FHA commissioner David H Stevens believes that the lack of private capital in the US housing industry indicates a “very sick system.” FHA is the predominant source of mortgage loans for low and moderate income families; Stevens thinks it’s time for private mortgage lenders to provide more mortgage loans to those without a 20% down payment. Stevens characterizes the 20% down payment as an obstacle keeping  private capital from flowing back into the housing markets. Unwilling to risk losses on mortgage loans with less than a 20% down payment, private lenders are all but leaving the niche for low and moderate income buyers and homeowners to FHA.

Mortgage Loans: The Times (and the Economy) are Changing

For years, the 30 year fixed rate mortgage loan provided a stable and affordable method for buying a home or seeking a mortgage refinance. With many borrowers taking advantage of today’s low mortgage rates for refinancing to fixed rate mortgages, others may be left on the sidelines. Today’s typical conventional home loan generally requires a minimum down payment of 20% and good to excellent credit. Borrowers with less than great credit and less cash for a down payment may find an FHA mortgage loan their only option. In view of changing economic conditions, traditional lending guidelines may no longer meet the needs of moderate income buyers with fair to good credit scores. Factors including unemployment, volatile financial markets, and loss of income have caused many individuals to lose their savings and favorable credit standing. Higher living expenses,health care, and education costs coupled with diminishing returns on savings and investments are making it more challenging for otherwise qualified borrowers to save 20% down.

It’s time to consider new ideas for mortgage lending, and that doesn’t mean loosening all lending requirements and giving away the store. If the sub-prime crisis taught us anything, it’s that responsible lending doesn’t involve having people sign mortgage papers and filling in the blanks later. Mortgage fraud and lax lending practices by FHA lenders lead to additional FHA oversight and regulation, and increase FHA risk for losses associated with mortgage defaults.

FHA Shouldn’t be Lending to Everybody and Their Brother

Although FHA functions as the residential housing finance arm of the US Department of Housing and Urban Development, the agency was never intended to take over the low to moderate income home loan market. Without involvement from private lenders, FHA may be absorbing too much risk while gaining influence in communities and the mortgage lending industry. A balance of private enterprise and government participation is necessary for addressing concerns about FHA exposure and influence in US mortgage lending.

The government has begun to enforce FHA regulations in a way not seen during the past decade, if seen at all. Some 360 lenders are now toast as a result of tougher HUD enforcement.

“Under the Obama Administration,” says FHA Commissioner David H. Stevens, the “FHA has significantly increased its lender enforcement activities to protect the MMI Fund, consumers, and address a number of bad actors that were previously not held accountable.

“Since July 1, 2009, the Mortgagee Review Board (MRB) has investigated 365 cases, resulting in withdrawal of approval for 354 lenders and suspension of an additional 6 lenders. The number of cases that have been investigated by the MRB since July 2009 are greater than those investigated in the years 2002-2008 combined. We take our responsibility to oversee lenders with the utmost seriousness. I would also like to emphasize that FHA’s intent is to protect the Fund through a commitment to lender enforcement, but FHA in no way intends to punish responsible lenders. We are working closely with lenders to identify best practices and share them among the lending community, proactively identify problem situations and identify means to improve performance, to the benefit of lenders, consumers, and the FHA.”

There’s nothing subtle in Stevens’ remarks. First, lenders who submit less-then-pristine FHA mortgage applications are now more likely to lose their right to underwrite FHA loans then at any time in the past. This is significant because FHA loans now represent about 30 percent of all purchase money mortgages and 20 percent of all refinancing. If you’re a lender and do not offer FHA mortgages then a large part of the market is off-limits, meaning that you’re likely to lose both revenue and mortgage loan officers.
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A proposed amendment by U.S. Sen. Claire McCaskill offering enhanced consumer protection for reverse mortgages failed to make the version of the financial reform bill that passed the Senate last week. McCaskill’s amendment was in response to questions about the safety of reverse mortgages for seniors. What are the risks of reverse mortgage loans, and are FHA reverse mortgages–also known as home equity conversion mortgages, which make up the vast majority of reverse mortgages–safe for consumers? read more

FHA mortgage volume fell substantially in April, news that was easy to call. As I wrote:

“The federal government’s tax credit for first-time homebuyers is now over and done, a program that largely ended April 30. The result is that a housing market that had begun to stabilize will now be set back as demand wanes, meaning that prices will soften. For buyers and investors the good news is that there will be less competition for short sales and foreclosures.

“The tax credit was worth as much as $8,000 for first-time buyers who purchased before April 30, 2010, however members of the military serving overseas were given until April 30, 2011 to qualify. In addition, there was a provision giving a $6,500 credit to home sellers.” (See: Are We Headed For A New Real Estate Decline?)

For April, HUD says the government received 215,578 FHA mortgage applications — that’s a big number but it’s also a number that’s down 23.1 percent from April 2009. Endorsements didn’t fare any better: 126,316 FHA mortgages were approved, a drop of 22.2 percent from a year ago.

