HUD recently released revised guidance for FHA mortgage lenders and underwriters for establishing and evaluating nontraditional credit histories and also describes FHA’s acceptance of those enterprises that can develop a verifiable credit history, no less than 12 months in duration, for borrowers with limited traditional credit. This FHA loan guide is effective immediately but must be considered for borrowers without traditional credit beginning with case numbers assigned 30 or more days after the date of this mortgage letter.

FHA announced last month additional underwriting and collateral assessment practices for mortgage loan amounts that will exceed the January 1, 2008 conforming home loan limit of $417,000, FHA is establishing a 2nd appraisal requirement for loans on properties in declining areas, and limiting the loan-to-value for cash out FHA refinancing. These requirements are effective for all mortgage loans with FHA case number assignments made on or after the date of this mortgagee letter.

The maximum on an FHA insured loan for 2008 is presently $729,750.  In the FHA guidelines for the new loan limits would exceed the conforming limits of $417,000 and become what mortgage executives call jumbo mortgage loans.  Higher FHA loan limits are set by the federal government as part of an economic stimulus package early this year, were supposed to make jumbo loans more affordable in expensive housing markets. FHA mortgage rates finally have come down on these so-called “jumbo conforming” mortgages, though these home loans may be difficult for many borrowers to qualify for.

Jumbo-conforming loans range in size from $417,000 to nearly $730,000 and are especially important in expensive housing markets. FHA continues to help homeowners who recently lost the equity in their home because of declining real estate values in the region.  The FHA home loan limits varies based on the cost of housing in the nearest metro area and can vary from $271,050 in average cost neighborhoods and rise up to $729,750 in  the more costly areas of towns. Homeowners that are considering a home refinance with a jumbo sized mortgage but do not have the 20 percent equity that most conforming lenders requires should  consider the FHA jumbo mortgage, which enables borrowers to refinance up to 97% on a rate and term mortgage.

One in every 519 homes was in some stage of foreclosure last month, the most since the real estate marketing firm Realty Trac began marketing such data in 2005. The 243,300 filings represent a 65 % increase year over year, and a 4% increase since March.”Although only about 2% of households nationally are in foreclosure, these properties contribute to already bloated inventories of  homes for sale, and put downward pressure on home values,” said James J. Saccacio, chief executive officer of  Realty Trac. “Areas of California, Florida, Nevada and Arizona continue to be particularly hard-hit. 

“Property tax bases are eroding, putting municipal budgets in peril. For example, the city council in Vallejo, California – part of a metropolitan area with a foreclosure rate that ranked sixth highest in the nation in April – last week voted to have the city file for bankruptcy,” Saccacio said.  The White House earlier this week threatened to veto a measure that would spend $300 billion to help distressed homeowners secure a better mortgage loan and be in a better position to prevent a foreclosure. The House passed the measure last week while a similar bill is making its way through the Senate.

Home mortgage applications dropped last week as purchases and refinance loan volume slowed and mortgage interest rates likely rose slightly, according to a weekly report published Wednesday morning by the Mortgage Bankers Association. The MBA’s market composite index lowered to 621.6 for the week ended May 16, a drop of 7.8% from one week earlier.

The home loan application index is calibrated to March 16, 1990; a reading of 621.6 means that application activity was roughly 6.2 times greater than when the index was first established.  Refinancing activity, usually the driver of overall application volume, fell 8.7% as mortgage rates appeared to have inched higher; the MBA said that average rates on a 30-year fixed rate mortgages rose 8 basis points during last week. Purchase application activity — usually used by economists to predict the direction of the housing market — feel 6.9%.

Surprisingly, FHA loan application activity took a sharp dip as well, falling 6.8%; the drop was one of the few weekly decreases posted for FHA applications so far this year.  The share of variable-rate mortgages as a portion of overall application activity continued to rise as well, hitting its first double-digit total this year at 10.0%, the MBA said.  For more information, visit  http://www.mortgagebankers.org

Today, the expansion of government assistance to help at-risk homeowners. According to CNN Money, the Senate Banking Committee voted 19-2 to pass a bill to limit foreclosures, create affordable housing and revamp oversight of Fannie Mae and Freddie Mac. “Many thought we couldn’t do this, that it would be a partisan exercise. I hope we’ve avoided that; I believe we have,” said Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut.

The pressure has been building in Washington to respond to the huge increases in foreclosure filings. Dodd said he hopes to get the bill approved by the full Senate soon and to President Bush for enactment by early July.  This home loan legislation is the result of weeks of heated negotiations between Dodd and the committee’s top Republican, Ranking Member Richard Shelby, R-Ala.

