It sounded like a nice idea when HUD announced a new FHA mortgage effort last summer: the short refinance program would help troubled homeowners get better rates and terms, including folks with credit scores of not more than 500.

A fine idea. A decent thought. A program which in a nation of 300 million people has so far produced just 40 loans since October 1st.

The catch is that looking at some local markets you have to wonder why there isn’t more demand for this program — from lenders. read more

In potentially good news for homeowners struggling with mortgage loans of more than their homes are worth, the Federal Housing Administration, popularly known as the FHA, and other government agencies are close to settling with banks and mortgage lenders over improper foreclosure procedures. The Washington Post cites an unnamed official in reporting that a nationwide investigation led by Iowa’s attorney general, is close to reaching a settlement allegedly requiring errant lenders to provide remedies to homeowners who were denied foreclosure prevention options including loan modifications. Under FHA guidelines, lenders are required to comply with FHA programs for preventing foreclosure of FHA insured home loans.

FHA loan programs protect mortgage lenders and homeowners

Although FHA does not directly provide mortgage loans, it insures loans made through its network of approved lenders. Mortgage lenders agree to abide by FHA guidelines for underwriting, approving, and servicing loans originated under its programs. Homeowners with FHA loans are protected by FHA regulations requiring lenders to work with borrowers toward saving their homes and preventing foreclosure. FHA is liable to mortgage lenders for losses caused by mortgage defaults and foreclosures, which explains its motivation for reducing such costs when feasible.

FHA foreclosure prevention options include temporary forbearance, repayment plans, mortgage loan modification, approving short sales, and accepting deeds in lieu of foreclosure. FHA also cooperates with government initiatives including the Making Home Affordable modification and refinance programs.

Settlement impeded by complex housing finance industry

The pending settlement between government agencies and mortgage lenders is being delayed by the complexities of the housing finance industry. This includes how mortgage loans are sold on the secondary mortgage market; Freddie Mac, Fannie Mae, and investors are interested parties in the settlement, which could allow for mortgage write downs and penalties that would be used to reimburse victims of wrongful foreclosure.

Additional stakeholders in any proposed settlement include private mortgage insurance companies and the Veterans Administration, which are also liable for reimbursing lenders for defaulted mortgage loans. Each entity has its own interests, requirements and bottom line to protect; this complicates the process of reaching a final settlement.

Preventing foreclosure: Don’t procrastinate

When financial difficulties occur, it’s essential not to procrastinate. Call your mortgage lender right away, or seek help elsewhere. Mortgage lenders may not provide assistance until your mortgage payments  become one to two months delinquent, but contacting  your mortgage lender or a housing counseling agency immediately demonstrates your cooperation and interest in saving your home.

Homeowners wanting assistance with their mortgage loans can contact FHA approved housing counselors for more information about foreclosure prevention options.

One way that FHA loans make buying a home easier is that their guidelines allow gift funds from relatives to help with the down payment on a home. A gift can be cash or home equity.

For example, parents call sell a home to their child and the child can purchase it with an FHA loan without a down payment as long as the sales price is at least 15 percent less than the appraised value of the property.

To document this gift, your fairy godparents must write a letter to the lender that includes the following information:

1. Name, address, and phone number of the donor

2. The amount of the gift of equity

3. The letter must include a statement that the equity is a true gift; that is, no repayment is required

4. The donor must specify his or her relationship to the buyer read more

By now, you probably know that FHA is raising its monthly mortgage insurance premiums. Again. But the trend of rising interest rates also presents added incentive to refinance an FHA loan sooner rather than later. That’s because if you want to take advantage of the easier and cheaper refinancing through the FHA streamline refi program, you need to pass the Net Tangible Benefit test. This is to prevent homeowners from being talked into refinances that strip their equity without doing them much good financially.

Here’s the scoop:

Streamline refinance from an adjustable rate mortgage:

1. If the new mortgage is a fixed-rate loan, its interest rate cannot exceed that of the current mortgage by more than 2 percent.  So if you are paying in the 3 percent range your new fixed loan can’t be much more than 5 percent.

