HUD mortgagee letter 2010-20 outlines new minimum net worth requirements for FHA lenders, and also phases out the loan correspondent program, which allows mortgage brokers direct approval authority. HUD approved lenders will now have to sponsor mortgage brokers and be fully accountable for any loans underwritten by sponsored loan correspondents.

FHA is changing its requirements in response to losses incurred after the demise of sub-prime lending caused FHA to take on a much larger share of new home loans. Rapidly increasing home loan volumes caused some FHA lenders to overlook underwriting criteria, which has caused FHA cash reserves to fall below required minimum levels. New FHA regulations are designed to reduce faulty lending practices and hold FHA lenders accountable for errors in underwriting and loan approvals.

FHA Guidelines: How they Help Buyers and Homeowners

Mortgage loans can last for decades and are typically the largest investment made by consumers. Problems with your mortgage loan can  impact your finances and may also lead to legal problems if FHA suspects that your mortgage was obtained using fraudulent information. Rogue mortgage lenders may commit mortgage fraud without consumers’ knowledge, but if you sign a fraudulent mortgage loan application or other documents, you may be held criminally liable for mortgage fraud.

Mortgage Lender Requirements Reduce Mortgage Fraud

FHA is phasing out its loan correspondent program, and will soon hold FHA lenders accountable for all FHA loans originated whether through sponsored loan correspondents or their own underwriting. Critics of the plan for phasing out loan correspondents suggest that this could impact buyers and homeowners by providing fewer sources of FHA loans. Although this is possible, it will also weed out third party loan originators who don’t follow FHA guidelines. FHA lenders working under the new criteria will have to demonstrate increased net worth and will also be held directly liable for losses stemming from non compliance with FHA requirements.

FHA Loans: Avoiding Problems

Dealing directly with an FHA lender in your area can help prevent problems with your loan application and documentation. Be proactive in protecting your interests:

• Ask questions, and more questions: If you’re concerned or confused about any aspect of your mortgage loan or the application process, don’t be shy. Ask questions and make sure that your concerns are addressed before signing anything.
• “Don’t worry about that” means you should worry: Don’t do business with a lender that suggests signing documents in blank or doesn’t take your questions seriously. Your signature on a mortgage loan application or other loan documents indicates that you have read, understand, and agree to the information contained in the documents you’re signing.
• Review documents before signing: Verify the information contained on documents you’re asked to sign. Make sure the loan amount, terms and your personal information is accurate. Pay close attention to your income and deposit information; if it’s inaccurate, ask to have it corrected.

FHA guidelines are designed to protect you, FHA lenders, and the agency from unnecessary risk and losses associated with foreclosure.

In New York the state attorney general, Andrew Cuomo, has sent cease and desist letters to more than 200 mortgage rescue companies.

I bring this up because if you’re an FHA loan borrower you don’t have to be involved with mortgage rescue companies. Here’s why:

One reason comes from the Cuomo letter. While rules concerning mortgage rescue companies vary by state, Cuomo has the right idea in general:

“Mortgage rescue companies,” says the NY attorney general’s office, “target homeowners facing foreclosure by claiming to be able to modify home mortgage loans and lower monthly payments. Often, these companies engage in deceptive and illegal marketing practices to lure customers and then fall short on their promises. After using a mortgage rescue company, homeowners can find themselves in worsened financial circumstances and at greater risk of losing their homes.”

Here are some of the practices cited by Cuomo which are prohibited in New York state as well as many other jurisdictions:
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The Wall Street Reform and Consumer Protection Act is now shaping up and at this writing a big winner is the FHA mortgage program. Given new rules FHA loans are going to become very popular, very quickly.

To see what’s going on here, we first have to start with the reality that the measure runs 1,616 pages. Deep inside the legislation is language which creates what will be known as a “qualified mortgage.”

A “qualified mortgage” is a home loan with certain characteristics. It does not allow negative amortization, prepayment penalties or require a balloon payment. The loan application must be fully documented.

If you’re a lender and want to originate qualified mortgages because there are big penalties if you don’t. For instance, you have to set aside 5 percent of the mortgage amount in a reserve. That may not sound like a big deal but bigger reserves reduce the ability of lenders to make loans, which means that bigger reserves also reduce the ability of lenders to make profits.