A key measure in the mortgage aid bill would allow the Federal Housing Administration to insure $300 billion in new loans for at-risk borrowers if lenders agree to write down loan balances below the appraised value of borrowers’ homes. “The passage of this bipartisan legislation marks tremendous progress in my ongoing effort to help stabilize our markets and provide relief to hundreds of thousands of Americans,” said Dodd.

A sticking point had been Shelby’s push to shield taxpayers if borrowers default on their payments after getting government-backed loans. He wanted the FHA plan funded by redirecting money that Dodd’s original bill earmarked for a new affordable housing trust fund. The funds would be paid by Fannie Mae and Freddie Mac.  “My primary concern in negotiations has been to protect the taxpayer,” Shelby said.

The compromise bill will still create a fund to spur affordable housing but would use the funding for that program in the first year to backstop the FHA mortgage program.

How the FHA plan would work

Dodd’s FHA plan is similar in structure to one sponsored by Rep. Barney Frank, D-Mass., and passed by the House on May 8 in a 266-154 vote. One key difference, Dodd’s FHA plan would be in effect through 2011 and Frank’s would go through 2012. Dodd’s plan would also not go into effect until Oct. 1.

To qualify for an FHA-backed loan in either proposed program, lenders would have to be willing to write a new, 30-year fixed rate loan for borrowers for an amount no greater than 90% of the appraised value of the home. The other 10% would be equity for the borrower.

So, in cases where borrowers owe more on their homes than they’re worth, lenders would forfeit any amount owed above appraised value plus 10% equity. They also would have to pay upfront costs to the government to participate.  Borrowers, for their part, must pay an annual premium to the FHA for the insurance backing their new loans. And they must share their equity with the government when they sell or refinance their homes.

They also must meet a number of qualifying criteria. They must be a full-time resident of their principal home. They must have a mortgage debt-to-income ratio of more than 31% under Dodd’s bill and if they have a second mortgage, the second mortgage holder must agree to extinguish that debt before the borrower can enter the FHA program.

The new FHA program could benefit an estimated 500,000 people, according to Dodd. Its cost: up to an estimated $500 million paid for by Fannie and Freddie. If it turns out the costs fall below that level – that is, should few if any borrowers default on their new FHA loans – the funds from Fannie and Freddie would be redirected back to the affordable housing trust fund.

Regulating Fannie and Freddie

The legislation also provides for stricter oversight of Fannie and Freddie. The two government-sponsored enterprises guarantee the purchase and sale of home mortgages in the secondary market.  Shelby had been campaigning for more stringent safeguards than Dodd’s original bill provided. Both Fannie and Freddie have experienced accounting scandals in the past and both saw steep first-quarter losses.

Dodd said he is hopeful he can get the votes he needs to pass the bill through the full Senate in time to go to President Bush before the July 4 congressional recess.  It remains an open question whether Bush would support the bill. He has threatened to veto Frank’s bill.

White House spokesman Dana Perino said Tuesday it is premature to say whether the president would sign the Senate version. “But we’re hopeful that we’ll be able to get to that point.”  Frank said in a statement “it is highly likely we will be able to compromise on a significant housing package.”

According to Freddie Mac, U.S. 30-year mortgage rates fell for a 2nd straight week. 30-year mortgage rates dipped to an average of 6.01 % from 6.05 % last week, while 15-year mortgages held steady at an average of 5.60 %. One-year adjustable rate mortgages, or ARMs, fell to an average of 5.18 % in the week from 5.29 %.  Freddie Mac said the “5/1″ ARM, set at a fixed rate for five years and adjustable each following year, averaged 5.57 % , down from 5.67 % a week earlier. 

According to a recent government lender survey, FHA mortgage rates remained steady with slight drops for FHA home loan rates across the board.  Last week FHA interest rates had worsened, so consumers were relieved tp see the decrease.

Just twelve months ago, 30-year mortgage rates averaged 6.21 %, 15-year mortgages 5.92 percent and the one-year ARM 5.48 percent. The 5/1 ARM averaged 5.92 %. “Recent remarks by Federal Reserve officials, which partly bolstered optimism that financial markets will recover later this year, helped mortgage rates ease up a little this week,” Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

“Despite the bleak housing market, there was positive news on the overall state of the economy. Retail sales excluding automobiles rose 0.5 percent in April, over twice that of market forecasts, and there was a significant upward revision in March’s figures as well. Also, the consumer price index for April rose less than expected, allaying some market concerns of inflation taking hold,” Nothaft said. Lenders charged an average of 0.6 % in fees and points on 30-year mortgages, up from 0.3 % last week, and 0.5 % on 15-year mortgages, also up from 0.3 %. Charges on the 5/1 ARM averaged 0.6 %, up from 0.5 % last week, while fees and points on the one-year ARM averaged 0.7 percent, compared with 0.6 % a week ago.