The percentage of borrowers who are delinquent on FHA loans backed by the Federal Housing Administration jumped by more than a third in the past year, signaling a new wave of home foreclosures that could further buffet an agency vital to the housing market’s recovery.  About 9.1% of FHA loan borrowers had missed at least three payments as of December, up from 6.5 % a year ago, the agency’s figures show.

Although the FHA default rate has been climbing for months and eating into the agency’s cash, the latest figures show that the FHA’s woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA home loans made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made. Most insiders would agree FHA guidelines must tighten.

If the trend continues and the FHA’s cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses — a first for the agency, which has always used the fees it charges borrowers to pay for its losses.  As these FHA mortgage loans from 2007 and 2008 go bad and clear off of the FHA’s books, agency officials said, losses are expected to taper off, aided by the housing market’s anticipated recovery and an influx of more creditworthy borrowers, who have flocked to the FHA’s home-buying program in the past year.  Agency officials said they have cracked down on poorly performing lenders and announced higher qualifying fees for borrowers. On Monday, the agency projected that the fees should generate $5.8 billion in fiscal 2011, up from $2 billion this year. That would fatten the FHA’s cash cushion, used to cover unexpected losses.

For now, just about every major measure of the agency’s financial health is worsening. The FHA does not make loans but insures lenders against losses. And claims have already spiked. The agency had to pay out on 47% more FHA home loans in October and November than in the corresponding period a year earlier, according to an FHA report.   The number of loans in foreclosure, including those that have not yet been billed to the agency, has also increased. They were up 26% in the last quarter from a year earlier.  FHA Commissioner David H. Stevens, who joined the agency in July, flagged his agency’s troubles with the 2007 and 2008 loans in October, when he told a House panel that “rogue players on the margin” immediately migrated to the world of FHA mortgage lending after the subprime mortgage market collapsed. Their aggressive mortgage lending tactics attracted borrowers with unusually poor credit profiles to the FHA. “That clearly impacted the books of business in 2007 and 2008, and that performance data is showing up very clearly in today’s balance sheet,” Stevens said at the time. Plunging home prices have exacerbated matters by leaving some FHA borrowers unable to sell or refinance their homes because they owe more than their homes are worth. Yet with unemployment running high, many borrowers can’t afford to keep up their payments.

Adding to the trouble was a now-defunct FHA mortgage program that enabled sellers to cover the down payments of buyers. This meant many borrowers had no skin in the game and were more likely to walk away at early signs of trouble. The program resulted in excessive defaults before it was ended in late 2008, and it is projected to cost FHA an additional $10.5 billion in losses, Stevens said. For all these reasons, the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 — the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.

The FHA home loan guidelines should see significant changes in 2010.  Look for credit score and down-payment requirements to rise.  FHA rates for January 4th, 2009 are down as the conforming thirty-year fixed mortgage rate is right at 5%.  The conforming fifteen year fixed mortgage rate is at 4.45% and the conforming 5/1 ARM is up slightly to 4.14%.  The 10 year treasury rate yield has pulled back slightly today which is a strong indicator that mortgage rates are going to be stable to down.  It will be interesting to see how FHA mortgage rates and the 10 year treasury rate yield move over this first week of January.

Lending guidelines have gotten out of reach for millions of homeowners seeking to refinance.  When a borrower is seeking an FHA or conventional mortgage, the lending guidelines have tighten significantly.  Frank Sullivan, is a homeowner seeking financing for home improvements.  He and his wife also want to refinance out of a 7.125% home loam, but he have been unable to secure a refinance loan.  Sullivan and his wife, Diane, an admin assistant in Carlsbad, California have a $3,350 monthly home loan payment now. They have never been late on a payment since they bought the house in 2003, he says, and they both have credit scores in the high 700s.  So why can’t they qualify for a refinance loan and benefit of the near-record-low mortgage rates that have led to a surge in mortgage refinancing applications?  They’re like many homeowners who are being shut out, local mortgage brokers and bankers say.

