We’ve addressed the issue of mortgage lenders adding their own requirements for approving FHA mortgage loans, a practice known as “investor overlay.” This typically means that a mortgage lender adds its own requirements over and above HUD/FHA requirements.

For example, a mortgage lender may require a higher FICO credit score than the FHA minimum of 580 for a mortgage loan with a minimum down payment of 3.5 percent. We don’t think this is conducive to improving the housing markets or promoting home ownership, and evidently others agree.

The National Community Reinvestment Coalition (NCRC) has sent letters to mortgage lenders it believes have used investor overlays to “up the ante” on qualifying for FHA loans. We’ve previously challenged investor overlays as further reducing available sources of affordable home loans for those who can’t qualify for mortgage loans underwriting to conventional lending criteria.

In this economy, a 20 percent down payment isn’t easy to produce for many folks. Instituting requirements in excess of FHA guidelines is bad enough, but The NCRC is now raising the ugly spectre of housing discrimination in its assertion that investor overlays are being used by mortgage lenders serving communities predominantly populated by minorities. In the past, before fair lending laws were enacted, mortgage lenders could “red-line” certain neighborhoods by charging exorbitant fees for home loans in red lined communities, or worse, flat-out decline to lend in red-lined neighborhoods. It was no coincidence that these practices typically equated to discrimination against minority borrowers and neighborhoods.

Prohibiting investor overlays would reduce discrimination claims

FHA, as an agency of the federal government, takes a strong position in defense of fair lending practices as required by the federal Fair Housing Act. In these times of economic challenges and difficulty, it would seem that FHA would want to do everything in its power to promote accessible home loans for working class people who would love to come home to their own home rather than paying their landlords’ mortgages.

The more accessible home loans are made available, the more people will buy homes. This produces demand for mortgage loans, and reinvigorate depressed housing markets. What’s not to understand?

Let’s give Americans their best shot at owning their own homes and end arbitrary and potentially exclusive investor overlays on FHA loans. And by the way, ending investor overlays now can help with limiting potential problems arising from potential claims of discriminatory lending. If FHA makes the rules for its home loan programs, then FHA lenders should follow FHA guidelines for making home loans. Allowing otherwise doesn’t make sense and is asking for trouble.

For the past few months robo-signing has been much in the news, a situation where foreclosure affidavits were signed by lender representatives — without actually being read. This is a huge problem because it means that lender claims could be wrong and that some borrowers — though probably not many — have been unjustly thrown out of their homes.

The robo-signing mess has largely skipped FHA loans, as we reported in October. The reason is that the federal government keeps a tight rein on lender requirements and paperwork.

Now we have Congressional testimony from FHA Commissioner David H. Stevens which explains in greater detail what HUD did and is doing to protect borrowers — lessons private-sector lenders might want to consider.

“At the time I took office at FHA,” said Stevens, “we found that significant reviews of servicer performance were not being done and had never been done, certainly not at the level of detail required. Thus, in November, 2009 we began implementing very specific monitoring around servicer performance — particularly whether servicers were helping to prevent foreclosures by helping responsible homeowners restructure their mortgages.”

Translation: FHA guidelines were in place long before the robo-signing storm arose — but to have impact those guidelines have to be enforced.

“Specifically,” said Stevens, “we initiated more robust servicer loss mitigation comparison reporting, which spanned the vast majority of the FHA portfolio. This new, more detailed reporting system enabled FHA to provide peer group comparisons of servicers in their utilization of loss mitigation options available to borrowers, which allowed us to identify which tools servicers were using, how frequently and how consistently.”

And what did the new reports show?

“Initial findings showed significant variations in the performance of different servicers, triggering a more in-depth look at firms servicing FHA mortgages.”

For those who have violated the rules the result has been costly: Stevens reports that since he became the FHA Commissioner the “FHA has suspended a number of well-known lenders, withdrawn approval for over 1,500 others and imposed over $4.27 million in civil money penalties and administrative payments to non-compliant lenders.”

