Existing home sales were down in April according to the National Association of Realtors (NAR), but what was most interesting about the NAR announcement was a very pointed claim regarding the FHA.

“Our data shows only one out of five first-time buyers needing a mortgage could afford a 20 percent down payment, and without first-time buyers the trade-up market would stall with very negative consequences for housing and the overall economy,” said NAR president Ron Phipps. “Ironically, low down payment FHA and VA loans, which are so critical to this segment, have performed well and never needed a taxpayer bailout because those borrowers stayed well within their budgets.”

Indeed, NAR consumer survey data tells us that 56 percent of entry level buyers in the past year financed with an FHA loan.

This is the second time NAR has recently mentioned that the FHA program is not taxpayer supported. In April NAR chief economist Lawrence Yun noted that “given that FHA and VA government-backed loan programs turned a modest profit over to the U.S. Treasury last year, and have never required a taxpayer bailout, we believe low down payment loans should continue to be available for those consumers who have demonstrated financial responsibility and are willing to stay well within their budget.”
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If you’re interested in buying a U.S. Department of Housing and Urban Development (HUD) home, now might be the time. Combine low FHA loan rates with stagnant prices and large inventories and the opportunities in some markets have become interesting.

As of February, the FHA held title to 68,801 homes. These are homes financed with FHA mortgages that were then foreclosed. The number is up substantially from 39,998 properties held by the government in October 2010, according to HUD.

FHA critics cite the number of homes FHA holds title on as evidence that the program is somehow failing and should end. This is nonsense.

Inside the numbers

Overall, HUD has 6,933,260 insured home mortgages outstanding as well as 530,930 insured reverse mortgages outstanding. That’s 7,464,190 loans. In other words, fewer than 1 percent of the loans insured by HUD have wound up in government inventories. Given the down market we have faced since the April 2007 peak, it’s amazing that the numbers are not worse.

Critics feel that FHA loans are somehow “iffy” because they only require 3.5 percent down. The down payment requirement is not much of an issue. If it were, then surely a lot more homes would be held by the government.

Falling Prices

The problem is falling prices, which left many home buyers with few options in a down economy.

Consider:

Mr. Smith buys a home for $250,000 in April 2007. The property is financed with an FHA-insured loan for $241,250. In 2011, Mr. Smith loses his job and is foreclosed. According to the Federal Housing Financing Agency (FHFA), home values have declined by an average of 18.6 percent nationwide since April 2007. As a result, the Smith property is now worth $203,500. Even if Smith put down 15 percent, there would have been a loss.

Rising Prices

Now, imagine if home prices had simply risen by the rate of inflation over the past four years. Mr. Smith’s property would now be worth $271,177.57. That’s more than $30,000 above the outstanding balance for the FHA loan. (The loan balance at 6 percent would be 228,257.34 after four years.)

In a market with rising prices, it would be easier to sell a distressed home. In fact, the term “rising prices” suggests more demand in the marketplace and thus more homes would sell at auction and fewer properties would wind up in the HUD inventory.

The growing number HUD properties are not evidence of a FHA loan program gone bad. Rather they are evidence of a marketplace that’s been undermined. Like everyone else, HUD is a victim.

For millions of people along the Mississippi River, times have gotten tough. The Big Muddy has crested at near-record levels. The damage is substantial, but the U.S. Department of Housing and Urban Development (HUD) is making moves to provide emergency assistance to homeowners who find themselves underwater.

“Families who may have been forced from their homes need to know that help is available to begin the rebuilding process,” said HUD Secretary Shaun Donovan. “Whether it’s foreclosure relief for FHA-insured families or helping these counties to recover, HUD stands ready to help in any way we can.”

HUD says lenders must suspend initiation of foreclosures and foreclosures in process for 90 days from May 12, which was the date President Barack Obama declared Mississippi River flooding a disaster.