The average mortgage rate for thirty-year fixed-rate mortgages fell to an all-time low of 4.71% the first week in December.  The rate was below 4.875% for seven weeks until Thursday, when Freddie Mac said the average rose above 5%. According to the Mortgage Bankers Association, the low refinance rates have spurred a surge in refinance applications, with 3 out of 4 loan applicants looking to refinance.

The volume of refinance loans would be much higher, experts say, if it weren’t for barriers facing many homeowners:

* Property values hurt by home foreclosures and short sales

* Tighter-underwriting guidelines for credit scores, delinquencies and debt to income ratio.

* Income rules that affect the self-employed.

Conventional lenders used to be able to do ’stated-income’ mortgages. But those have been banned by most banks and lending companies. “I get a lot of self-employed individuals that are 50, 60 years old with 780 credit scores, never made a late mortgage payment in their life, have got $500,000 to $1 million in the bank. But nobody’s going to give them a loan because they’re not showing any incomes on their tax returns.”  That’s what’s happening with the Sullivan’s.  “The only reason I can’t do anything is that I’m self-employed,” Sullivan said. “It’s extremely frustrating and irritating. Every month, I sit down to write that check, and I know I could be saving money. I’d be saving about 40 %.”

Industry insiders continue to wisper about FHA loan guidelines that may be tightening up.  According to Trust One mortgage banker, Al Pereida, “For all intensive purpose, the FHA home loan is a great option for first time homebuyers who are unable to come up with a 20% down-payment.” Keeping the FHA loan programs alive may be crucial for the housing recovery.”  Pereida continued, “If FHA disappears, mortgage professionals do not have a plan-B ready to replace the lending niche.”  Most FHA lenders doubt that raising credit scores or minimum home loan down-payments will help FHA’s bottom line in the short term, but is not opposed in principal to raising minimum down-payment requirements. 

FHA mortgage rates have stayed below 5% for the last 6 months and millions of homeowners still need a FHA refinance to reduce their loan payment to meet their budgets.  Lenders and brokers continue to worry that the HUD may be tightening FHA guidelines right about the same time as the Fed shuts down their program that has kept mortgage rates low by purchasing $1.25 trillion in mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The Federal Reserve has said it will wind the program down at the end of March, which could send interest rates up and put downward pressure on prices.  Most of the changes Donovan outlined can be made with no additional authority from Congress, and Donovan said HUD expects to provide more details and public guidance on the changes by the end of January.  If HUD issues revised FHA guidelines to lenders in January, they aren’t likely to take effect for 60 days, meaning homebuyers have several months before the latest changes kick in. In September, FHA announced new guidelines for ordering appraisals and streamline refinance loans, which take effect January 1^st.

In releasing the results of an actuarial study last month that found FHA’s capital reserve ratio has fallen below a 2% minimum established by Congress, an FHA spokesman said that seller-funded assistance loans were the most substantial pool of troubled loans on FHA’s books, with claim rates 2.5 to three times higher than other mortgage loans.  HUD has estimated that seller-funded down-payment assistance was used on more than 35% of all home purchase loans insured by FHA in fiscal year 2007, compared with less than 2 % seven years earlier.

FHA may not be “the next subprime mortgage product,” according to remarks prepared for presentation to congress this morning by HUD. Secretary Shaun Donovan said that FHA loan reserves will remain positive “under all but highly severe economic scenarios.”  He said that HUD had learned from recent history, “that the market is fragile, and we have to plan for the unexpected.  Donovan informed members of the House Committee on Financial Services that FHA, in spite of actuarial reports that its secondary reserve level has fallen below the required 2% to 0.53% of its total insurance-in-force, is capable of withstanding the current economic downturn.  That economic uncertainty is complicated by an organization we inherited that, to be honest, was simply not properly managing or monitoring its risk.  Credit and risk controls were antiquated.  Enforcement was weak.  And our personnel resources and IT systems were inadequate.  “Little of this may have been obvious when FHA’s market share was 3% as recently as 2006.  But when our mortgage loan markets collapsed last fall, and homebuyers increasingly turned to the FHA for help, the potential consequences of these lapses in risk management became very clear.  His department, he said, is in the process of drafting new policies to address the quality of FHA’s current loan portfolio, improve the performance of future FHA mortgage loans, and restore the capital reserve above its mandated levels. 

