HUD is out with a newly-minted FHA loan, the PowerSaver, and it’s a program that represents better than half a good idea.

Under the PowerSaver program as many as 30,000 homeowners will be able to borrow up to $25,000 for selected energy-efficient home improvements. The loans can be outstanding for as long as 20 years and interest rates are expected to range from 5 to 7 percent. Eligible improvements under FHA guidelines include such things as insulation, duct sealing, energy efficient doors and windows, energy efficient HVAC systems and water heaters, solar panels and geothermal systems.

“PowerSaver loans,” said HUD, “will only be available to homeowners who have the wherewithal and motivation to make energy improvements to their home. Borrowers must have credit scores of at least 660 and their total debt to income ratios cannot exceed 45 percent. The combined loan-to-value ratio for all loans on a home, including the PowerSaver loan, cannot exceed 100 percent.”

Ah, and there we have a problem.

You can understand that HUD is justified in wanting a 660 credit score–not a big deal given that typical FHA borrowers now have credit scores of 703. And you can easily understand the 45 percent LTV, a back ratio that includes both housing costs and recurring monthly debts. This is 2 percent more than the standard FHA back ratio of 43 percent, but a standard justified by the energy savings which should be produced from the improvements financed under the PowerSaver plan.

But–and this is a big one–there is the business of that loan-to-value ratio.

HUD is entirely right in not wanting to make loans which exceed the value of the property. That makes sense. HUD would actually be more right if it said the loan-to-value ratio of all financing was less than the value of the property.

The catch is that in today’s world huge numbers of properties are underwater. The value of the property is less than the mortgage balance. Especially in the nation’s foreclosure centers–such states as California, Florida, Nevada, Arizona, Michigan, Georgia, Ohio, Illinois and Texas according to RealtyTrac–the PowerSaver program is a non-starter.

These are precisely the areas where help is needed to raise home values. It would be terrific if homeowners were able to increase property prices by making their homes more attractive in the marketplace through lower energy costs and higher environmental standards.

You can’t blame HUD. FHA mortgage financing is an insurance program and HUD, being financially sensible, cannot be in the position of starting a program which is destined to produce large numbers of claims.

And there is the conflict. The PowerSaver program is a very good idea. In a perfect world one could argue that the entire housing stock should be retro-fitted so there’s less need for energy, less demand to build new electrical generating stations. If the economy was in better shape the PowerSaver program could be enormously popular, but the reality is that while 30,000 PowerSaver loans–the number expected to be initially insured–are a good idea we won’t get a chance to see the economic and environmental impact that several million PowerSaver mortgages would make.

FHA officials should be elated. Their stated goal to surrender mortgage originations to the private sector is coming true.

Yippee!

Oh wait, no yippees quite yet. Having a weaker FHA does not benefit borrowers.

The latest figures from HUD show that FHA applications for March were down 35.7 percent. Endorsements–loans actually made–were off 25.1 percent.

The National Association of Realtors reported that 4.25 million existing homes were sold in February, down a touch from 4.37 million units in February 2010.

So how does this happen? You can understand that FHA originations might rise of fall, but why is the fall so significant at a time when the real estate marketplace is stagnant.

This is not a minor manner. HUD Secretary Shaun Donovan told Congress recently that “over the last two years, FHA has helped over 2 million families buy a home – 80 percent of whom were first-time buyers. FHA also has helped nearly 1.5 million existing homeowners refinance into stable, affordable products, with monthly savings exceeding $100 in most cases. FHA financing was used by 38 percent of all homebuyers, insuring, along with the VA and federal farm programs, 81 percent of all loans to African Americans and 73 percent to Hispanics in 2009. But FHA is also a vital resource for homeowners facing foreclosure. FHA’s loss mitigation program minimizes the risk that financially struggling borrowers go into foreclosure. Since the start of the mortgage crisis, it has helped more than half a million homeowners.”

The Private Sector

“It is critical, however, that we pave the way toward a robust private mortgage market,” said Donovan, who then added:

“Taking steps to bring private capital back is a process that HUD began many months ago – and I want to thank you for passing legislation in the last Congress to provide more flexibility to FHA’s mortgage insurance premium structure. With this authority, FHA announced a premium increase of 25 basis points last month.”

Well, okay, this is the smoking gun which explains why FHA annual insurance rates are rising. Borrower costs are not being increased because of losses to reserve funds, delinquencies or foreclosures, they’re being raised so that the FHA program will be less attractive, thus pressuring borrowers to use loan products from the private sector.

