changes in FHA guidelines. Referring to a proposed reduction in seller contribution limits from 6% to 3%,  Mr. Courson noted: “…reduction in seller concessions will primarily impact low to moderate, first time, and minority homebuyers.” Although allowable seller concessions currently remain at 6%, FHA is expected to reduce them prior to summer’s prime homebuying season.

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Four times the government comes out with figures showing how well the nation’s federally-regulated banks and thrifts are doing in the mortgage department. Critics who dislike the FHA mortgage program are going to be very disappointed by the latest results.

The Office of the Comptroller of the Currency (OCC) tracks prime loans, subprime loans, Alt-A financing and government guaranteed loans. In the government-guaranteed category we have FHA loans (78%), VA financing (18 percent) and other federally-backed mortgages (4%).

According to OCC figures here’s what’s been happening with government-guaranteed mortgages:
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It was in 2007 that President Bush announced the FHASecure program, a program which would allow distressed conventional borrowers to refinance with FHA mortgages. The program never went anywhere — just 4,110 distressed conventional mortgages were actually refinanced — but now the government is trying again, this time with “enhancements” for troubled borrowers.

The basic idea, once more, is to move borrowers from conventional loans into FHA financing. For those with toxic loans this FHA Refinance Option program could be enormously valuable, but many distressed borrowers will not qualify for assistance. As the government explains:

“The new FHA loan must have a balance less than the current value of the home, and total mortgage debt for the borrower after the refinancing, including both first and any other mortgages, cannot be greater than 115 percent of the current value of the home.”

To make this happen, the government is putting up $14 billion in TARP money to offset lender losses, especially those with second liens who otherwise would likely lose everything in a foreclosure.

For all the yelling and screaming about the FHA mortgage program, the bottom line is that it represents mortgage sanity. By letting qualified borrowers into the program — borrowers with smaller loan amounts and lower monthly payments than they now face — we should be able to reduce foreclosure levels and thus the inventory of unsold homes which is holding down home prices.
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I can well remember when housing discrimination was a fact of life. Appraisal rules actually encouraged discrimination — including the appraisal rules used to create FHA mortgages.

To understand how the system worked allow me to borrow a bit of history from my personal blog, OurBroker.com:

>>>For example, it wasn’t until 1977, according to The Washington Post, that basic appraisal textbooks were updated to say “it was once common practice to examine the racial, religious or ethnic composition of a neighborhood in an effort to detect any sign of nonconformity or change. Such an approach is now regarded as misdirected and the use of factors relating to the racial, religious or ethnic composition of a neighborhood in arriving at a conclusion of value is now deemed an unreliable practice.” (See: Appraisers Institute Settles Suit, Nov. 19, 1977)

>>>In 1980, the appraisal industry finally agreed to a policy which said that “the value attributed to the property is not dependent upon the homogeneity of racial, religious or ethnic characteristics of the neighborhood…and the lack of such homogeneity in a neighborhood does not cause a diminution of value.” (See: Agreement Set In Rights Case Against Lenders, The Washington Post, Jan. 26, 1980)
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FHA has been facing challenging situations related to its home loan programs since taking on most if not all of the mortgage lending market once served by sub prime mortgage lenders. Amid growing concerns about FHA reserves falling below legally required levels, FHA is preparing for more problems as its mortgage loans originated during 2007 and 2008 are in or will soon enter the most risky period for foreclosure. Mortgage loans most often fail during their second or third year. Against this backdrop of “doom and gloom,” we’ll share some potentially good news.

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The National Association of Mortgage Brokers (NAMB) has some comments about the upcoming changes to FHA mortgage lending, and provides some interesting food for thought. In the organization’s statement issued March 15th, it claims that borrowers in most of the country are being unfairly asked to pay for those responsible for the deplorable condition of FHA’s reserves due to losses on claims. read more

If you’re shopping for an FHA mortgage and have some credit issues, you may have come upon a curious discrepancy. FHA states that it will soon impose a minimum 580 credit score for those who want to put only 3.5% down or refinance with only 3.5% home equity. Yet many lenders are requiring scores of 620 or even 640 to do an FHA loan at all. If FHA is willing to insure a mortgage with a 580 credit score, isn’t the lender protected? Why should it impose stricter requirements? read more

Homeowners anticipating difficulty making mortgage payments on their FHA loans should contact their mortgage lenders to discuss relief options. FHA guidelines do not require being behind on payments as a condition for getting assistance, but to qualify for help, you must be able to demonstrate a loss of income caused by the following:

• Reduced earnings due to cut in hours or pay
• Loss in self employment income
• Long term illness or disability impacting income
• Income loss due to death in family

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The decision by the FHA to suspend its 90-day anti-flipping rule has raised a ruckus, in part because the term “flipping” is not fully understood.