The government loan agency is looking at several measures to improve the quality of its portfolio going forward.  It plans to reduce the maximum permissible seller concession from 6% to 3% because the current level exposes the FHA to excessive risk by creating incentives to inflate appraised values.  The change, he said, will bring FHA into line with industry norms and even further reductions may be considered.   The minimum borrower FICO score will be raised although the final number has not yet been determined.  The agency is studying whether new FICO minimums should be accompanied by changes in other underwriting criteria for lower down payment loans.  The up-front cash that a borrower will be required to bring to the table for an FHA loan will also be increased to make sure that borrowers have “skin in the game.”  The exact way this will be accomplished is still under study.

These proposed changes, Donovan said, only require administrative decisions on the part of HUD, however, Congress will be asked to pass legislation to increase premiums.  The current up-front premium of 1.75% is below the statutory cap of 3% but the annual premium is at the maximum.  Raising premiums, he said, is the most effective means of raising capital for the reserve fund with the least impact per borrower.  Donovan said that more than 7% of the future losses the FHA is anticipating will come from loans already on its books, so, as Mortgage News Daily reported on Monday, the agency is taking steps to enforce lender accountability.  Donovan said that, in addition to holding FHA lenders responsible for their origination quality and compliance and increasing reviews of that compliance, lenders will be required to indemnify the FHA for losses resulting from their failures to meet FHA loan requirements and will be sanctioned nationally for any improper activities rather than through the FHA’s current policy of sanctioning individual branches.  The secretary reported that the anticipated changes are merely the latest in a series of improvements FHA has made to shore up its lending activities. 

In 2008, Congress put an end to the practices that led to the most troubled mortgage loans in FHA’s portfolio – so-called “seller-financed down-payment assistance” loans. Without these FHA home loans, Donovan said, the actuary reported that secondary reserves would have remained above the two percent threshold. “This year, we’ve taken several additional steps. We’ve steeply increased enforcement efforts, having suspended seven lenders, including Taylor, Bean and Whitaker and withdrawn FHA-approval for 270 others, including Lend America just this week.”

Credit and risk controls have been tightened. Requirements for the Streamlined Refinance program have been toughened with several improvements to the appraisal process and proposing a rule to increase net worth requirements for all FHA lenders. The latter has just entered the notice and comment period.  The agency has hired a permanent Chief Risk Officer to provide a comprehensive and thorough risk assessment and ensure that the assumptions going into the agency’s modeling reflect the most current economic conditions.

FHA is working to increase staffing and technical capacity and upgrade our technology systems and delivered FHA’s first comprehensive technology transformation plan to Congress in September.  The Secretary detailed the active role that FHA is taking in the current housing market, insuring almost 30% of purchases and 20% of refinance loans in the housing market, and financing the majority of minority home purchases.  But, he said, “as important as the FHA is at this moment, I want to emphasize that the elevated role it is playing is temporary – a bridge to economic recovery helping to ensure that mortgage finance remains available until private capital returns.”  Article was written by Jann Swanson  .

The FHA (Federal Housing Administration) a division of HUD (U.S. Department of Housing & Urban Development) has loan programs that help Americans own homes. They also have a new FHA loan program that has been created as a home repair and rehabilitation loan. It’s actually a mortgage to purchase a property that is for more than the property is currently worth leaving funds to fix up the purchase. The home rehabilitation loans for home rehabilitation help a community by helping the homeowners maintain the properties they buy which can revitalize an older area.

FHA 203k loans for home rehabilitation can work in a few ways for an existing property consisting of one to four units. The property can be purchased (dwelling & land) and the FHA 203k loan can be used to repair and/or rehabilitate the purchased property. Another way in which the loan can be used is for a dwelling to be purchased and then moved to a new foundation on mortgaged property where the 203k loan will help rehabilitate the property on its new location. The 203k FHA loan can also be used to refinance mortgages while providing cash out to repair a dwelling. In all cases it gives people an outlet to be able to buy “fixer-upper’s.”