The big club here are not the fines, instead it’s the ability to drop lenders from the FHA program and thus the ability to compete effectively in today’s marketplace.

Borrower Complaints

So what happens if you have a tiff with a lender?

Under the Real Estate Settlement and Procedures Act (RESPA), checks every borrower complaint it receives — and quickly.

Stevens explains that “RESPA Specialists investigate every complaint of loan servicer RESPA violations. Complaints are received from consumers by mail, phone calls and e-mail. Phone calls are assigned to Specialists on a rotating basis and must be answered within 2 business days of assignment. E-mails are also assigned to Specialists on a rotating basis and must be answered on the day of assignment. Case files are opened for each complaint received by mail and for each phone call and e-mail that cannot be immediately handled with a response to the complainant.”

In effect, the interests of borrowers and the FHA are similar — borrowers want to avoid foreclosure and the FHA wants to avoid unjustified lender claims.

If you have missed an FHA payment please contact a HUD foreclosure avoidance counselor for assistance — and to protect your interests.

FHA released its October Single Family Outlook report and it contains some interesting statistics. Here are the highlights:

75% of purchases funded were completed by first-time home buyers.

This is the silver lining of the housing crisis. Thanks to low FHA mortgage interest rates and plunging home prices, buying a home is more affordable than ever. This bodes well for the future of working and middle class families, who make more use of home ownership as a vehicle for wealth-building than do their more affluent counterparts.

46% of refinance applications were non-FHA to FHA refinances.

This means that it was either too difficult or too expensive for many homeowners to refinance conventional mortgages with non-government loans. So despite the fact that FHA mortgages require both upfront and monthly mortgage insurance premiums on all loans, it was apparently more cost effective for many applicants to choose an FHA refinance over a conventional one. Reasons for this would include the imposition of risk-based surcharges by Fannie Mae and Freddie Mac on all but the most perfect refinance candidates. These fees can add thousands of dollars to the cost of a mortgage refinance. Other causes would include the erosion of home equity across the country and the difficulty of getting conventional mortgage insurance when the loan-to-values exceed 80%. FHA’s3.5% home equity requirement facilitates refinancing in these declining markets.

There were only 21  FHA Short Refinance transaction applications

This program, which would allow underwater homeowners to refinance conventional loans and get new FHA mortgages with  lower principal balances is still DOA. Of the 1.1 million who the government estimated could be helped by such a program, only 35 have even applied (14 in September and 21 in October) and there have been no fundings (endorsements) to date. This is not because of a lack of interest on the part of the public but rather a dearth of enthusiasm among mortgage servicers and lenders including Fannie Mae and Freddie Mac.

The average FICO score of FHA borrowers now exceeds 700

Last month it was 702, the highest ever. So while the scores of the population as a whole have declined as economic troubles mount, those of FHA borrowers have increased. This is likely the combination of several factors — the drop in home values forcing those who formerly qualified for conventional financing into FHA refinancing, the added cost of conventional financing, and the overlays of FHA lenders. Overlays are lender requirements that are more stringent than the agency’s own guidelines. Lenders impose these because even if they comply with FHA guidelines, if they have a higher than average foreclosure experience for their area, they can lose their approval. So as the guidelines tighten, the average percentage of defaults drops, and lender guidelines tighten more to stay ahead of that curve.

National guidelines, local effects

Tighter FHA condo guidelines have rendered many projects all but unmarketable  in the most troubled parts of the country, say some Realtor organizations. With the dissolution of spot approvals, buyers cannot finance a condo through FHA unless the entire project goes through a rigorous approval process. In parts of the country already decimated by foreclosures, the new policy is especially devastating.

In Gainesville, Florida, for example, median sales price for all homes was up 11 percent to $174,000 from $156,700 a year ago, evidence of perhaps finally some recovery in its housing market. However, the median price of Gainesville condominiums fell 49 percent to $60,000 from $116,700 a year ago.

