You can get an FHA adjustable-rate mortgage with no problem. Indeed, given a lower start rate it might even be easier to get than a fixed-rate FHA loan product. That said, FHA ARMs are going the way of the dodo.

To get some sense of what’s happening consider BB&T bank, a major lender based in Winston-Salem, NC. Founded in 1872, BB&T says it was among the 10 largest financial-holding companies in the nation with $165.8 billion in assets as of Dec. 31, 2009.

You don’t hear to much about BB&T in terms of the mortgage crisis because this is a bank which acts differently. It has never offered toxic loans and it refuses to finance developers who have acquired private land through public condemnation — something now allowed under the infamous Kelo decision.

We will not, said BB&T, “lend to commercial developers that plan to build condominiums, shopping malls and other private projects on land taken from private citizens by government entities using eminent domain.”

Other lenders should be so bright.

Now BB&T is again doing something different read more

The Wall Street Journal reports that FHA may be planning to reduce its loan limits for high cost housing markets. Unless FHA extends the current mortgage loan limits, FHA loan limits in high cost areas could fall to $625,000. This amount may provide many homeowners with the mortgage amounts needed to purchase pricier homes, but in areas such as New York and San Francisco, borrowers may be limited to conventional mortgage loans. read more

Folks at Zillow studied over 25,000 loan inquiries and concluded that most people did not qualify for the lowest mortgage rates available. This is attributed to the changing lending environment as well as tough economic times taking their toll on borrowers’ credit scores.

Conventional mortgage pricing penalizes more than it used to read more

FHA’s “Short Refi” voluntary program was designed for sound bites I think but not to provide any real help. It sounds good: Prevent borrowers from walking away from underwater mortgages by refinancing them to a new mortgage of less than the property’s value. The incentive to walk away goes away. The lender gets a potential problem off its books. Everyone can exhale. Right?

Wrong. The fatal flaw of the new refinance program is the word “voluntary.” read more

For the past year or so various critics have said that the FHA would soon need taxpayer money to support its programs. Such dour predictions have turned out to be wrong, happy news for those who pay — or hope to pay — FHA mortgage insurance premiums.

Speaking before the House Financial Services Committee last week, FHA Commission David H. Stevens said that instead of a loss, the FHA’s Mutual Mortgage Insurance FUND (MMI) actually has grown.

“Last year at this time,” sais Stevens, “the independent actuaries predicted that we would draw down $2.6 billion of capital resources over the first three quarters of this year to pay for rising claim expenses. As noted in our third quarter MMI Fund report to Congress, instead of decreasing by $2.6 billion, net income increased by $450 million. Once we add interest earnings to core insurance income, our capital resources grew by $1.3 billion in the first three quarters of this fiscal year.”

Instead of the predicted $2.6 billion loss FHA wound on it’s forward mortgage program, the government wound up with an additional $1.3 billion — that $3.9 billion more in total than doom sayers predicted.

FHA Mortgage Insurance

This is important for FHA loan borrowers because if reserves fall to the point where taxpayer help is needed you can bet that read more

The announcement by the National Bureau of Economic Research that the recession ended in June 2009 was a stunner.

According to the group, it determined that a “trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.”

I read this and thought what you’re now thinking: Are you kidding me?

It sure doesn’t seem like the recession is over. I live read more

Okay, I’ll admit that I am watching Monday night football while writing this post, but I have only had one beer. And it’s true; if you want to build Rex a doggy dream palace (or a proverbial hideout for errant husbands), you can. Smaller projects come under the auspices of FHA’s Title 1 financing, and loans under $7,500 don’t even require a lien against your property. Loans on single family homes may be used for alterations, repairs and for site improvements. And, per FHA, “The Title I program insures loans to finance the light or moderate rehabilitation of properties, as well as the construction of nonresidential buildings on the property.“

You can apply at any lender (bank, mortgage company, savings and loan association, credit union) that is approved to make Title I loans. Many FHA lenders offer this loan. What are the interest rates like? A little higher than real estate loans, more in line with personal loans (remember that loans in smaller amounts don’t require a lien against the property). I did a quick search online and found that Title 1 rates run between 8% and 11%, depending on the loan’s term. You may be able to do better by requesting a quote from lenders on this site.

FHA’s Section 207/223(f) program insures loans on apartment buildings. And you though FHA was only for primary residences! Loan terms of up to 35 years and government backing keep qualified buildings affordable to landlords, which keeps rentals available and affordable for tenants. read more

The LA Times is reporting that FHA may implement changes to its reverse mortgage program that would cut up-front costs, but potentially increase the overall cost of FHA reverse mortgage loans. FHA has long been viewed as a safe source for reverse mortgage loans, which allow homeowners of age 62 and over to pay off their existing mortgages and/or draw on home equity for cash income. Although the theory of reverse mortgages may work, there are complexities and scams associated with reverse mortgages, and consumers tend to view FHA backed reverse mortgages as a safe option. read more

How should we modernize the FHA? Do we need to? The Mortgage Bankers Association says yes on both counts and argues that FHA loan limits should be reduced once the housing market returns to normal.