This type of loan is not a new concept; however, most people did not have any use for them and used home equity loans instead. When home prices were rising many home owners had enough equity in their homes to obtain an equity loan for home repairs. In the last couple of years as home prices decreased home equity loans have not been an option. For homeowners that want to fix up their home but cannot due to not having the extra money and not being able to fit the guidelines of a home equity loan anymore, the FHA 203k has become the answer. In our time of an economic crisis these 203k FHA loans for home rehabilitation work great for buying a foreclosure and being able to fix it up.

The amount of money that a FHA 203k loan user obtains depends on the repairs that are being done. The total of the loan will be based on the value of the property after the repairs and rehabilitation work has been completed. The amount allowed will come from an appraiser and/or home inspector and cannot exceed $35,000 for the repairs portion. The seller benefits from the government refinancing loan for home rehabilitation because they do not have to spend money for home repairs and the buyer benefits by getting a good buy on a property and then immediately having the money to fix it up.

Few mortgage executives would dispute that FHA home loans provide stellar options for home-buying and refinancing. The story of the collapsed of mortgage markets has been told.  Unfortunately, the effects are still hindering the housing recovery for most of the nation.  This organization’s mission is to bundle and sell home mortgages insured by the Federal Housing Administration (FHA). These mortgage-backed securities are backed by federally insured or guaranteed loans. FHA’s spectacular growth means the organization now insures $560 billion in mortgages.  FHA loan forecasts predict that by year’s end, Ginnie Mae’s mortgage exposure will top $1 Trillion. Along with Fannie Mae and Freddie Mac, Ginnie Mae provides some federal taxpayer guarantee for nearly 9 out of 10 new mortgages in the US. Moreover, the scope of the federal guarantees is the heart of the problem.

What are some of the characteristics of the FHA mortgage insurance program? The FHA loan program features low down payment loans to homeowners of below average to poor credit ratings. The profile of such a lender should be familiar to all and we came to know these loans as sub-prime home loans. The very type of loan that toppled Fannie Mae, Freddie Mac, and Countrywide Financial is back in vogue! Statistically, 7% of FHA’s loans are in default and 13% are delinquent by more than 30 days. The reserve fund backing the insured loans is now 3% implying a leverage ratio of 33%, which is dangerous territory. Refinancing programs approved by Congress add to these woes as hundreds of thousands of borrowers presently unable to pay mortgages move to FHA loan programs. This includes loans in the sub-prime and other exotic realms. Part of the refinancing program includes mortgage reductions of up to 30% to mitigate imminent home foreclosures. Naturally, the 30% home loan forgiveness must be taxpayer financed. There are cases of borrowers with 25% negative equity qualifying for FHA home refinancing under this program. The latter case is especially troubling since one has to ask how many banks would willingly offer FHA refinance terms to a borrower when their collateral is 25% less than the loan amount? Is it even a smart proposition for a borrower to enter into such a loan? How many of these borrowers will default even with new mortgage terms?  In the story, a former Fannie Mae executive noted the FHA might require a bailout (a familiar term lately) due to potential losses of $54 billion.  So consider that one of the pillars of the US mortgage industry is essentially bankrupt.

Don’t categorize FHA home loans in the subprime lending section. The credit score averages for FHA loans suggest just the opposite.  HUD released new credit score data figures indicating that the average FHA customer has a credit score of 670. HUD clearly releases the credit score information because it wants to show Wall Street and the mortgage insurance companies that thetypical borrowers for FHA mortgage loans is qualified for home financing.  FHA loans still have no credit score minimums.