A listserv for real estate brokers to which I belong has recently been discussing the issue of flipping and several writers seem aghast at the thought of quick profits in real estate. The idea seems to be that additional disclosures and “transparency” are required for speedy sales.
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Last week, New York University and the Federal Reserve Bank of New York released a study critical of FHA audit results indicating that the agency won’t need a taxpayer bailout due to high mortgage default and foreclosure rates. Professor Andrew Caplin of NYU and a co-author of the study, asserts that the FHA audit failed to consider the risks created by FHA borrowers who owed more on their mortgages than their homes were worth, and who were allowed to refinance to new FHA loans.

This is likely a reference to the FHA streamline refinance program, which provides FHA to FHA refinancing, and permits  unlimited combined loan-to-value ratios (CLTV) for new financing when secondary mortgage lenders remain in place with subordination agreements.  The combined effect of home equity financing and dramatic losses in home value have left FHA with little choice but to take on high CLTV refinance mortgages, or risk acquiring more properties through foreclosure.

FHA Mortgage Loans:  To Foreclose, or Not to Foreclose…

The streamline refinance program assists borrowers who cannot otherwise refinance their mortgage loans due to loss of home value; the FHA streamline refinancing program is only available to borrowers who have existing FHA loans. Which would be better–taking a risk on streamline refinancing to prevent foreclosure or just saying “no” and letting borrowers walk away? The consequences of foreclosing mortgage loans go far beyond ruining homeowner credit ratings:

• Foreclosed homes lose value, and bring down neighborhood home values
• Vacant foreclosed homes add blight and can attract crime
• Too many foreclosures in one area can cause increased vacancies and lost tax revenue

Bearing this vicious cycle in mind, FHA efforts to prevent foreclosures through streamline refinancing is not a bad idea. As far as the study is concerned, it’s not possible to compare refinancing results for underwater FHA loans to similar non-FHA loans, as conventional lenders don’t refinance underwater mortgages at all; conventional borrowers typically need to have at least 10 to 20 percent home equity to qualify for refinancing.

While it’s true that FHA borrowers generally have less invested in their homes due to low down payments, the housing crisis has seen home values in some areas tumble to the extent that conventional borrowers who started off with 20 percent home equity have seen it disappear. Although bailout weary legislators and taxpayers are watching falling FHA reserves closely, it’s likely that the wave of foreclosures resulting from tightening streamline refinance CLTV requirements would cause an outcry in neighborhoods impacted by higher foreclosure rates.  Providing refinancing to distressed homeowners at current FHA mortgage rates may make the difference between keeping a home or becoming a foreclosure statistic.

It’s undeniable that taxpayers include underwater homeowners, their neighbors and communities. FHA is performing yet while managing risk and accommodating the needs of homeowners and their communities through reducing foreclosures.

The FHA numbers for February have been released and the program continues to look remarkably strong.

The FHA mortgage program is on track to do more than 2 million loans in 2010. That’s a huge number but down 29.5 percent from 2009.

Given about 5 million existing home sales and perhaps 350,000 new home transactions during the coming year, it means that FHA market share will decline, something that should elate program critics. The reason for the lower market share, of course, is that not all FHA home loans are used to purchase real estate, many are instead originated to refinance existing loans.

Credit Scores

Average credit scores in February were are at 693. This is a very credible figure given that the FHA program is generally associated with entry-level borrowers. A year-ago the average score was 663, suggesting a considerable tightening of FHA loan guidelines.
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In Trouble? FHA Loss Mitigation May Be Able to Help

HUD requires lenders to take whatever measures are practicable to prevent mortgage foreclosures on FHA mortgages. If you are behind on your FHA mortgage payments, you may be able to use one or more forms of mortgage assistance.