Special protections for those who are current on their mortgage but now face flood-related financial problems are also in the offing. HUD is recommending mortgage lenders consider mortgage modifications, refinancing, waiver of late charges and Special Forbearance Agreements (SFA).

Special forbearance

According to HUD, SFA agreements provide:

1. Reinstatement of loans at least 3 months but not more than 12 months delinquent
2. More relief than informal or formal forbearance plans
3. No change in original loan terms
4. Failure options
5. No maximum terms

FHA-approved lenders are eligible for 100 percent financing, including closing costs when they participate in .

Additional help

Disaster financing “enables those who have lost their homes to finance the purchase or refinance of a house along with its repair through a single mortgage, HUD said. FHA-approved lenders are eligible for 100 percent financing, including closing costs.

Are you wondering where to start? If you’re in a Presidentially-declared disaster area you can get help with your FHA home loan. Contact your lender or servicer to start the process or FEMA, which can be reached toll-free at (800) 621-3362 or TTY (800) 462-7585.

Given the substantial drop in home prices seen during the past few years it’s not surprising that the Federal Housing Authority (FHA) program now finds itself with an enlarged supply of foreclosed properties. A new report from HUD shows that as of February the FHA now holds title to 68,801 foreclosed homes. That’s a big number, far higher than the 44,605 properties it held a year earlier.

The growing total of so-called REOs–”real estate owned” by a lender or insurer–suggests that home prices are unlikely to turn around anytime soon, especially in the most hard-hit foreclosure areas. The REO numbers have risen at the very time several bills have passed the House of Representatives which would end current foreclosure prevention programs.

For instance, H.R. 839, the HAMP Termination Act, would end the Making Home Affordable program. To date this program has prevented 586,916 foreclosures. The proposed legislation passed the House by a vote of 252 to 170.

Or, how about HR 836, the Emergency Mortgage Relief Program Termination Act. This legislation would end mortgage assistance for the unemployed. The House vote was 242 to 177 in favor.

The reality is that these bills will never pass the Senate and will be vetoed by the President. They are, in effect, a way to make a statement. So what statement do they make?

Modifications

Loan modification and foreclosure prevention programs have hardly been perfect. The Making Home Affordable program, as an example, not only helped almost 590,000 owners avoid foreclosure, it also failed to help more than 750,000 owners who entered the program but could not successfully complete the three-month trial period.

The catch is that cutting off help to citizens in need, even with programs that are not perfectly successful, ultimately hurts the FHA program. Consider what the FHA does: It’s an insurance program. Individuals who cannot buy with 20 percent down can buy with 3.5 percent percent down under FHA guidelines, if they meet FHA loan requirements.

When a lender makes an FHA loan it has 100 percent protection against losses. The reason is that in the event of default FHA insurance kicks in to protect the investor. The money paid to lenders comes from the premiums collected from FHA borrowers. There is no cost to the taxpayer.

So, if we cut loan modification programs we will increase the number of homes that go to foreclosure. This will help push down local home prices. The more homes are underwater the bigger the individual claims against the FHA. If it ever happened that the House termination bills became law then home prices would fall further (because the supply of foreclosed homes would increase) and FHA mortgage rates would rise (because all mortgages would be seen as more risky). None of this is good for the housing market.

In the ongoing effort to make the FHA loans less attractive, HUD has now removed the lender fee cap from FHA reverse mortgages and the 203(k) financing, loans used to acquire and improve homes.

To understand how this works we need to go back to December 30, 2009. If you think about that date you will quickly realize that, gee, December 30th, that’s the very end of the year, the day before New Year’s Eve, part of the week between Christmas and New Year’s Day, a time when a lot of folks are on vacation, an excellent time to change FHA loan requirements in a way which will draw the least possible attention.

So what did the FHA do? It gave billions of dollars to the nation’s lenders, a transfer from borrowers to lenders because–after all–FHA borrowers are just loaded with cash.