According to HUD, FHA guidelines still “do not have minimum credit score requirements.” However HUD does stipulate that past credit history is considered when underwriting FHA home loans.  FHA guidelines are based on the borrower’s ability and willingness to repay the mortgage loan.  “FHA lenders are empowered to make a credit determination based on the merits of each borrower.”  FHA lenders have the ability to disregard low credit scores if the borrower demonstrates significant compensating factors that outweigh the bad credit.  Do wholesale FHA lenders like B of A, Wells Fargo, Countrywide, Chase or SunTrust ignore credit scores and extend no credit requirements to brokers and loan officers?  NO –That is the myth…HUD does not have minimum credit score requirements but most FHA lenders have implemented their own credit score minimums in an effort to mitigate risks and reduce default ratios.  In most cases, if a borrower has a FICO score below 500 than the FHA underwriter typically requests an additional 10% of home equity or for a down-payment to show the applicant’s compensating factors.

o    Credit Score Average for FHA Loans is 670

o    Average Credit Score for Home Buying is 695

o    Credit Score Average for FHA Refinancing is 662

In the last two years, FHA introduced several loan modification plans and mortgage relief programs, like FHASecure and Hope for Homeowners and today they announced a third attempt with a new FHA loan modification program.  These past FHA home loan modification performed well because they never really got off the ground with the participating FHA mortgage lenders.  At press time, FHA mortgage rates remained at record low levels.

Most of you will remember how FHASecure was pushed out by the Bush Administration in an effort to salvage homeowners stuck in an ARM that was about to reset to a higher interest rate.  This FHA loan program was intended to enable delinquent borrowers a mortgage refinancing option with low fixed FHA rates. FHA Loan Pros discussed it in a recent article; HUD claims that “FHASecure has helped more than 100,000 borrowers remain in their property, but the reality was only 3,800 delinquent homeowners received specific aid from the FHASecure program in 2008.

Then late last year, FHA announced the lending savior, Hope for Homeowners that was designed to do what FHASecure was not able to accomplish.  The press ate it up and FHA was the home financing talk on airwaves for months. Unfortunately as of June 30th for the Hope for Homeowners program could account for 949 mortgage applications but only 1 Hope for Homeowner loan could be documented.   FHA remains determined to extend a loan modification to distressed homeowners, so hopefully this new FHA initiative will succeed.

The New FHA Loan Modification Program

o    FHA announced their new mortgage relief program to help distressed FHA borrowers.

o    The FHA home loan is refinanced and 30% of the FHA mortgage is placed into an interest-free second mortgage that must be paid back when the home is sold or refinanced.

o    Borrowers can qualify with ratios of 31/55. The first ratio says that up to 31% of the individual’s monthly income can be used for housing costs and that 55% can be used for housing costs plus other monthly debts.

o    The homeowners must be able to document a hardship (ie. an income change, loss of employment etc.) and it must be deemed as a long term hardship.

Last week, the US Senate Special Committee on Aging introduced an $800 million HUD bill to resolve some of the growing concerns over the FHA home loans created specifically for Seniors older than 62 years of age.  These FHA loans are also known as reverse mortgages, but the real concerns are that these loans may be leaving senior citizens and American taxpayers liable for millions of bad mortgages that may not perform. Clearly the fact that FHA insures these reverse mortgage loans adds to the concern for liability and stick Americans with more mortgage related debt.

Peter Bell, president of that National Reverse Mortgage Lenders Association testified that “a reverse mortgage must occupy the primary lien position on a property. All other home loans must be satisfied with reverse mortgage proceeds. If some of the proceeds available from the reverse mortgage are diverted to a tax and insurance escrow, in some cases, there would not be enough money left to satisfy the liens. In such cases, the homeowner would not be able to obtain the reverse mortgage – and probably be forced to give up the home.  “Instead of simply imposing an escrow, HUD (in partnership with a NRMLA Task Force on tax and insurance issues) is looking at utilizing the financial assessment tool to determine if the lender and counselor should work with the borrower to establish an escrow, amend the draw-down schedule, limit payment options, disallow a lump sum payment or take other steps appropriate to help protect borrowers from tax and insurance defaults. One obstacle here is that the Home Equity Conversion Mortgage statute requires all five payment options available under the program to be offered to all borrowers, restricting HUD and lenders’ ability to take appropriate action.”

FHA home loan programs have supported lenders and mortgage brokers nationwide for purchase, refinance and rehabilitation.  For several years there has been a big battle in Washington regarding the way in which new homes are financed. Basically, builders often give “incentives” if only you will use their lender. Their FHA lender, of course, is unlikely to be the world’s cheapest source of financing, thus you may get upfront benefits but may also pay extra over time. 