Was private capital ever missing from the FHA program? Not at all. There has been no problem getting FHA loans during the past several years while the private sector survived only because of massive taxpayer loans and the ability to borrow from the federal government at near zero percent.

Still, even with a shift toward the private sector, there is no justification for the FHA to openly cede market share to the private sector. Instead, private lenders ought to be more competitive and come up with better and cheaper mortgages.

If you’re a federal department you likely do not want to incite the attention of a powerful lobby. For the future education of government bureaucrats he’s why: It took HUD less than a week to back down after facing a lawsuit from one of the most important groups in Washington, AARP.

The dispute began in the waning weeks of the Bush Administration. Until this point it had been plainly understood when an individual with a reverse mortgage–or a Home Equity Conversion Mortgage (HEMC) as HUD calls them–moved, sold or passed away that the loan could be entirely paid off by giving title to the lender. Neither the lender nor HUD had any right to go after the borrower’s estate, spouse, children or heirs to make up any loan losses.

Big claims against spouses & heirs

But in late 2008 HUD came out with a new ideas.

“The HECM is a “non-recourse loan,” said HUD. “This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.”

“Some program participants mistakenly infer from this language that a borrower (or the borrower’s estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. This is not correct and is not the intended meaning of the quoted provision. Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.”

Get it?

Under HUD Mortgagee Letter 8-38 a spouse or heir who wanted to keep the property had to pay all that was owed to the lender, not just property’s appraised value. In other words, HUD would not pay lender claims if the family wanted to keep the property. Since a reverse mortgage is a negatively amortizing loan, in time the size of the mortgage debt would likely pass the value of the home–especially during the past few years as home values have generally fallen.

According to AARP, “HUD rules in place since 1989 clearly state that a borrower or heirs would never owe more than the home was worth at the time of repayment. But at the end 2008, HUD abruptly changed the policy and said that an heir–including a surviving spouse who was not named on the mortgage–must pay the full mortgage balance to keep the home, even it if exceeds the value of the property. This does not just violate HUD rules; it violates existing contracts between reverse mortgage borrowers and lenders, and negates a key purpose for which borrowers had been paying insurance premiums.”

New rules

Caught, HUD retreated with a new mortgage letter published April 5th:

“On December 5, 2008,” said HUD, “the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter (ML) 2008-38 to provide clarification to mortgagees regarding the requirements for repayment and termination of a Home Equity Conversion Mortgage loan. HUD’s intent in issuing ML 2008-38 was to supplement and explain provisions contained in the regulations at 24 CFR §206.125 and HUD Handbook 4235.1 (Home Equity Conversion Mortgages). Since there has been some uncertainty regarding the guidance in that ML, HUD is rescinding ML 2008-38, effective as of the date of this ML.”

In other words, let’s go back to the old understanding, a key reason to get a reverse mortgage.

Nope, there was no uncertainty. No clarification was needed. HUD tried to gut the FHA reverse mortgage system through the back door and got caught. It tried to change the contracts HUD had with existing reverse mortgage borrowers even though borrowers had not agreed to any revisions.

The next step, of course, will be to see what new “guidance” the government will proposes–and whether there will be another attempt to raid the wallets of the elderly.

If you’re a federal department you likely do not want to incite the attention of a powerful lobby. For the future education of government bureaucrats he’s why: It took HUD less than a week to back down after facing a lawsuit from one of the most important groups in Washington, the American Association of Retired People.

The dispute began in the waning weeks of the Bush Administration. Until this point it had been plainly understood when an individual with a reverse mortgage — or a Home Equity Conversion Mortgage (HEMC) as HUD calls them — moved, sold or passed away that the loan could be entirely paid off by giving title to the lender. Neither the lender nor HUD had any right to go after the borrower’s estate, spouse, children or heirs to make up any loan losses.

Big Claims Against Spouses & Heirs

But in late 2008 HUD came out with a new ideas.

“The HECM is a “non-recourse loan,” said HUD. “This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.”

“Some program participants mistakenly infer from this language that a borrower (or the borrower’s estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. This is not correct and is not the intended meaning of the quoted provision. Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.”

Get it?

Under HUD Mortgagee Letter 8-38 a spouse or heir who wanted to keep the property had to pay all that was owed to the lender, not just property’s appraised value. In other words, HUD would not pay lender claims if the family wanted to keep the property. Since a reverse mortgage is a negatively amortizing loan, in time the size of the mortgage debt would likely pass the value of the home — especially during the past few years as home values have generally fallen.

