The subprime market, which has been blamed for sparking the current financial and credit crisis, is pretty much dead and gone. FHA home loans have now become the primary home financing tool for lenders nationally. FHA has upheld their promise to lend to people with little money for down payments and credit blemishes.
The FHA requires a 3 percent down payment (due to raise to 3.5% beginning next January), compared with 20 percent for some conventional mortgages. The FHA also doesn’t require a minimum credit score, although lenders typically have minimum standards in place. But these minimums are nowhere near as stringent as those of conventional loans. For a conventional loan, you need a credit score of at least 660 if you’re putting 20% down and at least 700 if you have less than 20% startup equity. Most lenders who have a minimum credit score requirement for FHA loans will approve someone who has a score of as low as 500, but typically the required minimum is 580. But, that’s a lot less than what conventional lenders are asking for.
On top of that, the government has substantially increased the amount of money that can be borrowed through FHA loans, And, for the first time, FHA is allowing homeowners who are behind on their monthly payments to refinance through the FHA. Nationally, the FHA is insuring more than $24 billion in mortgages a month, up from about $6 billion a month a year ago, a figure that includes purchases and refinances. In metro Atlanta, the number of FHA loans is on pace to more than double this year.
“All of a sudden, FHA has come back in a big way and is a much bigger piece of the pie,” said Walter Moody, a Macon broker who is president of the Georgia Association of Mortgage Brokers. Jan Wagner, president of Canton Street Mortgage in Roswell, said her company began handling FHA loans only this year. But now, nearly one in three of her company’s mortgages are backed by the FHA.
Unlike the subprime market, FHA has measures in place to minimize lender risk for foreclosure. FHA mortgage lenders continue to praise HUD’s commitment to homeownership. “We have consistent guidelines in that we do require borrowers to document income and their ability to pay,” said Charles Gardner, director of the FHA’s Atlanta homeownership center. Subprime loans would allow people to borrow based on what they claimed their incomes were. The Federal Housing Administration (FHA), an arm of the U.S. Department of Housing and Development (HUD), requires borrowers to verify income and submit income tax records. Like conventional loans, FHA is a full documentation loan.
FHA is still the best option for cash-strapped first-time buyers and those who have a credit score of less than 700. Fill out the free loan quote form to see if you qualify for a FHA purchase loan or refinance. Interest rates are low right now, so it’s a good time to refinance, especially if you currently have a subprime adjustable rate mortgage (ARM) or exotic hybrid ARM interest only or negative amortization loan.
Last week it seemed that Bush may have opposed the FHA loan expansion programs. Ironically, the FHA was born in 1934 during the great depression in an effort to stabilize the housing market with the mission of HUD’s fair lending policies. The thirty-year mortgage loan featuring a fixed interest rate was a FHA initiative.
Secretary Paulson informed Congress to forget about passing a Democratic bill that would create a special Federal Housing Administration fund for refinancing one to two million homeowners with home mortgages that were greater than the home’s value. According to mortgage banker Bryan Dornan, “FHA has clearly been the savior for home financing products for the mortgage industry in 2007 and 2008.” Dornan continued, “Having the ability to offer Americans a quality home loan with an affordable rate is critical during these uncertain financial times.”
Under the proposal sponsored by Rep. Barney Frank, D-MA and Sen. Christopher Dodd, D-CT., FHA mortgage lenders would have to write down the mortgage to 85% Loan-to-Value. The FHA loan proposal would give lending-investors the option of taking a “quick hit or a slow bleed,” one pundit of the bill remarked. It might also offer homeowners a new opportunity with an affordable FHA mortgage and a fresh start. Recently we were told that Housing Dept of Urban Development has been working on a similar mortgage product. But the Bush administration does not want Congress to tinker with it, because it would be available faster by using FHA’s existing authority to mold the loan products for today’s circumstances.
The U.S. economy continues to struggle with new reports of financial melt-downs almost daily. The government home loans continue to provide the best home financing solutions with FHA home loans. New homebuyers like FHA loans for purchasing and current homeowners like FHA for streamline refinancing and cash out refinance opportunities. Will our government continue to bail out struggling mortgage lenders?