As a result of regulatory changes, said HUD in 2009, the “FHA no longer limits the origination fee to 1 percent of the mortgage amount for its standard mortgage insurance programs. However, both Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance Programs retain their statutory origination fee caps.”

Get it? There was a cap on lender fees when making FHA loans. That cap was eliminated in 2009–except for those pesky reverse mortgages and fix-up loans. Now, in 2011, HUD has gone back and gotten rid of the lender fee limitations on those loans as well.

Now you might think that HUD is allowing lenders to run wild, to charge whatever fees they like for FHA mortgages. And while the rules actually do allow unlimited fees–either you have a cap on fees or you don’t have a cap–HUD apparently thinks that moral suasion will impact lenders.

As it explained in 2009, HUD, “expects that lenders will continue to charge fair and reasonable fees for all origination services and the agency will continue to monitor to ensure that FHA borrowers are not overcharged. Furthermore, the FHA Commissioner retains the authority to set limits on the amount of any fees that mortgagees charge borrowers for obtaining an FHA loan and the agency does intend to issue additional guidance on the subject.”

Honest. HUD really expects that lenders will do nothing other than charge fair and reasonable fees.

Exactly what experience has HUD had that would lead them to this expectation?

In its 2010 Annual Management Report, HUD explained that “we suspended some well-known FHA approved lenders, withdrew FHA approval from over 1,500 others, and imposed over $4.27 million in civil money penalties and administrative payments on non-compliant lenders. We are sending a clear message that FHA will not do business with lenders who do not operate ethically and transparently, and are holding lenders accountable by publicly reporting lender performance rankings.”

But charging loan fees greater than 1 percent is entirely allowable. It makes FHA loans less desirable and it makes borrowers poorer. Charging steeper fees is not a transgression of any sort because now lender loan fees are entirely unlimited. There is no definition of the term “fair and reasonable.”

So, since the FHA has the authority to set fee limits, why not do that? It’s a system that worked well for decades, few lenders refused to make FHA loans and it didn’t take a stadium filled with lawyers to debate the meaning of fair and reasonable.

It used to be that FHA mortgages were as clear and understandable as possible, but then back in 2008 the Bush Administration began to fiddle with the FHA reverse mortgage product and now a new controversy has emerged.

The traditional understanding of an FHA-insured reverse mortgage was that it was a huge, negatively-amortizing mortgage. The owner–who had to be at least age 62–got financing on the basis of the property’s value and not income or credit. The FHA insured such mortgages because the loan amount was always far less than the appraised value of the property.

But what if the owner died, moved or sold the property? The rule was that the FHA reverse mortgage was to be repaid from the sale or refinancing of the property–that there would be NO claim against the estate or the heirs.

In 2008 HUD tried to re-write the rulebook with Mortgagee Letter 8-38. “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.”

Well, no, there was nothing mistakenly inferred. If heirs or a surviving spouse refinanced the house for the full amount of the property’s current value–and the value was now less than the loan amount–that was all that could be owed. Any shortfall would have to made up by the insurance provider, meaning HUD.

AARP sued HUD in an effort to return to the old interpretation. And, HUD agreed rather than take the matter to court.

Now there’s a new twist, one that could again change the game.

90 Days No More

Usually there’s a 90-day period to settle a reverse mortgage after the borrower dies, sells or moves, but under a proposed Texas bill, HB 2410, heirs would have the right to repay the debt over 15 years.

If this legislation were to pass–and if the concept spreads to other states–the reverse mortgage program would end. The reason is that reverse mortgage lenders are not interested in making longer term loans. Statistically, about half of all reverse mortgages end within six years. That means lenders can count on getting much of their investment back within a particular amount of time and then re-invest elsewhere if they like. It also means that HUD has a very good idea of how much might be owed in the event of a claim.

You understand what the authors of the Texas bill are trying to do, but it’s an idea which should be added to the FHA loan program, should apply only to new loans and should not imposed by the states. In this way there would be better balance betwee the interests of borrowers and the interests of lenders.