Realtor association president Joyce Dorval indicated that many buyers chose affordable condos during the boom years, but the FHA has tightened its loan standards. She said she just took a condo listing for $65,000 that sold for $150,000 during the boom.

This same scenario is playing out across the country, with U.S. condo and co-op sales down 28 percent and the median price dropping 4 percent to $166,000.

How does this drive the economy?

In a 2008 study of first-time home buyers, Elliot F. Eisenberg, Ph.D concluded that attached housing and condominiums are more popular among first-time buyers because of their relative affordability.  And with sub-prime and Alt-A products having left the mortgage industry, and mortgage insurers on the sidelines,  FHA is taking on a much larger role in financing for those with smaller down payments.  And according to Dr. Eisenberg, first-timers have less money to put down the average loan-to-value ratio (or LTV) was 87 percent, and 30 percent of first-time buyers borrow 95 percent or more of the purchase price of the home. Finally, a new survey of Realtors concluded that half of real estate sales this year were to first-time home buyers. So:

1. Today, first-time buyers execute half of property purchases.

2. These folks have a preference for condos because they are more affordable.

3. These buyers have less money to put down and rely more on FHA financing.

With FHA making it more difficult to finance condos, a significant part of the market is being cut off from this bloc of buyers, causing the prices of condos to fall even while prices of other properties in the same area are increasing. Associations are scrambling to make the change — in the past, building development and management companies rarely considered getting properties FHA approved because they didn’t need the extra paperwork and buyers could always apply for “spot” approval, that is get the approval to finance a single unit even if the project did not have approval.  back then, too, buyers lined up outside their doors  and other low-cost financing options were available.

Real estate ownership is often touted by experts as the most common vehicle for wealth building for those with lower incomes. Today, the rules create a drag on condo-heavy real estate markets and keep some of the most affordable options out of the reach of first-time home buyers.  The economy will have to wait a little longer.

A new buyer and seller study from the National Association of Realtors shows that the housing market would virtually stop without the FHA loan program.

“With historically low mortgage rates,” says the National Association of Realtors, “almost all buyers (95 percent) chose fixed rate mortgages. There was very
little difference between first-time and repeat buyers in their choice of mortgage. FHA loans were the most common type of loan, with 43 percent of buyers choosing
this option, slightly above conventional loans. FHA loans were much more prevalent among first-time buyers compared with repeat buyers. More than half of first-time
buyers (56 percent) chose FHA loans, while a similar share of repeat buyers used conventional loans.”

FHA guidelines assure borrowers that they’re getting a decent loan without any hidden traps, trick, or prepayment penalties. The fact that so many first-time buyers are using such financing is enormously important because without that segment of the marketplace real estate activity would slow to a crawl.

NAR’s report says that 50 percent of all purchasers are now first-time buyers. The catch is that if you don’t have a robust market for entry-level purchasers then the rest of the market stalls.

Here’s why: If there are no first-time buyers than owners with existing properties cannot sell their homes. If they cannot sell their homes they cannot move, rent or buy up. The marketplace is dependent on first-time buyers to keep the system going, to prevent marketplace stagnation.

Battling Associations

Could the heavy use of FHA mortgages by first-time buyers be an example of the free market at work? Or is it the “danger” of over-utilization which so worries the Mortgage Bankers Association?

For their part, the nation’s real estate brokers do not seem especially troubled by the growth of the FHA program.

“The National Association of Realtors strongly supports FHA’s mortgage insurance programs,” said NAR President Ron Phipps. “FHA announced major changes earlier this year and took critical steps to strengthen and ensure its long-term financial soundness, and those efforts have paid off.”

“FHA’s audit reflected a change in home values and was not tied to excessive increases in defaults or unsound underwriting practices. In fact, the credit quality of FHA borrowers has increased significantly in the last several years; the average credit score for FHA customers has grown to 693, and less than 8 percent of the agency’s purchase borrowers this year had FICO scores below 620. The capital reserves are not FHA’s only reserve fund; FHA also has a cash reserve account separate from the capital reserve — and actual total reserves have grown to $33 billion.”