The Department of Housing and Urban Development has tried to stop the practice with a new rule banned the “required use” of the builder’s mortgage lender, was promptly sued by the home building industry and has now withdrawn its proposal altogether, meaning that new home buyers will continue to have the opportunity to pay more than they should for real estate financing.  It may seem improbable, but the HUD notice in the Federal Register is fascinating reading. For instance, it says that: “It is HUD’s view that, especially given the attention focused on HUD’s concerns through this rulemaking, the prior definition of ‘‘required use’’ can be used to address some deceptive referral arrangements, even though it does not achieve the enhanced consumer protections that FHA sought with respect to mortgages involving affiliated business arrangements. HUD will continue to seek consumer protections, especially as mortgage products continue to change, often becoming more complex and challenging buyers’ understanding of the costs and nature of mortgage transactions. HUD is not abandoning its goal of providing greater protections to consumers in real estate settlement transactions, but remains open to different means of achieving this goal.”

According to the FHA Mortgage Guide, HUD says that it “reiterates its commitment to fair real estate settlement practices that are not misleading, prevent abuse, offer proper disclosures to homebuyers, and promote choice and competition. HUD’s intent in revising the definition of “required use” was to clarify its interpretation of RESPA’s loan disclosure requirements with respect to transactions involving affiliated businesses in order to promote more competition among settlement service providers. After further evaluation and consideration of the concerns voiced by consumers and industry participants from various fields about the application of the revised definition of “required use,” HUD has concluded that all would benefit by HUD withdrawing the revised definition and addressing “required use” through new rulemaking.”

The importance and value of FHA loans in the mortgage industry and real estate market should not be overlooked as HUD’s mortgages have helped finance America during some tough times. In 2006, FHA’s share of the purchase market had fallen to less than 4%.  Then the subprime mortgage crisis arose as borrowers began to default at great numbers.  The foreclosure crisis followed which caused the real estate market to crash nationwide. As a result, the financial crisis arose and that has our economy wondering when the housing market will bottom out.  With home prices declining and defaults rising, the subprime market largely disappeared; option ARMs declined to a trickle; and documentation requirements on prime conventional loans were substantially tightened. In addition, FHA home loan limits were raised materially in 2008, and again in 2009. In early 2009, FHA’s market share of new purchases was back to about 15 %, and its share of refinances was substantially higher.

The FHA Home Loan Benefits:

o    FHA mortgage loan limits: The FHA loan limits on FHAs effective until year-end 2009, established on a county basis, were the same as those applicable to Freddie Mac and Fannie Mae. On a single-family house, they ranged from $271,050 to $729,750 in 76 higher-price counties.

o    Down-payment requirements: In 2009, FHA’s 3.5% down payment compared with 5 % to 10 % on most conventional loan programs. Zero-down loans, which were widely available in the conventional sector during the dodgy years of 2000-2006, have largely evaporated. The only generally available zero-down loans are VA mortgages for military home financing.

o    Underwriting requirements: FHA accepts lower credit scores than are allowed with “A-paper” conventional mortgages and in most cases FHA loans are more forgiving of past credit blemishes like collections, charge-offs and delinquencies. FHA underwriting will allow a bankruptcy after only 2 years and a foreclosure after 3 years with strong compensating factors.

o    Mortgage insurance: FHA borrowers pay a monthly mortgage insurance premium of 0.5 % per year

Compare FHA mortgage rates and lender costs: Consumers are now in a great position to shop and compare FHA and conventional mortgages for refinance or home-buying.  We suggest analyzing 3 loan offers from different lenders or brokers.  Compare interest rates, loan amounts, origination fees, discount fees, processing fees, underwriting fees and the appraisal fees. Don’t forget that with FHA refinance loans all cash out transactions above 85% Loan to Value now require 2 appraisals from FHA licensed appraisers.  Don’t forget to factor in the upfront mortgage insurance premium, with FHA mortgage loans.