Amazingly enough the numbers for FHA loans may actually be better than those for the private sector.
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Some of you lucky dogs have people willing to give you money to help with your mortgage down payment. But how does an FHA lender feel about that?

First, gifts or down payment assistance can’t be from just anyone with a fat wallet. Sellers, real estate agents, or anyone else who profits from the sale can’t “gift” you with down payment money. Private party down payment assistance plans, like the Nehemiah program, were eliminated back in 2008. Per FHA’s guidelines: read more

Condos in many real estate markets have taken a beating lately. Conventional lenders charge more to finance them, mortgage insurers shun them, and as of February 1st, FHA no longer allows “spot” approvals of individual units. This means that selling a unit to anyone with less than 20% down is a challenge. Which creates a bigger supply, a smaller demand, and perhaps further price erosion. Bummer. read more

The latest numbers from HUD show a strong rise in FHA mortgage loans for condos. As of March, says HUD, 53,799 condo loans had been originated, up 35 percent from the same period a year earlier.

When it comes to mortgage activity we usually like to see “up” as better than “down” but in this case there’s some room for concern. Yes, FHA loans for condo buyers and owners have increased, but some portion of that increase is a result of rule changes — rule changes which also raise FHA risk.
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In an address sponsored by the National Association of Realtors (NAR), FHA commissioner David Stevens noted positive signs of recovering housing markets. Although increasing sales can be partially attributed to the expired federal tax credit program, Stevens also noted that private capital is returning along with investor confidence in housing markets. Stevens also cited signs that employment is improving in some areas, a major factor influencing consumer confidence toward buying homes. read more

A  recent blog post for the Huffington Post proposes merging Fannie Mae and Freddie Mac, and eliminating their public purpose mandates for making home ownership accessible to low and moderate income borrowers. From the position of reducing government spending and duplicated efforts, the merger may make sense; Jerry Chautin, the post’s author, points out that FHA already serves low to moderate income borrowers with its mortgage insurance program. This seems to suggest that were Fannie and Freddie to merge, FHA would assume these agencies’ roles for serving low to moderate income families and communities. read more

According to TheStreet.com, “now that the subprime market is temporarily dead, FHA loans have become, in some respects, the ‘new subprime,’ with borrowers making down payments as low as 3.5%, and qualifying for lower rates than conventional borrowers.”

Really? Is this true?
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FHA Commissioner David H Stevens addressed Senate lawmakers with comments concerning the role of the federal government in the mortgage loan industry. After the sub-prime market crashed in 2007, the market share of FHA loans has grown from less than 10% to 30% or more. FHA also insured approximately 20% of mortgage refinance loans in 2009, which assisted approximately 800,000 families obtain stable, affordable mortgage loans. Citing the fragile US housing market, Stevens noted that FHA must not disturb the markets with “aggressive actions.” read more

There have been worries that the FHA mortgage program will be changed to include a steeper down-payment and a higher annual MIP. The way the world is going such changes would be minor compared to what’s going on with other loan concepts.

Remember the interest-only loan? Something not offered by the FHA for the obvious reason that such financing is risky for all but the best-qualified borrowers.

Now Fannie Mae has come out with new standards for interest-only mortgages. It says the company “will continue to make available an interest-only loan product, but will change its qualification criteria. The maximum loan-to-value ratio cannot exceed 70 percent, the borrower’s credit score must be 720 or higher and the borrower must have a minimum of 24 months of liquid asset reserves remaining after loan closing. Balloon mortgages, which typically offer lower initial interest rates but leave a significant balance due at maturity, will no longer be eligible, except with special approval.”
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On May 20th, FHA will stop evaluating and tracking the performance of the nearly 10,000 mortgage brokers that originate FHA mortgages. The agency claims that it creates an undue burden and that the private sector can do a better job policing these outfits. Instead, lenders that want to work with brokers will have to sponsor them, and they will be held responsible for what their brokers do. It’s the lenders that will eat the fallout of any brokered loans that go sideways. read more

A few years ago, FHA had less than six percent of the mortgage market share. As a loan officer during that time, I would run the numbers for my clients, and the results almost never indicated that FHA was the more economical option. Back then, you could get get an FHA mortgage with only 3% down, but you could get a Fannie Mae or Freddie Mac 97% loan as well. The Fannie or Freddie mortgage didn’t require an upfront mortgage insurance premium (MIP). And real estate agents hated FHA because they took longer and insisted on silly stuff like lead paint disclosures. Didn’t want to bring in even 3%? No problem, your Alt-A lenders didn’t require any down payment at all. And if you went further down the food chain, to sub-prime, you didn’t need to prove that you had a job, either. We had loan officers in our office who couldn’t even spell FHA. read more

In a recent news feature, CBS 60 Minutes covered a trend that could compromise improving housing markets. Homeowners faced with paying off mortgages worth considerably more than their homes are worth are simply walking away from their homes and mortgage loans. read more