2. If you’re refinancing to a new ARM, your new payment must be at least 5 percent lower than your old payment. So if your principal, interest, and mortgage insurance is $1,000 a month, your refinance payment can’t exceed $950. The new, higher mortgage insurance premiums could make that figure harder to hit.

3. If you’re refinancing to a hybrid ARM, say a 5/1 loan with a rate fixed for five years, your new loan must have an interest rate at least 2 percent lower than that of your current loan.

Streamline refinance from a fixed-rate mortgage:

1. If refinancing to a fixed-rate loan, your new mortgage payment must be at least 5 percent lower than your current payment.

2. If refinancing to an adjustable rate mortgage, your new interest rate must be at least 2 percent lower than your current mortgage rate. Why would you refinance to an ARM from a fixed rate? If you plan to sell in the next few years, it could be smart, since FHA ARM interest rates only increase at a rate of 1 percent per year.

3. If refinancing to a hybrid ARM, your new payment must be at least 5 percent less than your current payment.

Streamline refinance from a hybrid ARM:

The rules depend on whether you refinance while the hybrid ARM is still in its introductory (fixed) period, or during its adjustable phase. If it’s still fixed, the guidelines are identical to those of the fixed rate mortgage refinance. If it’s in its adjustable phase, the guidelines mirror those of the ARM streamline refinance.

FHA streamline refinances are a cheap and easy way to lower your monthly payments and/or rate. So check with some lenders and see if you can’t save by pulling the trigger on a streamline refinance now.

With the FHA raising annual mortgage insurance premiums after April 18th, borrowers with an interest in financing or refinancing with an FHA loan need to consider the benefits of acting quickly.

At first it may seem as though a mere .25 percent increase in the annual mortgage insurance premium (MIP) is not a big deal. It is. According to FHA Commission David H. Stevens, “the annual MIP increase would generate an additional $2.5 — $3 billion annually.”

You can do your part to give the government an additional few billion dollars, or you can keep the money in your pocket. How? read more

Adam Quinones at Mortgage News Daily threw out a suggestion that may have some merit and solve a couple of problems.

We have a serious problem with housing inventory that needs work –  foreclosures, rentals, and reverse mortgage property that went unmaintained or has been vandalized.

There is a dearth of construction financing in the U.S. Fannie Mae and Freddie Mac no longer touch it. Lenders like CTX Mortgage are out of business. This down-at-heels housing could be converted to safe shelter for the folks who need it (perhaps after losing their own homes to foreclosure).  And those best equipped to take on these projects are the experienced investors who have fixed and flipped or fixed and rented for years.

I’m not saying that they should get to finance investor homes with 3.5 percent down, or that they shouldn’t pay a higher rate for insuring their mortgage. But if such financing were available, it would go a long way toward relieving the blight on the landscape of many of the hardest-hit cities in the country. While government agencies and charitable organizations are about to purchase rental housing with HUD funds, they aren’t the most efficient delivery system for large-scale housing solutions. read more

The latest numbers from the Mortgage Bankers Association show a substantial improvement in FHA loan quality with both foreclosures and delinquencies down significantly.

For the fourth quarter overall, the MBA says that seasonally adjusted delinquencies went from 9.13 percent to 8.22 percent.

___The delinquency rate decreased from 6.29 percent to 5.48 percent for prime loans.

__ The delinquency rate for subprime loans fell from 26.23 percent to 23.01 percent.

___ FHA mortgage delinquency levels dropped from from 12.62 percent to 12.26 percent.

___ The VA delinquency rate decreased from 7.44 percent to 6.67 percent.

Foreclosures

News on the foreclosure front is mixed read more

FHA commissioner David H. Stevens is pushing for broader authority for FHA to enforce its lending requirements among all FHA approved lenders. The agency currently requests reimbursements from certain large lenders, but the commissioner brings up a strong point that all FHA lenders should be held to account for failing to observe FHA requirements for approving loans.