NAR, in fact, welcomes even more FHA loans:

“NAR is working closely with FHA to reassess and amend their lending policies so even more qualified home buyers can become home owners.”

The Mortgage Bankers Association has come out with its quarterly analysis of delinquencies and foreclosures, an analysis which has a lot of good news.

The MBA says the delinquency rate for mortgage loans on one-to-four-unit residential properties has fallen to 9.13 percent of all loans outstanding at the end of the third quarter, a decrease of .51 percent from one year ago. The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure.

“The delinquency rate,” says the MBA, “decreased 81 basis points for prime loans (from 7.10 percent to 6.29 percent), 79 basis points for subprime loans (from 27.02 percent to 26.23 percent), 67 basis points for FHA loans (from 13.29 percent to 12.62 percent) and 35 basis points for VA loans (from 7.79 percent to 7.44 percent).”

Lower delinquency rates are good news because they suggest fewer foreclosures in the future. That said, relative to historic levels, delinquencies remain remarkably high and could climb further without an improvement in employment levels.

Foreclosures

Delinquencies are correctable lapses that can generally be undone. Foreclosures are different. When a home is foreclosed there’s little possibility for owners to get back their property — or for lenders to avoid a loss.

The big news concerns foreclosures.

First, foreclosure levels have begun to decline.

Second, the FHA loan foreclosure inventory rates are lower than foreclosure levels for prime financing.

The MBA reports that “the non-seasonally adjusted foreclosure inventory rate for all loans at the end of the third quarter of 2010 was 4.39 percent, 18 basis points lower than the second quarter of 2010 rate of 4.57 percent and eight basis points lower than the third quarter of 2009 rate of 4.47 percent.

“During the third quarter of 2010, the foreclosure inventory rate decreased three basis points for prime loans (from 3.49 percent to 3.46 percent) and 65 basis points for subprime loans (from 14.38 percent to 13.73 percent). FHA loans saw a 40 basis-point decrease in foreclosure inventory rate (from 3.62 percent to 3.22 percent), while the foreclosure inventory rate for VA loans decreased 36 basis points (from 2.50 percent to 2.14 percent). Compared with the third quarter of 2009, the foreclosure inventory rate increased 26 basis points for prime loans, while the foreclosure inventory rate decreased 162 basis points for subprime loans, 10 basis points for FHA loans and 15 basis points for VA loans.”

Notice that the FHA foreclosure inventory rate is now LOWER than the rate for prime loans, 3.22 percent versus 3.46 percent.

Foreclosure Starts

The story with foreclosure starts is a little different.

The non-seasonally adjusted foreclosure starts rate in the third quarter, says the MBA, was 1.34 percent, an increase of 23 basis points from the second quarter of 2010 rate of 1.11 percent.

“By loan type, the foreclosure starts rate increased 21 basis points for prime loans (from 0.91 percent to 1.12 percent), 48 basis points for subprime loans (from 2.83 percent to 3.31 percent), 22 basis points for FHA loans (from 1.02 percent to 1.24 percent) and 16 basis points for VA loans (from 0.70 percent to 0.86 percent).”

In effect, the foreclosure rates for prime mortgages (1.12 percent) and FHA loans (1.24 percent) are beginning to merge, something that could happen during the next quarter.

Bloomberg reports that some FHA approved lenders are adding stricter requirements to those already established by FHA for its home mortgage programs. Common sense would seek to dictate that if FHA lenders underwrite mortgages according to FHA requirements, and mortgage servicing companies take care of customer service and loan administration duties as required by FHA, there shouldn’t be any justification for upping the ante  on FICO credit scores required for FHA loans. But that’s common sense, and in recent times we’ve seen all kinds of phenomena in mortgage loans and housing markets that don’t make much sense. read more

As of early October, the average 30-year fixed rate was at 4.3 percent and the monthly mortgage payment for a median-priced home purchased with FHA-insured financing was $1,150 — down over 30% from 2006′s $1,658 in 2006.

