Homeowners struggling with mortgages of more than their homes are worth are said to be “underwater.” We’ll continue the marine theme by pointing out that in spite of FHA’s good intentions, its short refinance program is likely to function as an anchor rather than as lifesaver, tossed to drowning homeowners who can’t refinance to current low mortgage rates. read more

Over the weekend there were big doings in Washington. Duel demonstrations on the anniversary of the “I have a Dream” speech by Dr. Martin Luther King showcased many of the divisions which continue to separate our political thinking.

Meanwhile, on CNN’s “State of the Nation,” HUD Secretary Shaun Donovan told interviewer Candy Crowley that “we’re going to be rolling out an FHA mortgage refinancing effort to help borrowers who are under water in their homes get above water. And second, we’re launching an emergency homeowners’ loan program for unemployed borrowers to be able to stay in their homes.”

This is all good stuff. It’s also all old stuff and unworkable stuff. read more

Writing in the Financial Times, economist Charles W. Calomiris suggests that we raise down payment standards by 1 percent per year until all loans require 20 percent down.

Calomiris, the Henry Kaufman Professor of Financial Institutions at Columbia Business School, says in time “FHA mortgage guarantees would end, Fannie and Freddie’s assets would be sold into the market, and Federal Home Loan Banks would also be phased out.”

If the goal is to have less risk then surely Dr. Calomiris is right. More down means less risk for lenders and a greater willingness by borrowers to assure that homes do not go to foreclosure.

That said, is 20 percent down the magic number?

Right now you can get a freshly-minted FHA loan with 3.5 percent down. That’s surely a lot less than 20 percent but the down payment is not the whole story. With the FHA program borrowers trade less down for payments into an insurance plan.

To date the FHA program has worked very well — the program was started in 1934 and has insured more than 37 million loans. But what about raising down payment levels? Should the FHA move in that direction? read more

For home buyers, housing news is both good and not so good with MSNBC reporting prices of existing homes falling to 15 year lows and ongoing coverage of FHA mortgage insurance premiums being raised. For those buying their first homes, the combination of lower home prices and lenient FHA guidelines can make buying a home affordable. Unfortunately, many would-be buyers remain fearful of their job security, and are putting off buying until the economy and related employment figures stabilize. What should you do? We can’t offer any definite solutions, but these factors can help with exploring your options: read more

There seems to be a considerable amount of confusion regarding the new FHA loan fees scheduled to start in October and how they will impact individual borrowers.

The Wall Street Journal headlines that “Red-Ink Fears Prompt Mortgage Backer to Raise Fees.”

The FHA, says the paper, “will raise annual insurance premiums to as high as 0.9% of the loan amount, up from 0.55%. For new borrowers, that would translate into an average monthly payment increase of $40. At the same time, it will drop the upfront premium that borrowers pay when they take out a mortgage to 1%, from 2.25%.”

Alternatively, you can see these numbers very differently.

To start read more

On September 7, 2010, FHA’s latest loss mitigation project goes into effect. This is the FHA Short Refinance program. If you have a loan with a negative amortization feature or just live in an area devastated by foreclosures and plunging home values, you may be able to refinance into an FHA loan and get a principal reduction too. This program is not for those who have problems affording their mortgage and are in trouble; it’s for those who are underwater but otherwise okay. In other words, if you’ve been considering a strategic default, buy-and-bail, or other dirty trick, this program is for you!

To be eligible, your current loan should not be an FHA mortgage (because if it was you’d have been able to streamline refinance without an appraisal or credit check, or you’d be eligible for FHA-HAMP). You have to be current on your mortgage. If not, go directly to FHA-HAMP or other loss mitigation services. You have to be able to qualify for a new mortgage under FHA’s current underwriting standards.

read more

In the past, a luxury condominium development would not have sought out FHA approval for a couple of reasons. First, very few fell into the price range that would make an FHA loan a feasible alternative. Second, being approved for government financing did not project the aura of exclusivity that the sellers wanted; if anything, FHA approval was a detriment, a label that packed a low income stigma not compatible with concierge service, spas, and rooftop garden lounges.

That’s all changed. read more

One of the most frequent subjects I find online regarding the FHA loan program is that it is the equivalent of subprime financing and that the FHA will soon go bust.

The first one is easy to tackle: The Mortgage Bankers Association reported in May, the latest figures available, that “the seasonally adjusted delinquency rate increased for all loan types with the exception of FHA loans. On a seasonally adjusted basis, the delinquency rate stood at 6.17 percent for prime fixed loans, 13.52 percent for prime ARM loans, 25.69 percent for subprime fixed loans, 29.09 percent for subprime ARM loans, 13.15 percent for FHA loans, and 7.96 percent for VA loans.”

So, no, FHA loans are not having subprime problems.

But what about an outright bust? Could the FHA read more

FHA currently insures the majority of mortgage loans for first time home buyers; FHA guidelines allow for a 3.5 percent down payment compared to the 20 percent minimum typically required for a conventional mortgage loan. Cash-starved first timers may be more likely to qualify for a mortgage loan under flexible FHA requirements, but you’ll still need to come up with some cash. When planning to buy your first home, these ideas can help with meeting your up-front mortgage costs.

