First time homebuyers like FHA loan programs because the down-payment requirements are low, the lending fees are low and of course it doesn’t hurt that FHA rates are the lowest they have been in 50-years. With record low FHA loan rates and home prices dropping, you would think that home buying would be exploding, yet the FHA home loan application volumes have been flat since the tax credit for first time homebuyers expired on April 30th. Needless to say there are still thousands of borrowers that have taken advantage of FHA refinancing and FHA lenders anticipate that thousands more will utilize FHA mortgage products this year while low interest rates are available. FHA guidelines for refinance loans have already made significant changes in the last few years.
HUD announced that The Federal Housing Administration plans to hike the annual fees it charges new borrowers starting September 7th, which would add about $300 million a month to the agency’s eroding cash reserves. The insurance premiums are capped at 0.55 % of the value of a loan. Earlier this week, the Senate voted to raise the cap to 1.5 %. President Obama is expected to sign the measure this month. But the FHA does not plan to raise the fees to the maximum level allowed, and it estimates that borrowers would pay about $38 more on average each month, agency officials said. The increase would not apply to current FHA loan holders. HUD said that raising the FHA lending fees will give the agency a much needed cash injection. The fee structure revision only aligns its fee structure with that of private mortgage insurers, which were crowded out of the market as the popularity of FHA loan program increased.
Increasing the premiums is a quick way for the agency to elevate its loan reserves that have been dwindling down from the foreclosures and loan defaults. In the past, FHA has avoided raising loan fees because they feared that they were closing the door of opportunity for qualified borrowers. In addition, many economists had warned that drastic changes to home financing would likely hinder recovery of the housing sector nationally. FHA already increased the upfront fees it charges borrowers earlier this year. Those FHA mortgage lending fees helped keep the agency cash-positive this fiscal year, with a net cash flow of $446 million as of June 30th.
FHA Commissioner David H. Stevens said, “The premium is another important measure to help protect the FHA mortgage program.” FHA asked Congress for authority to increase the annual fees. The loan fee increase was included in a broad FHA loan reform bill that passed the House in June. But when the Senate did not act on it, the FHA pushed for a free-standing bill that would allow for passage of the premium increase before Congress began its August recess.
Once again this week, FHA loan rates fall to record levels. Qualified borrowers can qualify for a 30-year fixed rate at 4.25%. Yet, HUD is considering even more changes to FHA guidelines for purchase mortgages and FHA refinance options. HUD has been talking about implementing a minimum credit score requirement of 500 for FHA mortgage loans. In regards to FHA purchase loans, borrowers with credit scores below 580 would be required to make a down-payment of at least 10% rather than the 3.5%. Many FHA lenders have already taken steps like these with minimum credit scores and higher down-payments. In regards to FHA refinancing, many lenders have been requesting more home equity in situations when the borrower’s credit is in question. FHA credit has always been paramount to FHA lending.
Will a Minimum Credit Score Requirement Hinder the Ability for Americans to Refinance with an FHA Mortgage?
Over the years, FHA credit has been a great alternative to subprime lending because FHA would consider borrowers with low credit scores if they had compensating factors. These types of FHA loans were manually underwritten and in most cases would be required to have cash reserves equal to at least one monthly mortgage payment. Rumor has it that HUD is considering reducing the ability for FHA refinance opportunities if the mortgage balance is greater than the home values.
HUD is set to roll out a few new policies that could significantly affect the way some FHA lenders originate mortgages nationally. FHA invited public comment on several of these policy changes in an effort to bolster FHA loan reserves. According to FHA Commissioner David Stevens, “Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important ” to FHA’s success.
There has been a lot of talk about FHA home loan programs in recent months. It has been no secret that HUD has tightened FHA guidelines in an effort to stem foreclosures and FHA loan defaults nationwide. The Federal Housing Administration already tightened the FHA streamline program so FHA customers can no longer finance closing cost with the streamline refinance loan. Many of the FHA borrowers with good credit have been able to find FHA lenders offering no cost FHA streamline refinance offers. This is the situation in which lenders are paying streamline closing costs in an effort to win the borrower’s business. In most cases no cost streamline loans are approved for borrowers that have a high credit scores and low debt to income ratios.
