The demand for refinance FHA loans continues to rise, but borrowers who actually qualify for a FHA loan seems to decline as HUD tightened FHA guidelines.  FHA lending continues to expand their scope with new FHA mortgages designed to stimulate first time homebuyers.  FHA refinancing has become a priority for most FHA lenders.  FHA rates remain low with lenders reporting 30-year fixed rates at 5% and the 5/1 ARM is available at 4%.

While it will be months before FHA’s increased annual fee or tougher credit score requirements take effect, the housing agency already is seeing a drop in activity in its most popular sector the home purchase market. According to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, FHA’s share of home purchases fell to 31.5% in January.

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.

FHA announced new changes to FHA loan guidelines in an effort to improve its depleted cash reserves.  A few days ago, HUD announced tighter FHA guidelines with multiple changes to FHA underwriting.  A recent article revealed that FHA requirements may actually penalize borrowers with poor credit.  The FHA Mortgage Lending Blog believes that the Federal Housing Administration will expand mortgage refinance guidelines later this year.

FHA will enable borrowers to continue financing the upfront MIP. The agency also will pursue legislative authority to allow flexibility to bring the annual premium, which borrowers pay on a monthly basis, higher. Also, seller concessions will be reduced to 3% from 6%. Frank Black, who managed a Wells Fargo branch in California said, “After reviewing the changes to the FHA requirements, I believe FHA lenders will agree that the new rules make sense and are needed to keep the government financing alive. A few years ago, many brokers and lenders took advantage of FHA underwriting by pushing the envelope with risky home loans.”

Visit the FHA Mortgage Lending Blog and read the original article > FHA Mortgage Guidelines 10% Down for Low FICOs.

Many FHA loan experts are predicting the Fed will begin increasing the rates in 2010.  How will that affect the FHA mortgage rates?  They will rise just like the conventional and second mortgage rates.  FHA guidelines have already seen some changes this year and its no secret the FHA requirements will get more difficult for homebuyers and homeowners looking for refinance loans.

Ending the Federal Reserve’s mortgage-buying program will likely cause mortgage rates to increase by as much as three-quarters of a percentage point, Boston Fed President Eric Rosengren told The Hartford Courant Friday. “Actually, I’ve been surprised that we haven’t seen higher mortgage rates already,” Rosengren told the paper. “You maybe would have thought you would have seen interest rates move up more quickly than they have, but nonetheless, that is a concern.”

The Fed is scheduled to retire its $1.25 trillion mortgage-backed securities purchase program at the end of March. Described by the Courant as an “inflation dove,” Rosengren also commented that the target federal funds rate will remain low in the near term, commensurate with the low threat of inflation about 1.5%.

The Federal Housing Administration was formed in 1934 to ensure American borrowers would experience fair lending for mortgage refinancing and purchase loans regardless of their job type or skin color.  Over the years FHA refinance loans have become a popular option because the FHA mortgage rates are low and the credit guidelines are more forgiving than conventional mortgage lending guidelines.  In the last 3 years, FHA refinancing has actually taken the lead for mortgage market-share nationally.

There are several types of FHA home loans for refinancing:

• Cash out refinancing for raising capital or debt consolidation
• FHA streamline loans for refinancing existing FHA loans
• FHA refinance loans up to 97% Loan to Value
• FHA 203k loans for home rehabilitation.

In these situations homeowners must have some equity in their home to be able to qualify for FHA loan programs. FHA guidelines also stipulate that FHA loans may only be used to borrow against the home of their primary residence. 

FHA home refinancing ensures low fixed mortgage rates and no pre-payment penalties. FHA refinance loans are underwritten differently than traditional conforming mortgage refinance loans.  A person’s income and credit will be viewed more leniently or not at all with an FHA refinance.   FHA loans require mortgage insurance, but less equity is needed to qualify.  FHA streamline refinance does not offer the option of getting cash back and you must presently have a FHA mortgage with no late payments in the last year.  FHA 203K loans provide funds for home rehabilitation and major home improvements.