FHA recently announced revions to their Hope for Homeowner product that is designed to offer “short refinance” loans to distressed homeowners fighting to stop foreclosure.
o Write-Down: Participating FHA mortgage lenders must agree to a reduction in principal to achieve the 9 % loan-to-value requirement.
o Prepayment penalties and fees related to default or delinquency must also be waived for this loan modification program.
o Premiums: Lenders must pay the 3% upfront premium from the proceeds of the refinance. Borrower pays 1.5% premium annually.
o Shared Appreciation and Equity: Borrower must share newly created equity with FHA when the property is sold or the loan is refinanced. FHA’s share in the equity is reduced from 100% to 50% in 10 % increments over first five years. After five years, the homeowner and government each will share in 50 % of the equity. Borrowers must also share any future appreciation 50/50 with FHA upon the sale of the property. The program’s governing Board will establish standards for sharing future appreciation owed to HUD with second mortgage holders.
o The FHA Hope for Homeowner refinance program runs from October 1, 2008 through September 30, 2011.
o Servicer Liability: Amends the Truth in Lending Act (TILA) to create a fiduciary duty for mortgage servicers to “maximize the net present value of the pooled mortgages in an investment to all investors and parties having a direct or indirect interest.” The duty does not supersede servicing contracts. It also would deem servicers to act in the best interests of all investors if the servicer implements a refinance or modifies a loan through the HOPE for Homeowners plan.
QUESTION: How soon can we anticipate the Hope for Homeowner program to be up and running with FHA home loans?
ANSWER: FHA will be working with a Board established under the law to make the program operational and issue guidance by October 1, 2008. FHA’s ongoing program, FHA Secure Refinance continues to help with a loan program designed for refinancing homeowners who are struggling since their adjustable rate mortgage reset.
QUESTION: How is credit approval being defined for FHA mortgage lenders?
ANSWER: Credit approval is defined for loans scored through FHA’s Mortgage Scorecard TOTAL as Accept/Approve on or after October 1, 2008. For those FHA home loans manually underwritten, credit approval is defined as the date the Direct Endorsement Underwriter approves the loan, as indicated by the DE signature on the Mortgage Credit Analysis Worksheet (MCAW) or L1008 oan Transmittal form.
QUESTION: What if we re-score the loan through an AUS/TOTAL?
ANSWER: For those FHA loans that are re-scored and result in a downgrade to Refer — requiring the lender to manually underwrite the loan — credit approval is defined as the date the Direct Endorsement Underwriter approves the loan, as indicated by the DE signature on the MCAW or LT. For those loans that are re-scored and remain an Accept/Approve, the date of the last scoring would be the date used to determine the credit approval.
QUESTION: How will this change affect systems such as FHA Connection?
ANSWER: Hard system edits will be implemented to facilitate the implementation of this new prohibition.
QUESTION: What if the credit was approved prior to October 1, 2008 but the loan closes after October 1, 2008? Is it eligible for insurance?
ANSWER: Yes, so long as the credit was approved before October 1, the home loan is insurable.
QUESTION: Can municipalities and other government agencies continue to offer down payment assistance loans after October 1?
ANSWER: Yes, provided that the assistance is in the form of a second mortgage. There is no combined loan to value restriction, where a 2nd mortgage is provided by a government agency. Information source – Mortgage Bankers Association
QUESTION: What is the new cash requirement for down-payments on FHA home loans?
ANSWER: Borrowers must pay, in cash or its equivalent, 3.5% of the appraised value of the property. This means that borrower must provide a 3.5% down payment on purchase money mortgages. Borrowers must come to the closing table with 3.5% cash. New home-buyers seeking FHA home financing can no longer accept seller-funded down payments.
QUESTION: When does this new cash requirement for down-payments take effect?
ANSWER: It is unclear at this time. Currently, FHA indicates that while the provision appears to be self implementing as of the date of enactment, under case law, the effective date is dependent on issuance of FHA guidance. FHA Down Payment Assistance Loans have many new restrictions.
QUESTION: Does HERA prohibit seller-funded down payment assistance and if so what is the effective date of the new prohibition?