Unfortunately investors began to dump U.S. debt which has caused conforming and FHA mortgage rates to rise again.
According to the Mortgage Bankers Association, the 30 year fixed mortgage rate topped the 6 percent to end the week at 6.08 percent, up 0.26 percent from a week ago. The 15 year fixed rate mortgage jumped 0.30 percent to 5.84 percent and the 1 year adjustable mortgage rate increased from 6.95 percent to 7.01 percent throughout the week.
FHA mortgage loan application volume was down 10.6 percent on an adjusted basis and down 11.1 percent on an unadjusted basis for the week ending September 19, 2008. Compared to one year ago, FHA mortgage loan applications were down 9.3 percent. The Mortgage Refinance index dropped 11.2 percent to 2043.4 from the previous week and the seasonally Adjusted Purchase Index decreased 10.0 percent to 342.2 from one week earlier. The Conventional Home Purchase Index decreased 10.4 percent while the Government Purchase Index (largely FHA) decreased 8.9 percent. Get more insight at FHA Mortgage Services.
Negotiations over an unprecedented $700 billion bailout opened on Sunday between Congress and the administration of President George W. Bush. The idea of this intervention is to revive the U.S. financial system, which includes a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.
Mortgage rates remained low, but home lending guidelines continue to tighten. Most brokers are reporting that FHA home loans have taken 75% of the market share. According to Nationwide Lender Jeff Moran, “FHA mortgage products are most attractive because they underwrite loans beyond the credit scores.” FHA mortgage guidelines promote fair lending with underwriting practices that encourage qualifications based on compensating factors like, equity, assets, benefits and likelihood of the proposed borrower making the loan payment on time each month.
The sweeping proposal would have the Treasury buy up bad mortgage-related debts from financial institutions, including U.S. subsidiaries of foreign banks, to try to stem the worst financial storm since the Great Depression. This is supposed to leave banks with more money and fewer problems, according to two sources familiar with what was said at the meeting.
The Securities and Exchange Commission (SEC) is considering further limits on short-selling, a practice that allows investors to bet on a decline in a company’s stock price, according to a person familiar with the matter. Critics of the practice say short sellers are driving down the share prices of financial companies, thereby contributing to their destruction. So, short sales could very well be out of the housing market picture in the very near future.
People are withdrawing money from money-market mutual funds. Banks are refusing to lend to one another. Several large financial companies need money to stay in business, including the bank Washington Mutual, which is seeking a buyer. Regulators and the banking industry are increasingly concerned about customer withdrawals from money-market funds. Crane Data, which tracks the industry, said total deposits in money-market funds fell Wednesday by at least $79 billion, or about 2.6 percent.
Money-market funds are particularly important because they buy short-term debt, which is used by financial companies and other corporations to finance day-to-day activities.
“As of now, the Bush administration has only offered a concept with a staggering price tag, not a plan. Even if the U.S. Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering,” says Democratic presidential candidate Barack Obama.
If a plan does move forward, Democrats may try to demand concessions from the suddenly humbled industry, said Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, including support for a proposal to permit bankruptcy judges to modify mortgages for distressed borrowers. Currently, judges may set new terms for mortgages on second homes but not on primary residences.
At this point, all of this financial turmoil seems only to affect conventional loans. Credit is pretty much frozen. FHA Lenders don’t even want to lend to each other much less borrowers, which is why FHA, VA and other government-backed Ginnie Mae loans are being extended (particularly for refinance loans) at a record pace. What’s happened so far is that interest rates have dropped lower than they’ve been in a year.
With sellers having to deal with a huge inventory of houses on the market and declining prices, they have to make what they have for sale stand out in the marketplace. One of the ways is to be open to FHA home refinancing and other government-backed loans. It may take a little longer to process the loan, but at least loans are being extended through the government-backed channels rather than being stagnated as are conventional loans. It’s better to jump through a couple of extra hoops in getting your house sold than to let it sit while all this financial mess is sorted out by investment bankers that adversely affect lenders and their ability to lend.