The significance of FHA, says the association, “has been underscored with the recent mortgage crisis that began in late 2006 and resulted in the retreat of the private sector and an illiquid mortgage market. FHA’s counter-cyclical role has proven invaluable to maintaining liquidity in the mortgage market and has helped buttress the country’s unstable housing finance system.”

This is important stuff because it acknowledges the important roll played by the FHA program during the mortgage meltdown. While some commentators have been calling for an end to the FHA, the MBA at least acknowledges the necessity and value of the program.

At the same time, the MBA makes this point:

“A wake-up call for FHA and the lending community occurred in September 2009, however, when the U.S. Department of Housing and Urban Development (HUD) announced that the capital reserve ratio for the Mutual Mortgage Insurance (MMI) Fund — the largest of FHA’s four insurance funds — had dropped to 0.53 percent of the Fund amount, well below the requirement of two percent from the 1990 Cranston-Gonzalez National Affordable Housing Act. While not a reason to panic, the Fund’s reduction publically signaled to FHA and the mortgage industry that changes must be made. With the withdrawal of the private sector, FHA’s market share has continued to increase and is close to 30 percent of all loan originations and has reached as high as 50 percent of purchase mortgage applications in parts of the country.” (Emphasis mine.)

FHA Loan Limits

What would the MBA change? One idea is to reduce FHA loan limits once real estate markets begin to return.

The “MBA supports a decrease in FHA’s loan limit after the stabilization of the housing market and a return of private financing.”

In addition, says the Association, “a mechanism should be developed so that loan limits bear reasonable relationship to median home prices to encourage both government and private lending.”

I’m unclear why an association which champions private enterprise feels the government should do anything to encourage private lending. That surely sounds like a job for, well, private lenders.

As to lower loan limits, the FHA program is really designed and intended for entry level borrowers and those who want to refinance. However, you can now get an FHA loan for as much as $729,750 in high-cost areas. As the MBA points out, “homebuyers who are able to qualify for loans at the upper loan limit in high-cost areas need to have an income of approximately $183,000, assuming a 4.5 percent interest rate.”

Given that we now have 43.6 million people who live in poverty, it makes sense for the FHA to concentrate on its traditional role once markets return to normal, especially now that we have new mortgage rules to protect borrowers under the just-passed Wall Street reform legislation.

In August I wrote about credit score standards and how they were changing in practice as well as by regulation. Now we have new FHA guidelines which say that after October 4th you won’t be able to get an FHA loan with a credit score below 500, regardless of how much you put down.

The new standards look like this read more

The Louisiana Weekly reports concerns registered by the Center for Responsible Lending (CRL) and other community and housing advocacy agencies in response to pending changes to FHA loan guidelines. The controversy stems from FHA’s need to shore up its reserves after a wave of mortgage foreclosures drained the agency’s fund for reimbursing lenders to well below its legally required minimum.

Critics note that changes designed to cost mortgage borrowers more at the closing table or add to their monthly mortgage payments are counterproductive for providing affordable housing to low and moderate income families.

FHA loan guidelines: Housing advocacy agencies propose their own changes

The CRL asserts that the recent foreclosure crisis was caused not by low income borrowers, but instead by the greed driven actions and decision making by certain mortgage lenders and brokers; it notes that proposals for raising the minimum credit score requirement and charging higher mortgage insurance premiums up front and annually will obstruct the path to buying a home for some. CRL recommends the following changes as alternatives to FHA’s current plans:

• Eliminating the “yield spread premium” paid by mortgage lenders to mortgage brokers: If adopted, this would prevent mortgage lenders from paying premiums to mortgage brokers who originate high cost mortgage loans.
• Increasing oversight over FHA approved mortgage lenders: CRL recommends intensifying scrutiny of FHA approved lenders to prevent excessive mortgage loan fees, and is requesting additional preventive measures for reducing the number of higher cost FHA home loans slipping through the cracks.
• Ensuring that borrowers are not victimized by “junk fees” and excessive charges: The CRL asserts that the recent foreclosure crisis was caused by “…reckless and predatory lending practices and toxic financial products [and] not by any policy goal aimed at increasing home ownership.” Unfortunately, if FHA wishes to keep its home loan programs self sustaining, raising mortgage insurance premiums either paid at closing or as part of monthly mortgage payments appears necessary.

Actions taken now for reestablishing the mortgage insurance fund may prevent much larger headaches down the road if the mortgage insurance fund sustains losses greater than its ability to reimburse lenders. This could lead to a taxpayer bailout, and resulting criticism of FHA guidelines and programs. In weighing the options between financial responsibility and making home ownership affordable for under served communities, FHA is likely to find itself between the proverbial rock and a hard place. Striking a compromise that serves both increasing FHA cash reserves and its original purpose for making home ownership affordable appears to be the only win-win option for the FHA.