The commissioner also announced that FHA is increasing its annual mortgage insurance premiums, which are paid by borrowers by 0.25 percent effective April 18, 2011.

FHA mops up the mess and strives to maintain solvency

The collapse of the sub-prime mortgage market caused FHA market share to increase quickly; some FHA lenders were approving mortgages without regard for the agency’s loan underwriting requirements. The resulting mortgage defaults drained the FHA mutual mortgage insurance fund below legally required limits.

Mortgage loan servicing companies have further contributed to FHA financial woes by signing multitudes of foreclosure documents without properly reviewing the documents and circumstances leading to foreclosures. Commissioner Stevens holds that all errant FHA lenders and loan servicers should be required to reimburse the agency for poor loan origination and servicing practices resulting in FHA claims paid to lenders.

FHA policy: What is mutual mortgage insurance, and who pays for it?

FHA does not make home loans, but guarantees its approved mortgage lenders against losses arising from failing FHA loans. This guarantee influences mortgage lenders to underwrite home loans requiring lower down payments and less stringent credit requirements than conventional mortgage loans.

FHA collects premiums from borrowers of FHA mortgage loans and deposits the funds into its mutual mortgage insurance (MMI) fund. This fund provides funds for reimbursing FHA lenders for losses resulting from mortgage loan defaults and foreclosures. FHA does not rely on taxpayers for funding MMI reimbursements, but the fund fell below legally required levels a few months ago. This event has caused FHA to review and revise its policies in an effort to re-pad the MMI fund and actively reduce future losses associated with poor lending and mortgage servicing practices.

FHA is reviewing further changes to its mortgage insurance program with the goal of reducing the agency’s market share in residential home loans. Commissioner Stevens acknowledged in his testimony the importance of balancing FHA risk exposure with providing affordable home loans. It will be interesting to see what further changes will be made to FHA home loan programs in the coming weeks, and how or if such changes will impact home buyers and homeowners wishing to buy or refinance homes with FHA loans.

Just when you thought the fees were set for the next few years….

FHA Commissioner David H. Stevens  announced a new premium structure for FHA-insured mortgages. Don’t expect it to save you money — the change means an increase of 0.25 percent to your annual mortgage insurance premium (MIP).

This applies to all 30- and 15-year loans and it doesn’t matter if you put 80 percent down on your property purchase.  The upfront MIP will remain unchanged at 1 percent at least for now.  This premium change was spelled out in the President’s fiscal year 2012 budget and will affect new loans insured by FHA on or after April 18, 2011.  FHA Commissioner David H. Stevens explained,

“After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market. This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.”

This increase adds an average of $30 a month to what new FHA borrowers will pay.  While FHA doesn’t expect the change to impact home affordability for most borrowers, there’s no reason to pay it if you don’t have to. So those on the fence about refinancing or buying a home should get off fast. Unless they can’t find anything to do with an extra $360 per year.

A Philadelphia homeowner who had been paying his mortgage without incident for seven years was recently slapped with an ugly surprise when his lender decided to up his homeowner’s insurance coverage without his consent. Yes, the lender (which shall remain nameless here but you can read the story yourself) decided that maintaining coverage based on the property value would no longer satisfy it; instead it wanted the homeowner to place $1 million worth of coverage on a home he’d paid $180,000 for!

Why the discrepancy?  Well, it’s no surprise that home values have plummeted halfway to Hell, and that in many cases you could not sell a home for what it cost to build. In such situations, most lenders require a homeowner to insure for the home’s market value. But this lender wanted enough insurance to provide funds enough to rebuild the home exactly as it is regardless of what the property could fetch in a sale — and the home is a century old. Rebuilding it would be more like a restoration than a repair, hence the million dollar policy.

S0 the homeowner took exception to having his payment increased by $500 and sued the lender for violating the Real Estate Settlement Procedures Act (RESPA), winning $1,200, and the story continues.