According to AARP, “HUD rules in place since 1989 clearly state that a borrower or heirs would never owe more than the home was worth at the time of repayment. But at the end 2008, HUD abruptly changed the policy and said that an heir — including a surviving spouse who was not named on the mortgage — must pay the full mortgage balance to keep the home, even it if exceeds the value of the property. This does not just violate HUD rules; it violates existing contracts between reverse mortgage borrowers and lenders, and negates a key purpose for which borrowers had been paying insurance premiums.”

Caught, HUD retreated with a new mortgage letter published April 5th:

“On December 5, 2008,” said HUD, “the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter (ML) 2008-38 to provide clarification to mortgagees regarding the requirements for repayment and termination of a Home Equity Conversion Mortgage loan. HUD’s intent in issuing ML 2008-38 was to supplement and explain provisions contained in the regulations at 24 CFR §206.125 and HUD Handbook 4235.1 (Home Equity Conversion Mortgages). Since there has been some uncertainty regarding the guidance in that ML, HUD is rescinding ML 2008-38, effective as of the date of this ML.”

In other words, let’s go back to the old understanding, a key reason to get a reverse mortgage.

And no, there was no uncertainty. No clarification was needed. HUD, under the Bush Administration, tried to gut the FHA reverse mortgage system through the back door and got caught. It tried to change the contracts HUD had with existing reverse mortgage borrowers even though borrowers had not agreed to any revisions.

Congratulations to AARP for protecting its members and their families.

This is the month when the annual FHA mortgage insurance premium will rise and you have to wonder if the same thing will happen to the FHA down payment requirement, currently 3.5 percent for most borrowers.

On April 18th the annual mortgage insurance premium will rise for new FHA loans from .90 percent to 1.15 percent for most borrowers. The change will cost a new FHA borrower about $30 a month or $360 a year and is entirely unnecessary.

The increased insurance premium is unnecessary for the very simple reason that FHA reserves are growing, not falling. HUD tells us that the FHA’s Mutual Mortgage Insurance fund — it’s reserve account — should grow by $9.76 billion in fiscal 2011.

So why would FHA guidelines be changed if the FHA is doing so well? Don’t higher costs hurt borrowers?

Working For The Private Sector

It is critical, says HUD Secretary Shaun Donovan, “that we pave the way toward a robust private mortgage market. This was a central goal of the Administration’s recently released report on Reforming America’s Housing Finance Market, which proposed to wind down Fannie Mae and Freddie Mac, fix fundamental flaws the mortgage markets, better target the government’s support for affordable housing, and provide choices for longer-term reforms.

“Taking steps to bring private capital back is a process that HUD began many months ago — and I want to thank you for passing legislation in the last Congress to provide more flexibility to FHA’s mortgage insurance premium structure. With this authority, FHA announced a premium increase of 25 basis points last month.”

Actually, I don’t think it is critical at all for HUD to pave the way toward a robust private mortgage market. I think that’s the job of private-sector lenders and Wall Street.

HUD, after all, ought to be doing what it was designed to do, to help entry-level purchasers and those in the lower and middle income brackets.

“We project that FHA will continue to support the housing market,” says Donovan, “insuring $218 billion in mortgage borrowing in 2012. These guarantees will support new home purchases and re-financed mortgages that
significantly reduce borrower payments. Over the last two years, FHA has helped over 2 million families buy a home – 80 percent of whom were first-time buyers. FHA also has helped nearly 1.5 million existing homeowners refinance into stable, affordable products, with monthly savings exceeding $100 in most cases. FHA financing was used by 38 percent of all homebuyers, insuring, along with the VA and federal farm programs, 81 percent of all loans to African Americans and 73 percent to Hispanics in 2009.”

The Conflict

You can see the basic conflict: On one hand HUD correctly crows about fulfilling its historic mission while on the other with higher insurance costs it’s plainly not acting to further borrower interests.

You have to wonder why HUD suddenly feels compelled to make it’s own products less attractive with an unnecessary insurance increase. You also have to wonder what’s next.

If I were guessing I can see a situation where there will be a need to raise the basic FHA down payment from 3.5 percent to, say, 5 percent. That would make FHA loans less attractive and for many borrowers no different than private-sector financing.

Now that’s some real paving….