Welcome to FHA Mortgage Guide.

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.

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….

February turned out to be a woeful month for the FHA, despite interest rates which hovered around five percent.

Comparing February 2011 with the same period in 2010, figures from HUD show a distinct FHA mortgage slowdown.

1. Applications: Down 30.9 percent.
2. Endorsements: Down 33.1 percent.
3. Purchase money mortgages: Down 35.8 percent.
4. Refinances: Down 33.6 percent.

HUD has also run into problems with its much-touted FHA reverse mortgage “SAVER” product. Apparently it’s tough to give this one away: There were 6,092 standard reverse mortgages insured during the month versus just 296 for the Saver.

There are some reasons why FHA numbers might be down.

First, February was a tough month on the weather front. A lot of areas got pounded with deep snow and high winds, not the best time to look at houses or plunk down offers to buy.

Second, unemployment continues to be remarkably high. Official figures show that nonfarm payroll employment increased by 192,000 in February, and the unemployment
rate was little changed at 8.9 percent, according to the Bureau of Labor Statistics. While the unemployment rate has dipped in terms of percentages, the important point is that millions of Americans remain unemployed, underemployed and nervous about job prospects, all reasons to avoid major financial decisions such as the purchase or refinancing of a home.

“The number of job losers and persons who completed temporary jobs, at 8.3 million, continued to trend down in February and has fallen by 1.2 million over the past 12 months,” said the BLS.

Well, really, could not the government come up with a better word than losers?

Delinquencies

For February there were 619,712 seriously-delinquent FHA loan borrowers. That’s an 8.9 percent delinquency rate for folks who are at least 90-days behind. The “good news” is that the rate a year ago was 9.5 percent.

The catch is that while the percentage has declined, the absolute number of delinquent loans has increased from 570,799 last year to 619,712 this February.

In other words, the delinquency percentage is down not because we have fewer borrowers making late payments or no payments but because the universe of loans is growing faster than the number of delinquent borrowers.

To its credit, the FHA has done an unusually good job converting delinquencies to paying loans. However, when you have an additional 48,913 delinquent loans you also have a large number of additional chances for claims against the system.

There is at least one group which should be elated at the decline in FHA loans: Private-sector lenders have been screaming about the need for more, well, private sector loans. The latest FHA results should make the private sector very happy.

Whether it will also make borrowers happy is a different question. What is it, exactly, that private-sector lenders are offering which is better than an FHA mortgage? Less down? Lower rates? Lower mortgage insurance costs? A high cure rate for defaults?

While millions of people struggle to find jobs, and while Congress works feverishly to reduce the safety net which barely supports them, outgoing FHA Commissioner David H. Stevens has had the good fortune to instantly find work.

It was on March 11th that statements made available from both HUD and Mr. Stevens explained that he would leave his position as FHA Commissioner. On March 15th, the Mortgage Bankers Association announced that John A. Courson, the association’s President and CEO, will be leaving the association, effective June 1, 2011.

“Courson,” said the Association, “will be replaced by David H. Stevens, Assistant Secretary for Housing and Commissioner of the Federal Housing Administration at the U.S. Department of Housing and Urban Development in May. Stevens had announced earlier that he would be resigning from his position at HUD. He will leave HUD on March 31, 2011.”

Reuters announced the change with a headline that read: “Obama housing aide to be mortgage banking lobbyist.”

Or, as New York magazine explained, “The Former Heads of the FCC and FHA Will Soon Be Lobbying for the Industries They Regulated”

Well, not quite. Let’s see why:

Mr. Stevens cannot possibly become a mortgage banking lobbyist — for at least for two years read more

The House of Representatives is busily chewing away at the FHA program, but largely missing what needs to be done.

First, of course, there has been the passage of H.R.830, the FHA Refinance Program Termination Act. With a vote of 256 to 171 the House has moved to dump the FHA short refi program. Since this program has resulted in just 44 FHA loans it’s not a big deal and is likely to pass in the Senate.

Second, in the kick-people-while-they’re-down-department, the House also passed H.R.836, the Emergency Mortgage Relief Program Termination Act with a vote of 242 to 177. This legislation denies emergency mortgage assistance to individuals who have lost their jobs. The result, of course, will be more foreclosures and thus additional pressure to reduce local home values. Passage in the Senate is uncertain.

This legislative work curiously goes after one federal program that doesn’t matter and a second program which is a reasonable necessity at a time when the housing market remains hugely depressed. Such activity reminds one of George Santayana, who said “fanaticism” is when you redouble your efforts and forget your purpose.

The oddity here, one of them anyway, is that the House could actually have done something useful. Here’s how: read more

Amazingly, after mortgage bloggers including us have spent months snickering at that stupid Short Refi program, America’s five largest mortgage servicers have agreed to participate! If they actually agree to allow a significant number of these refis for underwater borrowers, it would really shake up the mortgage landscape.

Bank of America, Wells Fargo, JP Morgan Chase, Citigroup and Ally Financial/GMAC are all reportedly participating in the struggling program, according to spokespeople for HUD and JP Morgan Chase.

To recap, the program allows homeowners in underwater mortgages to refinance out of a current, conventional mortgage and into an FHA mortgage with neutral or slightly positive equity. The lender currently holding the mortgage (this has been the booger!) must agree to write down enough principal so that the borrower can qualify for a new FHA refinance.

The news comes only a few days after the House of Representatives voted to kill the program on a near party-line vote. Republicans (and just about every mortgage industry commentator) have criticized the $8 billion program as ineffective, correctly noting that only 44 homeowners had been approved for assistance by mid-February, approximately 6 months after the program’s launch.

One wonders if the lenders were scared into getting with the program before something more onerous was concocted by the Administration or Congress. The Obama administration has defended the program, claiming that it isn’t yet on its feet and that bringing the major lenders on board as part of the issue, along with the need to develop procedures and infrastructure. And, yes, for what it’s worth, the number of homeowners assisted under the program has more than doubled over the past month.

For lenders, the program offers to opportunity to get rid of a risky mortgage while possibly recovering much of what they’re owed, and likely more than what they would get for the property in foreclosure (ignoring the fact that these loans are not delinquent and so foreclosure isn’t exactly on the near horizon).  For  homeowners, it offers a chance to reduce their mortgage debt  and start building positive equity in the property again.

Is this new spirit of cooperation a real change or is it lip service on the part of mortgage servicers?

My money’s on lip service, but I wouldn’t mind being wrong.