1. Assumption
2. Partial Claim
3. Special Forbearance
4. Extension of Time
5. Deed in Lieu of Foreclosure
6. FHA HAMP

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Immigrants: Real Estate Market Saviors?

A study of home ownership in mid-size American cities conducted by the University of Southern California’s Lusk Center for Real Estate found that immigrants have a lower home ownership rate than native-born Americans with the same income and education levels.  The results suggested that areas with declining home values could see prices stabilize thanks to a wave of first-time home buyers who speak English as a second language, if local governments made a point of supporting immigrant communities and real estate companies and mortgage lenders brought in representatives of those groups as employees. read more

FHA Commissioner David Stevens indicates that the agency has no plans for increasing minimum credit scores from 580 to an estimated minimum of 620), and will not engage in risk based pricing, which would charge riskier borrowers more for getting an FHA mortgage loan.

FHA Plays “Counter-Cyclical Role” in Mortgage Market

The commissioner described FHA as playing a counter cyclical role in US housing and mortgage markets. FHA provides loans when private lenders have pulled back due to concerns over credit and potential risks. In a recent address to a group of Colorado mortgage brokers, Stevens suggested  that without government underwriting in the current difficult credit environment, mortgage lending could disappear. Fannie Mae, Freddie Mac, and FHA  account for 95% or more of new home loans in the US. Of particular concern to FHA is its commitment to serving communities and borrowers who cannot qualify for conventional mortgage financing. FHA provides borrowers with marginal and non traditional credit, and those with moderate income their only viable opportunity for qualifying for mortgage loans in today’s tight credit environment. Stevens cited the stabilizing influence of the government’s participation in mortgage lending as central to the nation’s housing recovery.

FHA also plays a critical role in assisting borrowers wishing to refinance to lower mortgage rates, but who cannot qualify through conventional lending due to loss in property value. Reducing mortgage rates provides lower monthly payment and can help struggling families stabilize their finances.

FHA and Public Policy: Who Gets to Own a Home

FHA is facing the “next wave” of mortgage foreclosures in 2010-2011; this is the result of its rapid growth and inability  to effectively monitor mortgage lenders in the wake of the collapse of sub prime lending.  Coupled with less than mandatory reserves for paying claims for defaulted mortgage loans, this is causing legislators to question whether FHA should up the ante on its lending requirements at the expense of potential borrowers who cannot meet higher underwriting standards. Although it’s true that many people aren’t financially prepared for owning a home, should we eliminate hard working Americans who cannot afford a 10 or 20% down payment, but who have decent credit and steady employment  from owning homes?

The FHA Commissioner reaffirms the agency’s role in helping under served buyers and homeowners seeking refinance mortgage loans, and claimed that risk based pricing is not an option for FHA mortgage loan programs, as it would adversely impact under served communities.

Cyclical Trends: When Conditions Improve, Will FHA Role Decrease?

As real estate markets and employment levels improve, the theory goes that conventional  mortgage lenders will be exposed to less risk, and therefore may loosen credit criteria as default levels fall. Unfortunately, we have no guarantees, and it seems likely that FHA loan programs will continue providing a safety net for borrowers who otherwise cannot qualify for mortgage loans and refinancing options.

Those who have been worrying FHA mortgages and falling home prices might want to take a look at the congressional testimony given last week by FHA Commissioner David H. Stevens.

Stevens had some surprising remarks regarding home values, numbers not seen previously.

“As measured by the widely referenced FHFA index, home prices have been rising more or less steadily since last April. As recently as January of 2009 house prices had been projected to decline by as much as 5 percent in 2009 by leading major macro-economic forecasters. This is all the more surprising since most forecasters had underestimated the rise in unemployment that has occurred over the past year.

“Homeowner equity started to grow again — increasing by over $900 billion by the end of September, or $12,000 on average for the nation’s nearly 78 million homeowners, and helping our economy grow at the fastest rate in six years in the fourth quarter of last year.

“And mortgage rates which have been at or near historic lows over the past eleven months have spurred a refinancing boom that has helped nearly 4 million borrowers to save an average of $1,500 per year on housing costs — pumping an additional $7 billion annually into local economies and businesses, generating additional revenues for our nation’s cities, suburbs, and rural communities.”

NAR Numbers Down

The Stevens figures contrast mightily with the numbers released by the National Association of Realtors last month.
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