If his loan had been with FHA, this would almost surely not have happened.

Here is what HUD has to say about hazard insurance coverage and FHA home loans:

“While HUD does not require (borrowers) to carry hazard insurance, the office does permit (lenders) to require it.” However, the lender must escrow the funds for hazard insurance if it’s required (meaning it must collect them on a pro-rated basis each month and then pay the premium each year).  When the lender escrows the insurance, it must renew the same type of policy that had been carried previously. So FHA lenders don’t get to arbitrarily change your home’s insurance coverage or impose expensive forced-placed policies on you.

Bloggers like me almost always point out the by-the-numbers savings as the main FHA advantage. But there are other protections that government-backed loans provide that private-sector lenders won’t. That has become a lot more apparent in these days of robo-signing, foreclosures and dirty tricks than it was in the past.

A few days ago we reported that the new Obama mortgage plan would increase the cost of FHA mortgages while reducing maximum loan sizes.

But would such changes be so terrible? Would borrowers really suffer?

The answer is yes, more or less. It’s the “more or less” that’s interesting.

Let’s start with loan limits. Under the Obama plan the current loan limit should be reduced from $729,750 — the amount for a single-family residence in a “high cost” area — to $625,500.

Truth is, most borrowers won’t care. In December, HUD reported that 133,603 FHA forward mortgages worth $26.4 billion were endorsed. This means the typical FHA loan had a principal balance of $197,600.

Mortgage Insurance Premium

The deal with the MIP is different. Here’s why: read more

When seniors opt to take out Home Equity Conversion Mortgages (HECMs) against their homes, they are required to get reverse mortgage counseling from HUD-approved professionals before they can close the deal. And the loans are supposed to be safe — the lender pays you, after all, and any remaining mortgage must be retired before funds can be dispensed.  So how did an FHA audit discover that 5 percentof its reverse mortgages are in danger of foreclosure?

According to a letter sent last month to FHA lenders and mortgage servicers, advances made by lenders to cover unpaid taxes and insurance from homeowners with reverse mortgages are putting the FHA insurance fund at risk. So now  FHA is conducting an extensive national audit to determine the exact extent of the delinquent payments and will likely have to foreclose on the properties.

But doesn’t FHA have a policy designed to avoid reverse mortgage foreclosure? (Answer: yes)

On January 3rd, HUD issued guidance for lenders in its Home Equity Conversion Mortgage Property Charge Loss Mitigation letter. The letter states that if several missed payments occur, the lender may pay the property taxes, insurance, and other charges from the mortgage proceeds if available. However, once the available funds dry up,  the lender is obligated to advance its own corporate funds to protect HUD’s interest in the property. Then the lender is supposed to ask the borrower to reimburse it.

In any event, foreclosure cannot occur unless “all applicable loss mitigation strategies have been exhausted” and only then does the lender get to submit a claim to HUD. “While it is HUD’s goal to avoid foreclosures as a result of unpaid property charges, mortgagors must comply with the terms of their mortgage, and mortgagees must comply with FHA requirements including the regulations as clarified in pertinent policy issuances.” Mortgagor means the borrower, and mortgagee means the lender.

HUD is getting tough

According to preliminary numbers from a non-profit credit counseling group, about 5 percent of  reverse mortgages (about 30,000 total) are delinquent now. HUD may be realizing that foreclosure may be necessary in order to avoid putting the entire FHA program at risk.

Throwing Grandma out?

People with parents who have reverse mortgages should take note — if there is any chance that your parents could neglect to pay their property expenses and end up in trouble with the foreclosure police at FHA, encourage them to set up their loan so the taxes and insurance are escrowed; that is, paid by the lender from the proceeds so delinquency does not occur. Alternatively, pay the charges yourself or at least check with the county (in most cases public property tax records are available online) to verify that the taxes are being paid on time.