In addition, the National Association of Realtors Housing Affordability Index reached a staggering 179 last month. That means that a family earning the median income has 180% of what is needed to purchase a median-priced home.

This means that for those nurturing dreams of home ownership, there will likely be no better time than right now to take your shot at it. Home prices and interest rates have combined to make the dream more affordable than it has ever been since data was first tracked in 1969 according to Beacon Economics.

FHA mortgage best way to get foot in the door

If you are intimidated by the home purchase and mortgage approval process, start by taking a first-time home buyer class or speaking to a housing counselor. HUD has a list of approved counselors on its Web site. These folks can tell you about other programs like down payment assistance as well.

You may be able to use an FHA mortgage to buy a fixer-upper or foreclosure home and make a very good investment. Home ownership is the most widely-used method of wealth-building for working class Americans.  Get started by taking the time to learn all you can and by purchasing an affordable home with an FHA mortgage.

Housing prices may have hit bottom in many markets; in some parts of the country they have begun increasing. You’d love to be able to take advantage of this but the same economy that blasted property values took its toll on you as well. Those with damaged credit or a gap in employment probably need some extra time to stabilize their finances and rebuild their good credit before they can realistically expect to get approved for a mortgage.

FHA does allow you to buy with a lease option read more

Part of the good news which resulted from the passage of the Wall Street Reform Act was the decision to create a “Qualified Residential Mortgage” standard or QRM. In basic terms, the deal is that if a lender offers a QRM such as a conventional, VA for FHA loan that has a fully-documented mortgage application it cannot be easily sued for abusing a borrower.

Of course, the mortgage industry is now greatly concerned about the specific rules related to QRMs and is busily trying to overturn by regulation what it could not earn through legislation.

One of the major targets of this effort is the FHA loan program.

“Unless the QRM definition is calibrated properly,” says the Mortgage Bankers Association in a letter to regulators, “there is a danger that the FHA program could be over utilized.”

Really? What exactly is the danger? Who, precisely, is endangered?

The MBA would like the new mortgage regulations now being developed in Washington to include certain allowances. For instance read more

FHA loan limits will remain at the high levels first introduced in 2008.

Under HR 3081, the Department of State, Foreign Operations, and Related Programs Appropriations Act, the FHA loan levels for owner-occupied properties will generally remain at the following levels: read more

A study by Communities United, a community advocacy group based in the Baltimore-Washington DC area suggests that minority and low income borrowers may pay more for FHA loans. FHA guidelines prohibit housing discrimination, and this troubling assertion accentuates the need for prospective buyers and homeowners seeking mortgage loans and refinance mortgage loans to shop and carefully compare mortgage quotes for FHA loans. read more

If you were running the FHA loan program and wanted to make sure it stays solvent one of the first things you need to do is to figure out how many loans will fail. Sorry, but claims against any insurance fund are a fact of life and that includes the FHA.

So for fiscal 2010, the government accounting period that ended September 30th, the government figured that 837,842 FHA borrowers would fail. That’s a huge number and evidence of great human anguish, but with the housing markets beat up in many places that was the FHA estimate.

The FHA was wrong — a happy event for everyone.

It turns out that the actual number of termination and claim losses amounted to 430,516. That’s still a big number in normal times and it still means that a lot of households have been hurt during the current economic crunch. But the final figures are also 49 percent lower than the original prediction.

This is important stuff. Here’s why:

When an insurance program — which is what the FHA loan program is — has fewer claims it means there is more ability to make future claims. That means there should be greater confidence in the FHA program by lenders — the people who benefit from FHA insurance coverage when something goes wrong.

Last year there has been worries that FHA reserves would drop by some $5 billion. FHA critics, of course, yelled and screamed that taxpayer money would be needed to bail out the program — as if stimulating the housing market would be a bad thing when compared, say, to bailing out a bank here and there.