ANSWER: HERA prohibits seller-paid down payment assistance although it does permit such assistance from family members. The prohibition against seller funded down payment assistance applies to those loans for which the lender has issued credit approval for the borrower on or after October 1, 2008. This means that if a FHA mortgage lender issues credit approval before October 1, 2008, seller funded down payment assistance is permissible. Information source – Mortgage Bankers Association
QUESTION: What are the new single-family FHA loan limits?
ANSWER: The Housing and Economic Reform Act increases the FHA home loan limits limit for FHA mortgage insurance for single family, one-unit properties (with increased limits for other single-family properties up to four units) to 115 % of the local area median home price, as determined by HUD (but no lower than a floor of 65 % of $417,000 that is $271,050) or up to a cap of 150 % of the GSE limit of $417,000, or $625,500. Note that the limits for the new FHA Hope for Homeowners Program may vary.
QUESTION: When do the new FHA single family loan limits become effective?
ANSWER: The new FHA loan limits go into effect after the limits in the Economic Stimulus Act expire on December 31, 2008, i.e., January 1, 2009.
QUESTION: Since the FHA mortgage limits are based on the conforming loan limit for Fannie Mae and Freddie Mac (the GSE limit) what happens if the GSE limit changes?
ANSWER: The FHA mortgage limit changes. The GSE regulator sets the GSE conforming mortgage loan limit annually, based on the agency’s home price index. The GSE limit will be adjusted in years when home prices increase, but increases must be offset by prior year decreases.
QUESTION: Will the new FHA home loan limits be the same everywhere in the nation?
ANSWER: No. The FHA loan limit will vary based on the local area median home price, as determined by HUD up to a limit of $625,500. The mortgage amount also cannot exceed 100 % of the appraised value of the individual property.
QUESTION: Do the new FHA loan limits apply to all “forward” single family mortgages?
ANSWER: The new FHA loan limits apply to all 1-family reverse mortgages except for Home Equity Conversion Mortgages, also known as reverse mortgage loans. HECMs and Hope for Homeowners mortgages have different limits, which is below.
QUESTION: Does HERA eliminate the existing percentage limitations for home financing?
ANSWER: Yes. It permits financing of up to 100% of the appraised value of the property.
QUESTION: Can the amount of the mortgage be increased above 100% of the appraised value, by the amount of the mortgage insurance premium?
ANSWER: No. The maximum amount of mortgage cannot be increased by the amount of the mortgage insurance premium when the principal obligation to be insured equals 100% of the appraised value. The premium can be financed as long as the principal obligation does not exceed 100% of the appraised value. Risk Based Premiums
QUESTION: Does this new law prohibit risk-based premiums? ANSWER: Only temporarily. It prohibits HUD from taking any action to implement or carry out a risk-based premium program for a period of twelve months beginning on October 1, 2008. 2 Housing and Economic Reform Act (HERA): FHA Single-Family Program Changes FAQ
QUESTION: Do FHA mortgage lenders have to stop using risk-based premiums immediately?
ANSWER: No. FHA will insure loans using risk-based premiums through September 30, 2008.
QUESTION: What action must be taken to ensure that a risk based premium home loan will be insured by FHA?
ANSWER: FHA Loans for which case numbers are assigned on or after October 1, 2008 will have the new premiums. Case numbers issued before October 1 will be subject to the current Risk-Based Premium rules that took effect on July 14. Information source – Mortgage Bankers Association
Many mortgage brokers and lenders suggest many buyers are taking advantage of FHA, which allows for down payments as low as 3% of the purchase price. That 3% can be a gift from a relative. First American Loan Peformance provided the OC Register data Orange County-Los Angeles that estimated that 18.5% was FHA home buying in August. That dropped slightly from 18.8% in July, but increased significantly from 2.3% in August ‘07. Nationwide, FHA home mortgages were even more popular with 28.6% of August home buyers financing with this program, up from 27.2% in July and 9.5% in August ‘07.
The Census Bureau released the FHA loan data for new home sales and it indicated that borrowers used FHA home financing 17% of the time in the 3rd quarter, up from 15% in 2nd quarter and 4% in the 3rd quarter of 2007. FHA finally put an end to the risky down-payment assistance loans on Oct. 1. DPAs, as they are known, allowed the seller to provide the buyer with the down-payment.