If investment banks aren’t making any money, they can’t fund loans. So, until investment bankers can make money to fund lenders, conventional lenders won’t be able to extend loans, so FHA and other government-backed loans are pretty much the only players in the housing market. Sellers need to accept FHA home loans, and borrowers need to apply for them to buy houses. This financial mess has made FHA not only the refinance loan of choice, but also the purchase loan of choice.
FHA lending standards are still reasonable, and FHA only requires 3% down. However, the down payment requirement will be going up to 3.5% in January of next year. But, that’s still a lot better than what conventional loans have to offer. And, at least you can get a FHA loan. Not too many people can get conventional loans right now, and they probably won’t be able to for quite some time to come. If you’re looking to buy while housing prices are low, FHA and other government-backed loans are the best way of securing financing for your new home. Otherwise, you could be in for a long wait, especially if you’re a first-time buyer who can’t afford a 20% down payment.
Accepting these new criteria was hardly voluntary. The Fed warned the banks: “Did You Know? Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions.”
FHA mortgage refinance tends to follow the most flexible underwriting criteria permitted under with government and FHA guidelines. When necessary — in cases where FHA loan applicants have no established credit history, for example — FHA allows nontraditional credit, a practice now accepted by most government lending institutions.
Credit History: When considering past credit problems FHA mortgage lenders should review isolated circumstances. For lower–income applicants in particular, unforeseen expenses can have a significant effect on an overall good credit history. When looking at a refinance transaction that pays off past collections and high rate credit card debts, the debt to income ratio would be reduced significantly.
Sources of Income: In addition to primary employment income, FHA, Fannie Mae and Freddie Mac will accept the following as valid income sources: overtime and part–time work, second jobs (including seasonal work), retirement and Social Security income, alimony, child support, Veterans Administration (VA) benefits, welfare payments, and unemployment benefits.
Credit scores. While credit scores can be an analytical tool with conforming loans, their effectiveness is limited with Community Reinvestment Act loans. Unfortunately, Community Reinvestment Act loans do not fit neatly into the standard credit score framework…Given these mortgage lending practices mandated by the Federal Reserve and encouraged by FHA Fannie Mae and Freddie Mac, the resulting financial problems for financial institutions such as Countrywide, Indy Mac, Bear Stearns and WAMU are not that shocking.
“This is the worst housing crisis of our lifetime, and we’re in a recession as a result of it,” said Senator Chris Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, the author of the legislation. “Property values decline sharply when a home in the neighborhood is foreclosed upon. In order to stabilize neighborhoods, we must take actions to prevent foreclosures. This proposal will help provide much-needed relief for people on the brink of foreclosure, keeping families in their houses and neighborhoods financially stable.”
The Bush administration rolled out the new FHA HOPE for Homeowners Loan on October 1, 2008. It’s the Department of Housing and Urban Development’s new mortgage insurance program. The new insurance, offered through the Federal Housing Administration (FHA), will allow qualifying homeowners to refinance with fixed-rate mortgages, said Brian Sullivan, who works for HUD in Washington, D.C. This program is called the HOPE for Homeowners Act of 2008 and is part of the Housing and Economic Recovery Act. It begins on October 1, 2008 and ends in September 2011. The Federal Housing Administration (FHA) would insure the program up to $300 billion.
It was the mortgage of last resort when home sales were booming. Buyers balked at the paperwork. Sellers hated the home-repair rules. FHA lenders are anxiously awaiting the government to roll out the new FHA mortgage loans. The Federal Housing Administration (FHA) mortgage guarantee program, long considered a backwater, has garnered newfound respect in industry and policy circles. President Bush made it the centerpiece of his mortgage relief plan.
The Federal Housing Administration, the once-viewed-as-antiquated, irrelevant Great Depression-era government agency, is suddenly emerging as the centerpiece of government efforts to bolster the U.S. housing market, reported The Wall Street Journal.
The FHA loan options have become the cheapest, and in many cases, the only alternative for borrowers who can make only a small down payment and the agency is rapidly gaining market share.
Home buyers and mortgage refinancing owners nationwide took out nearly 530,000 FHA loans in the first half of the year, 160 percent more than in the corresponding months last year. Many of the new local FHA home loans this year are FHA refinancing loans. But even in this market, where home sales are falling precipitously, FHA mortgages for new purchases jumped 170 percent. “Now, it’s almost automatic that it’s FHA,” said Keith L. Cross, a real estate agent with Century 21 Downtown in Baltimore.