In fact, what happened was completely different.

Total capital resources available to the FHA went from $31.8 billion at the end of fiscal 2009 to $33.3 billion at the end of fiscal 2010. Even without advanced math it’s fairly obvious that the FHA did not lose billions of dollars, in fact it didn’t lose anything. Reserves rose. If this was a private company we might think in terms of increased profits and retained earnings.

This is important because it means the changes the FHA undertook to refine the program have succeeded. Earlier this year the up-front FHA mortgage insurance premium fell from 2.25 percent to 1.00 percent while the annual mortgage insurance increased from .55 to as much as .90 percent.

For borrowers you want the FHA to succeed because a healthy reserve system means there’s no reason to justify increased insurance premiums.

No less important, as private-sector lenders use funny-money accounting to record “profits” by ignoring reduced asset values the FHA has generated real income while paying out all claims. That’s exactly what a well-run insurance program ought to be doing — and something many big-name lenders have been unable to duplicate.

In the future we will see more and more private-sector lenders getting FHA-like results. Why? Because the new mortgage standards required under the Wall Street Reform Act — the bill lenders want to revoke — essentially demand that lenders follow many FHA guidelines.

In the past few days HUD has announced that it has suspended still more lenders from the FHA mortgage program. This is becoming routine, but this time around you have to wonder if some lenders are being hurt by numbers.

If you want an FHA loan you also want a solid lender, someone who plays by the rules. This means in part that most of the lender’s loans will be successful but some won’t. Some mortgages fail for reasons outside the lender’s control such as the loss of a job, divorce, a car accident or big medical bills.

Also, it’s not fair to judge all lenders nationwide by one standard. Because of local economic conditions there are far more foreclosures in some areas than in others. For instance, RealtyTrac reports that in Las Vegas one out of every 25 homes is in foreclosure. Meanwhile, in Boston, the foreclosure rate is one for every 240 houses. The Las Vegas foreclosure rate is nearly 10 times higher than the rate in Boston.

To assure loan quality control HUD has two interesting FHA guidelines:

First, The regulations permit HUD to terminate the direct endorsement approval of any lender who has a default rate during the past 24 months which is 300 percent higher than the local default and claim rate for other FHA lenders.

Second, HUD says it can terminate any lender who has a default rate during the past 24 months which is 200 percent of the default and claim rate within the geographic area served by a HUD field office, and also exceeds the national default and claim rate.

Okay, so HUD understands that some lenders will have more foreclosures than others simply as a matter of location and that such lenders should not be penalized. Alternatively, there comes a point where you have to say that default rates are excessive.

Go back to the RealtyTrac numbers: The average foreclosure rate is one for every 139 homes. The rate for Las Vegas is instantly five times greater than the national average. If a Las-Vegas area lender also has foreclosures which are 200 percent greater than the local average the lender could lose its FHA approval status.

It may be in a weak market that a very good local FHA lender violates the HUD standards even if it does everything right. The local market is just so weak that even the world’s best lender can run into problems.

You can see the concern here. HUD is trying to do the right thing — but if you go purely by numbers you can run into statistical problems and if you go by subjective standards you then get into the possible issue of abusive and unfair program administration.

In normal times the FHA benchmarks would be easy to understand. Unfortunately, we live in strange times, especially for hard-hit foreclosure centers. You want to encourage lending in such areas to stimulate local markets but you also want to hold down FHA claims. In a way, running the FHA loan program is like physics, sometimes the usual rules don’t work in all parts of the universe — or in all times.

Mortgage loans failing to meet FHA guidelines must be manually underwritten, but current FHA requirements allow lenders flexibility in approving such loans. The Mortgage Bankers Association (MBA) addressed its concerns in a letter to FHA, and noted ” A greater emphasis on specificity in policies is necessary to give underwriters comfort that their manual underwriting decisions can withstand a post-technical review.” read more