According to HousingWire, Federal Housing Administration Commissioner Brian Montgomery criticized DPA. Here’s a clip from that story: “Data clearly demonstrates that FHA mortgage loans made to borrowers relying on seller-funded down-payment assistance loans go to foreclosure at 3 times the rate of FHA home loans made to borrowers who purchase a home with their own down-payments,” Montgomery said at a National Press Club event.
Such FHA home loans are currently one-third of the government agency’s portfolio, he added, and led the agency to book an additional $4.6 billion in unanticipated long-term losses in an annual re-estimate. “No insurance company can sustain that amount of additional costs year after year and still survive,” he argued. “Unless we take action to mitigate these losses, FHA will soon need to provide loan modifications and they could face the possibility of shutting down some more programs or rely on appropriations to operate.” For anyone who doesn’t know the basics on FHA, it is an insurance program protecting lenders and note-holders against loss in case the borrower doesn’t pay. Consumers who get FHA home loans pay a premium, which goes into a pool that covers losses on loans.
Emergency economic legislation temporarily increased the limit on loans insured by the Federal Housing Administration. But that increase is set to expire this year. However, other legislation made permanent increases to maximum FHA loans. H.R. 5140, the Economic Stimulus Act of 2008, was signed by President Bush on Feb. 13. Among other provisions, it temporarily increased– until Dec. 31, 2008 — the FHA home loan limit in high-cost areas to $729,750. Prior to the legislation, the FHA mortgage loans limit was $362,790. H.R. 3221, the Housing and the Economic Recovery Act of 2008, was signed by Bush on July 30.
Among its provisions was a permanent increase to FHA mortgage loan amounts — which the U.S. Department of Housing and Urban Development said today would be $625,500 in high-cost areas. In low-cost areas, the limit is $271,050. Unfortunately many FHA mortgage lenders believe they have been given a “raw deal” after the President signed a bill that mad the higher FHA loan limits permanent. According to FHA mortgage banker, Pat O’Connell, “The mortgage industry has enough setbacks in the last two years for a lifetime…Homeowners need a FHA refinance loan they can count on.”
Mortgage limits for FHA home loans for specific areas are set at 115 % of the median house price. In high-cost areas, the FHA mortgage limit on a duplex is $800,775, while loans on triplexes can go as high as $967,950 and four-unit properties can be financed for up to $1,202,925, according to Mortgagee Letter 2008-36 distributed Friday. In low-cost areas, the maximum FHA loan on a four-unit property is $521,250.
In for Alaska, Guam, Hawaii and the Virgin Islands, the FHA loan limit is set at $938,250 for a single-family residence. Last month, the Federal Housing Finance Agency confirmed the 2009 conforming FHA loan limit in high-cost areas at $625,500. This month, HUD issued Mortgagee Letter 2008-35 indicating that a nationwide mortgage limit had been established on reverse mortgage loans at $417,000.
The Mortgage Bankers Association recently reported a significant increase in FHA loan share of the mortgage market. The Association says “the government share of originations more than doubled to 11.8 % in the first half of 2008 compared to 5.7 % in the second half of 2007. The government home loans category includes loans guaranteed or insured by the Department of Veterans Affairs, the Federal Housing Administration and Rural Housing Service. The increase in the FHA home loan limit, which broadened FHA refinancing and purchase loan options for more consumers, was one of the factors that contributed to the increased popularity of the FHA.”
The increase in federally-insured loan programs should hardly come as a surprise. The subprime and conventional mortgages have been impacted by the lack of bank lending. Private and portfolio lending is being done more as they account for 88.2 % of all mortgage loans closed. But the FHA home loans being made today are objectively better than the junk seen during the past few years because mortgage lenders are requiring documentation and eliminating negative amortization mortgages, interest-only loans and other forms of risky financing. FHA mortgage loans make sense because they have no penalties for early termination and no balloon payments due. Private money has begun to carry the FHA mortgage market.