Fewer than 10 percent of mortgage applications were for government-insured loans in July 2007, the Mortgage Bankers Association said. This July, it was nearly 30 percent. “Suddenly, we’re a good option and perhaps the best option,” said Meg Burns, FHA’s director of single-family program development. She sees parallels to the early days of the agency, which was founded during the Depression to keep financing flowing to Americans after banks failed.
FHA Changes
Starting October 1, the minimum will increase to 3.5 percent from 3 percent. Seller-funded down payment assistance also becomes a thing of the past as of October 1. This includes nonprofit groups whose assistance to buyers is funded by sellers. FHA also says it will raise its fees come Oct. 1. Most borrowers will pay upfront mortgage insurance premiums of 1.75 percent of their loan amount rather than 1.5 percent and annual premiums of 0.55 percent rather than 0.5 percent.
The economic-stimulus bill passed by Congress and signed by President Bush earlier this year raised the ceiling on the size of loans the FHA can insure to $729,750 in the highest-cost areas, up from a previous cap of $362,790. The new limits are due to expire at the end of this year, and the new limits under the Housing and Economic Recovery Act of 2008 are lower. The new loan limits set by this Act will be $625,500.
If you’re looking to buy or refinance through FHA, now is the time to do it before these changes take place. Fill out the free loan quote request form on this page or call us toll-free.
The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies. The two government sponsored enterprises (GSEs) own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt. Treasury Secretary Henry Carlson said he hopes the move will lower FHA mortgage rates, increase home buying and slow down the drop in home values. The government plans to move these two mortgage giants into the FHA home loan division for the time being.
The news, first reported on The Wall Street Journal’s Web site, came after stock markets closed. In after-hours trading Fannie Mae’s shares plunged $1.54, or 22 percent, to $5.50. Freddie Mac’s shares fell $1.06, or almost 21 percent, to $4.04. The news also follows a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June. The FHA secure refinance loan was created for foreclosure prevention so this number may drop further in the next few months.
The number of new mortgage holders entering foreclosure in the second quarter stood at 1.19 per cent of all US mortgages, the Mortgage Bankers Association said Friday. This is the first time the rate has topped 1 per cent in the 29-year-history of the association’s record keeping. Fannie and Freddie have suffered 14.9 billion dollars in losses from the widening mortgage foreclosure crisis in the US that has rippled outward to foreign investors. The central banks of many countries, including those in Asia, hold considerable stock in Fannie and Freddie.
The US Treasury has plans to put Fannie and Freddie into a so-called conservatorship, House Financial Services Committee Chairman Barney Frank told Bloomberg financial news agency, after a briefing by Treasury Secretary Henry Paulson on Saturday. “What they are talking about doing are two things, one is conservatorship and two, putting some money into them. I think it’s an important combination,” Frank said.
Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts eventually, the Wall Street Journal reported. The value of the company’s common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares, would be protected by the government, the Washington Post said. The Federal Housing Finance Agency (FHFA), a new agency that Congress created this summer, will regulate Fannie and Freddie. Instead of giving each company a big capital infusion up front, the government plans to make quarterly infusions as the companies’ losses warrant, sources told the Washington Post late Friday. This would be an attempt to minimize the initial cost of the rescue, the paper said.
How is all this going to affect the housing market?
“I think it is probably a good thing. We could see the foreclosures were going to continue and something needed to happen. This will bring some cash to the organizations and I think it’s going to bring some stability,” said Greg Bauman, president of the St. Paul Area Association of Realtors.
Bauman said if the government would not have taken over, and Fannie and Freddie failed, the results would have been devastating. Now with the government in control and funding the organizations, and with new CEOs in place, Bauman said there will be more stability in the housing market.
Local mortgage brokers have commented that there is a void for down-payment assistance loans with FHA. However, local home buyers and sellers may not see that much of a difference. “I don’t think consumers are really going to see a real impact. I don’t think we will see a big change in interest rates and mortgages or the qualifying for them,” said Bauman.
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