Oh, and if a loan is not a qualified mortgage then read more

Buying a home with FHA is a bit different than buying when financing with a conventional mortgage. The government wants the purchase done in such a way that it minimizes your risk of losing the home, and the FHA having to pay a claim if you default. So there are some provisions that must be part of your contract when you buy a home using an FHA mortgage. read more

If you’re a first-time home buyer, you probably won’t keep your new home more than a few years. So why pay a higher interest rate than necessary? FHA ARMs and hybrid ARMs offer low interest rates, plus protections that ordinary ARMs don’t. To understand the advantage of FHA ARMs over ordinary ARMs, you first need an idea of how ARM rates work. read more

FHA insured reverse mortgage loans, also called Home Equity Conversion Loans (HECM), are coming under scrutiny as delinquency rates for property taxes on these loans are increasing. Although FHA faces a potential public relations nightmare if it authorizes more foreclosures reverse mortgage loans, there are genuine risks stemming from reverse mortgage borrowers failing to pay property taxes and hazard insurance. Here’s why. read more

For some time there have been loud worries that if the FHA defaults then taxpayers will have to bailout the program. Now, officially, the government says this can’t happen.

The new 2010 FHA Reform Act says the FHA is bailout-proof.

The very last item in the bill is Section 26 which tells us there is now a “Prohibition on Taxpayer Bailout of FHA Program.”

This is an absolute bunch of nonsense. Let me explain why.
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When last we left off with the tax credit, it ended for most buyers and sellers as of April 30th. The exception is for active-duty military personnel serving outside the US, individuals who have until April 30, 2011.

So if the tax credit ended April 1st what happened to FHA mortgage volume in May? Should it not decline?

Funny the question should arise. Before the end of the tax credit — as much as $8,000 for first-time home buyers and $6,500 for sellers — I would have argued that sales and FHA loan originations would slip significantly in May. Indeed, I did make that argument.
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The Washington Post reports the urgency of federal agencies in attempting to recover billions of dollars lost in a mortgage fraud scam perpetrated by a now defunct mortgage lender. Legal experts doubt that parties affected will fully recover their losses, and HUD inspector general Kenneth Donohue estimates that government housing agencies FHA and Ginnie Mae could withstand losses totaling $3 billion. read more

FHA’s reverse mortgage program, the Home Equity Conversion Mortgage (HECM), lost $798 million in 2009, and the agency wants to prevent a recurrance. This is the first time the HECM program incurred losses. To combat this, FHA has toughened up its enforcement of property tax and home maintenance requirements on seniors. They used to let you slide a bit if you didn’t pay your property taxes or let the property get scroungy. Today, you are far more likely to lose your home if you neglect to take care fo these things. Here’s why. read more

Despite the efforts of several Congresspeople, FHA borrowers will not be required to put up more than 3.5% for a down payment as long as their credit scores are 580 or higher. Amendment after amendment that included higher down payments went down in flames. Is it due to the devilish work of the evil Empire itself, the National Association of Realtors? Is it because too many in office felt the need to suck up to FHA borrowers? Probably not. read more

FHA offers a great opportunity for home renovation enthusiasts with its combined home purchase and repair loan, also known as the FHA 203(k) loan. This mortgage loan program provides funding for buying and repairing a home based on the home’s estimated value once necessary repairs have been completed.  For those seeking to save money by buying a home in as-is condition, this FHA loan program can save time by eliminating the step of getting a separate loan for repairs. It also solves the dilemma of trying to finance a property in sub-standard condition. read more

With the passage of the 2010 FHA Reform Act in the House, it might be good to remember that such legislation is an alternative to what was proposed — and actually what passed — four years ago.

The 2010 proposal gives the FHA the right to increase the annual mortgage insurance premium from .55 percent to 1.5 percent. The legislation also gives the FHA more ability to go after lenders who originate FHA loans through the use of fraud and misrepresentation.

But, FHA “reform” could have been very different. In 2006 the House of Representatives passed The Expanding American Homeownership Act (H.R. 5121) on July 25 with a vote of 415 to 7. The measure failed in the Senate.

Good thing.
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As part of a legislative bill being debated in the US House of Representatives, FHA is being asked to find solutions for controlling so called “strategic defaults.” Strategic default occurs when mortgage borrowers walk away from mortgage loans they are capable of paying. This typically occurs in areas where home values have steeply declined, leaving homeowners to pay mortgages of significantly more than their homes are worth. read more

The April numbers from the FHA show a disturbing trend, an 80-percent increase in serious loan delinquencies.

In April 2009 the FHA had 293,275 loans that were at least 90 days behind. This April the number swelled to 527,504 — an increase of 79.9 percent.

The good news here is that the FHA mortgage program does a very good job in the “cure” department — that is, most delinquencies do not wind up in foreclosure and that means big claims against the reserve fund are avoided. In fiscal 2009, for example, the FHA annual report shows that “82.7 percent of the HUD-held loans that are 90 days or more delinquent were brought under control.”

The not-so-good news is this: If 17.3 percent of 293,275 delinquent loans are not cured it means government must deal with 50,737 foreclosure claims. If 17.3 percent of 527,504 loans are foreclosed it means there will be 91,258 claims and potentially billions of dollars in additional liability.

Unfortunately, the odds are that the delinquency rate is about to rise and the cure rate is about to go down.
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