The Washington Post tells us that “documents and interviews reveal that more than 34,000 home loans have been issued over the past two years by a dozen FHA-approved lenders that have employed people who were convicted of felonies, banned from the securities industry or previously worked for firms barred by the agency.” (See: Executives with criminal records slip through FHA crackdown, documents show, September 10, 2010)

The Post adds that “more than 3,000 of those loans, about 9 percent, were seriously delinquent or already a claim on the FHA insurance fund as of June 30. That’s nearly triple the rate for all loans made by FHA lenders over the past two years, about 3.4 million.”

I don’t like to be a contrarian, but there are several things about this story which I find perplexing.

Let’s start with that 9 percent foreclosure rate. You have to ask the question: Where are these lenders located? If they’re in North Dakota then I understand that we may have a problem. But what if they’re in Las Vegas, Miami, California, Phoenix and Detroit? Then, maybe, they have a minimal or even below-average foreclosure rate.

What about lenders in general. Do private-sector lenders ever employ individuals with criminal backgrounds? How many? What’s the foreclosure percentage? Where are they located? Is the foreclosure experience in the private sector higher or lower than the experience with FHA loans? Or is it ONLY the FHA program that involves individuals with criminal records?

The Post was able to identify several FHA-lenders that it alleged had questionable pasts. But is this a big problem or a little problem? The FHA loan program now represents about 30 percent all new loans in the country and about 20 percent of all refinancing. Does anyone really think it’s possible to have such a huge program without concerns and questions?

Besides, 34,000 loans out of 3.4 million is 1 percent. Of that 1 percent, roughly 31,000 loans were not foreclosed. Of the 2,000 or so that were foreclosed (that 9%) you might expect that 700 or so would be lost in today’s market regardless of who originated them. That leaves about 1,300 loans out of 3.4 million. A concern, but not much of a concern.

A Real Crime

Rather than worry about obtaining FHA perfection, why is it not criminal to shunt people into high-cost subprime loans when they qualify for conforming financing? High-cost financing for better-qualified borrowers creates an unnecessary and unfair economic burden and a greater propensity for foreclosure.

Think it doesn’t happen? The Wall Street Journal discovered that 55 percent of all subprime borrowers in 2005 actually qualified for conventional financing. The percentage increased to 61 percent in 2006. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007)

And how many people who sold over-priced loans which resulted in needless foreclosures went to jail? How many lenders who created toxic loans are now serving time? Look at the harm and damage done to families, neighborhoods and the national economy.

I look forward to the Post’s coverage.

If ever a loan program appeared bulletproof, it was FHA’s Home Equity Conversion Mortgage (HECM). Consider that a typical borrower with a home valued at $300,000 is allowed to borrow about $150,000 against it (amount depends on borrower’s age, interest rates, and the home’s value) and that the lender collects $6,000 in fees plus another $6,000 in upfront mortgage insurance, plus monthly premiums. In addition, the borrower typically pays a variable interest rate, eliminating a large portion of risk for the insurer (taxpayers). Add in the home’s appreciation, which creates another safety net. Finally, the loan can be repaid from the proceeds when the property is sold, so the borrower’s credit isn’t even an issue. Why ever would the program lose money?

Well, HUD has been paying out record claims on its reverse mortgages, and here’s why. Consider that almost no one pays the upfront costs out of pocket; they are instead deducted from the proceeds borrowers can receive. The interest is likewise added to the loan’s balance. And (here’s the biggie), the profitability of an individual HECM loan depends on home appreciation.

A 2008 study of HECMs found that the probability of losing money on such a loan ranges from 2.7% to 8.9% (depending on how long the senior keeps the loan before moving from the home or dying) as long as there is home appreciation of 4% per year. However, once homes stop appreciating, the risk of loss increases to a range of 43.2% to 65.4%! Imagine a borrower takes that $150,000 HECM against a $300,000 home in 2007. But home values across the country have fallen by one-third in the last three years, so that property may well be worth only $200,000. And it’s worse in states like California, Florida, Nevada, Arizona, and Michigan. The home may only be worth $140,000 if it’s in Stockton. Meanwhile, the balance on the loan continues to increase.

Right now, four large loan servicers have about 13,000 HECMs in default because the borrowers have stopped paying their property taxes and homeowners insurance. The loans total over $2.5 billion. Analysts fear this is just the beginning.

Would you feel comfortable making a commitment to covering the losses on loans in this scenario? Like it or not, Mr. and Ms. Taxpayer, you have.

With FHA restructuring its mortgage insurance premiums on October 4th, it’s probably time to take a look at other financing options. Many folks don’t realize that Fannie Mae and Freddie Mac offer low down payment options too. For example, Fannie Mae’s My Community Mortgage allows qualifying borrowers to buy a home with only 3% down, no upfront mortgage insurance premium, and pay a very low monthly mortgage insurance fee. read more