Other details from the MBA report include:
o The refinance share of all originations was 61.7 % in the first half of 2008, compared to 54.8 % in the second half of 2007. The % of home refinance loans for rate or term purposes increased from 38.1 % in the second half of 2007 to 48.6 % in the first half of 2008. The refinance volume also increased 5.8 % in the first half of 2008, based on data from repeater companies, which are participants that responded to the survey in both halves.
o For 1st mortgages, fixed-rate mortgage loans, excluding interest-only loans, accounted for 78.5 % of the dollar volume of originated home loans in the first half of 2008, compared to 63.6 % in the 2nd half of 2007.
o In the 1st half of 2008, 82.7 % of all origination dollars were for prime loans, compared to 79.0 % in the 2nd half of 2007, 3.8 % were non-prime, compared to 7.5 % in the 2nd half of 2007, and 1.7 % were Alt-A, compared to 7.8 % in the second half of 2007.
o Originations of mortgages with deferred amortization (“interest only” or “IO”) continued to decrease significantly for both fixed and adjustable rate mortgage programs from the 2nd half of 2007. IOs accounted for 10.6 % of originations in the 1st half of 2008, compared to 22.4 % in the second half of 2007.
o In the first half of 2008, first-time homebuyer purchases represented 29.9 % of the volume of purchase fundings, compared to 27.9 % in the second half of 2007. They represented 32.2 % of the number of purchase loans in the 1st half of 2008, compared to 30.2 % in the 2nd half of 2007.
o Estimates from MBA’s Mortgage Finance Forecast further demonstrate the trends in originations as purchase money loans were down by 16.2 % in the first half of 2008 compared to the 2nd half of 2007. Refinance fundings increased 16.3 % in the 1st half of 2008 compared to the 2nd half of 2007.
Many people are under the mistaken impression that because Federal Housing Administration (FHA) offers incentives such as low down payments and low credit availability that it will be the new subprime loan. This is not true. FHA home loans remain focused on make sense mortgages and they stress that homeownership is a privilege, not a right. Unlike subprime refinance loans that offer low documentation and no documentation (stated income) loans, FHA loans require full documentation of income.
Other ways FHA separates itself from the subprime mentality include:
o Abolishing seller-funded down payment assistance and upping down payment requirements to 3.5% (the previous requirement was 3%). There have been even talks of limiting FHA cash out from the now 95% back to 85% LTV ratios. FHA has always verified income and offered traditional fixed rate mortgages.
o Requiring that your mortgage payment (generally meaning principal, interest, property taxes and property insurance — PITI) to be no more than 31% of your gross monthly income. Those whose PITI is more than 31% are a much greater risk for default, and ultimately, foreclosure.
o Debt to income (DTI) ratio requirements, which state that your total monthly debt obligation including the mortgage, credit cards, auto loans, student loans, etc., should come to no more than 43% of your monthly income. This is still much more generous than standards set by the government-sponsored entities (GSEs), Freddie Mac and Fannie Mae–conventional loan standards.
FHA makes an exception to the PITI and DTI requirements if you are buying an energy-efficient home. The PITI is increased to 33% and 45% for all ongoing monthly payments. The reason for this is because of the long-term savings in energy costs.
Other FHA Requirements
Credit scores above 620 will probably qualify through the automated application process. Scores below 620 will be rejected in the automated process and will have be processed manually, including an interview with the applicant. Cash out refinance loans rarely qualify at 95% any more. Mortgage lenders contest that FHA likes 85% for cash out refinancing.
With re-established credit, applicants who are still paying on a Chapter 13 bankruptcy filing are eligible after one year and those who filed Chapter 7 are eligible after two years. Conventional lenders typically require a three-year wait after a Chapter 7.
Applicants who have gone through foreclosure are ineligible until at least three years have passed since the foreclosure date. In the interim, the applicant must have reestablished good credit. Any civil judgments must be paid off. Any delinquency on federal debts such as taxes and student loans will disqualify the applicant.
The FHA’s mission is to help those with lower incomes be able to own their own homes. But, borrowers must qualify for the loans. The days of stated income and non-verifiable income loans have ended. Borrowers must now fully document their income and expenses. There are credit score and DTI requirements. Now, a borrower must prove they are actually able to afford the mortgage loan. Going back to traditional lender underwriting standards is the only way to assure that another mortgage meltdown like this one does not happen again.
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