• Cash gifts: FHA allows borrowers to use cash gifts from relatives and friends as a source for down payments and closing costs. The donor must document that the amount given is a gift and is not expected to be repaid. Gifts in excess of $13,000 for an individual and $26,000 for a couple are subject to income taxes. Consult a tax accountant or financial advisor for more information on tax liability.
• Second job or home based business: Use your professional expertise to offer consulting, tutoring, lawn care or whatever skills you have. Direct extra income from these activities to a savings account dedicated to your home purchase. Although the job market hasn’t recovered, word-of-mouth “gigs” may be easier to land. Put the word out among friends and associates that you’re looking for extra work.
• 401(k) or IRA Accounts: Some employer sponsored 401(k) retirement plans allow for taking loans from your account. This shelters the funds from taxes, and ensures that you’ll put the funds back into your retirement account. You may also qualify for a tax-free withdrawal from your IRA or 401(k) for buying your first home. Ask your retirement plan administrator for details of what your plan allows.
• Direct deposit savings accounts: Set up a savings account specifically for saving for a home. Arrange direct deposits coinciding with your paydays. if you need help with budgeting, contact a HUD approved housing counselor for assistance.

State and local home buying assistance programs: Start with your state’s housing finance agency, and also ask local real estate agents and mortgage lenders about city and county based home buyer assistance programs. These programs are generally  limited to first time buyers and income eligibility guidelines, but can provide low cost loans for meeting your down payment and closing costs. In some cases, these loans don’t have to be repaid until you vacate the home you’re buying.

FHA Guidelines Promote Owning a Home

FHA guidelines are designed for making owning a home accessible to moderate income families and individuals. Taking time to ensure that you’re ready to buy a home and make mortgage payments helps to ensure that you’ll find an affordable home that you can enjoy for years.

When it comes to the FHA program there’s a constant worry that FHA lending guidelines are not tough enough, that the FHA should require more from borrowers to hold down program risks.

It was in January that HUD said new FHA borrowers would need a credit score of at least 580 to borrow with 3.5% down, a score below the magic 580 would require a 10 percent up front.

Now we have the new FHA short refinance program for underwater borrowers, a program which has no possibility of working. This plan says that borrowers need at least a credit score of 500 to qualify, not that it will matter. (The program won’t work because the borrower must be current on the mortgage and the lender must be willing to reduce the mortgage balance by 10 percent. Why a lucid lender would agree to reduce the principal balance on a performing loan is entirely unclear.)

Why HUD has established such minimum credit score standards seems curious. In the case of the 580 requirement it’s certain that read more

As we reported August 5th, the FHA said it would move to a new set of mortgage insurance premiums beginning September 7th. However, the start date has now been pushed back to October 4th, according to Vicki Bott, HUD’s deputy assistant Secretary.

“Last week, FHA Commissioner David H. Stevens announced plans for implementing FHA’s new mortgage insurance premium structure,” says Bott. “As we work to publish a Mortgagee Letter, it is our intention to announce that based on industry feedback and our desire to have this change implemented successfully in the marketplace, FHA will make the premium fee changes on all new case numbers effective October 4, 2010.

“Over this past week, the industry responded with support of the new fee structure, but voiced strong concern about having system changes ready in time to meet the original September 7, 2010 deadline. Since these system changes impact regulatory disclosures, lenders expressed they must have the additional time to implement and test systems. FHA took this feedback seriously and has accommodated the need for additional time.”

For a complete explanation of the changes to the FHA loan guidelines, please go to:

New FHA Fees To Start In September

HUD and FHA have finally grasped what the mortgage lending industry seems slow to accept. Mortgage lenders can reduce mortgage rates, add past due payments to mortgage balances, and extend mortgage terms, but unless you address dramatic drops in home prices, loan modifications are likely to fail.

Owing more on a mortgage than your home is worth creates problems including inability to relocate for a new job, and losing potential buyers when mortgage lenders take forever and a day to approve a short sale. Homeowners faced with owing more than their homes are worth have less incentive to continue making payments, and in some cases are choosing “strategic default” and walking away from a no-win situation. read more

As if the loan limit system for FHA loans is not sufficiently complex, Sen. Charles E. Schumer (D-NY) has proposed a new loan limit for apartment units financed with FHA-backed loans.

At this time the FHA cap is $214,421 per unit for high cost areas, yet the average cost per unit in New York City is $419,000 according to Schumer. As you can guess, there’s not a lot of FHA financing being used to create new units in the Big Apple or other high-cost metro areas. Schumer says that in 2006-2007 only three high-rise multi-family development projects were insured read more

With all the talk recently about the FHA short refi, (not) coming to a bank near you, the short refi that can actually be done has gotten short shrift. It’s a little gem called an FHA streamline refinance with no appraisal. read more

In case you’re interested, here are the 2 steps involved for participating in this program:

1. You, a homeowner with a non-FHA mortgage that you are paying as agreed, ask your current mortgage lender to write down your outstanding balance by at least 10% so that you can replace the loan with an FHA mortgage.

2. Your lender says no. read more