The White House released a white paper stating proposals for winding down Fannie Mae and Freddie Mac, the two government sponsored enterprises that have largely funded mortgage lenders by purchasing the majority of their newly originated home loans. If Fannie and Freddie go away, how will this affect the Federal Housing Administration (FHA)? The agency could grow, or may shrink if the current administration and legislators are determined to reduce government’s role in U.S. mortgage lending.

Hypothetical demise of Fannie Mae and Freddie Mac: Would FHA grow, or diminish?

Although critics point out that government currently has too large a role in U.S. home loans, it’s unclear what would happen to the FHA if Fannie and Freddie are liquidated. It seems likely that the government would continue to play a significant role in working with lenders and communities in support of affordable housing and home loans, but the administration is suggesting changes that could make home loans less affordable for first time buyers with little cash and moderate income families currently depending on FHA for buying homes or refinancing existing mortgage loans. Changes to FHA guidelines as proposed in the white paper include:

–Reducing FHA maximum mortgage amounts: FHA loan amounts are currently in line with Fannie Mae and Freddie Mac’s maximum mortgage amount of $417,000 for conforming mortgage loans, but the agency also approve mortgage limits as high as $729,750 in established high cost areas. If Fannie and Freddie lower maximum loan amounts, it’s likely that FHA will also do so.

–Charging 0.25 percent more for FHA mortgage fees: This would either add to the up-front mortgage insurance fee paid at closing, or increase the annual mortgage insurance amount that is pro-rated monthly and added to monthly mortgage payments.

–Increasing the minimum down payment for FHA loans from 3.5 percent to 5 percent: This proposal has been brought up before, but lawmakers supporting methods for providing affordable home ownership are protesting this idea on behalf of homeowners who rely on low down payment mortgage loans for buying their first homes or refinancing existing mortgages on homes that have lost most of their value.

The Administration states that these ideas are presently “talking points,” but how FHA will be impacted by changes to Fannie and Freddie and its own lending requirements can go either way. FHA could become a larger agency and guarantee sales of mortgage loans to secondary market investors as well as guaranteeing home loans for FHA mortgage lenders, or FHA could diminish its role in US housing and mortgage lending.

If FHA loans disappear, it’s doubtful that moderate income borrowers will have many, if any choices for financing and refinancing their homes.

In a report to Congress, the Obama administration says the time has come to “wind down Fannie Mae and Freddie Mac and shrink the government’s current footprint in housing finance on a responsible timeline.” A big part of that footprint involves FHA home loans, which the government wants to make smaller and more expensive.

FHA Changes

In terms of the FHA, the plan suggests that the current loan limit should be reduced from $729,750 — the amount for a single-family residence in a “high cost” area — to $625,500. (This is also the current maximum loan amount for FHA-insured reverse mortgages.)

A second change would revise FHA guidelines and raise the annual insurance premium from .90 percent for most borrowers to 1.15 percent.

Under the new system FHA loans would be less attractive than today. Given today’s current mortgage rates, present loan limits and attendant insurance costs borrowers with an interest in an FHA mortgage may want to consider financing or refinancing now rather than later.

Politics

The FHA has the authority to increase the annual mortgage insurance premium to as much as 1.5 percent. This is in addition to the up-front mortgage insurance premium which is now at 1 percent. In effect, the higher premium is a done deal, if that’s what the Obama Administration wants.

The revised loan limits are a different story read more

Bank of America recently made the news when it announced that it would be discontinuing its profitable reverse mortgage product. The change is intended to free up resources so the bank can focus on making traditional mortgages and processing mortgage modification applications. Others, however, speculate that the move is a preemptive strike meant to head off potential criticism that could come from selling a controversial product.

Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, compared reverse mortgages to subprime loans. Home Equity Conversion Mortgages (HECMs) are unlike subprime mortgages for several reasons.

First, with subprime mortgages, people whose credit has been damaged in a poor economy pay a much higher interest rate, while with reverse mortgages, borrowers’ credit rating has no effect on their rate. Interest rates are similar to those charged for normal prime mortgages — unlike subprime products which impose rates several percentage points higher than prime loans. read more