With FHA rates still be recorded at all-time lows it’s hard to understand why low fixed mortgage payments are not enough of a motivation for first time homebuyers. Yet sluggish reports continue to be reported weekly with low FHA purchase loan activity. The housing sector continues to wait to see if the home buying market can rebound since the expiration of the first-time homebuyer tax credit. The FHA has remained aggressive with the FHA loan guidelines as borrowers still only need to come up with 3.5% of the down-payment.
The FHA has promised to lower allowable seller concessions (the percentage sellers can take from the sales price of a home to fund closing costs). FHA will reduce seller concessions from 6% to 3%. According to an announcement in January, the current level of 6% exposes the FHA to excess risk by creating incentives for appraisers to increase the value of these homes. The change will take place in “early summer,” according to the FHA, but a spokesperson said no specific date has been set. The FHA closing costs include fees for origination, attorneys, appraisal and inspections, title search, title insurance, credit reports, and more. FHA down payment assistance is not included as a closing cost.
As we have reported in recent articles, FHA defaults had increased to a level that put the FHA loan programs in jeopardy so FHA guidelines could be tightened. The Department of Housing and Urban Development announced new measures will help FHA reduce foreclosures, control risk, continue supporting housing recovery The Federal Housing Administration Commissioner David Stevens today unveiled three specific policy changes to strengthen the FHA’s capital reserves while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities.
In addition to earlier steps taken to manage its risks and to boost reserves, FHA is proposing to update the combination of credit and down payment requirements for new borrowers; reduce seller concessions from six to three percent; and tighten underwriting standards for manually underwritten FHA mortgage loans. “These are the latest in a series of changes to allow the FHA to manage its risk better while continuing to support the nation’s housing recovery,” said Stevens.”
FHA guidelines could be tightened more for purchase and FHA refinance programs.
1. Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA home financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10%. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.
2. Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to 3% will bring FHA into conformity with industry standards.
3. Tighten underwriting standards for manually underwritten FHA home loans. When using compensating factors in the underwriting process, FHA lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.
What was at one time a green light for bad credit mortgages may be at risk as HUD considers incorporating minimum fico requirements for FHA home loan programs for both purchase and refinance products. HUD contends that their oversight committee will implement a minimum credit score requirement of at least 500 for FHA loan approvals. Borrowers who are plagued with bad credit would likely be hindered by HUD’s policy mandate of applicants to have credit scores higher than 500 for FHA-home loan requirements. Believe it or not, FHA has never had credit score requirements factored into the FHA underwriting guidelines. According to Michael Fratantoni, of the Mortgage Bankers Association “It really is just reforming what FHA lenders and FHA loan guidelines have been doing for quite a while.” FHA lenders had instituted their own minimum credit score requirement and many loan professionals did not know that Fico score restrictions did not come from The Federal Housing Administration.
FHA has implemented several changes in regards to FHA requirements for mortgage companies to be approved to offer FHA loan programs. This government finance giant has tightened FHA loan guidelines and made significant initiatives in an effort to reduce the risk of FHA loan defaults and home foreclosures across the nation.
According to HUD Commissioner David Stevens, they have made a concerted effort to enhance the public perception for responsible lending while also boosting FHA loan reserves that act as insurance for non-performing mortgage loans. It is clear that the HUD Commissioner believes that the entity can carry out their plan to protect the FHA loan reserves that the likelihood of FHA to continue to offer affordable home financing programs is good. FHA has been helping first time home buyers become homeowners with affordable low rate FHA loans since 1934. It is no secret that HUD has been concerned that the FHA loan programs was in jeopardy of becoming extinct because of poor loan performance and loan companies pushing their subprime mortgage candidates to the FHA loan products. A few years ago, FHA loan delinquencies started to increase, but so have defaults for nearly all types of home loan products. Conventional, jumbo, home equity and even VA loan defaults have all risen over the last few years. FHA loan policies continued to play an important role in helping our economy rebound as they remain the biggest advocate for affordable home financing and fair lending.
FHA has made several moves recently in an effort to raise the standards and FHA loan requirements for FHA lenders offering single-family home loans. Most insiders believed that the Federal Housing Administration had targeted single family homes because of the FHA loan defaults. However, for the first time in nearly forty years, FHA announced they would be tightening FHA guidelines for multifamily home loans. Menzo Case, the president and chief executive of Seneca Falls Savings Bank in upstate New York said, “We’re not surprised by anything nowadays.” Among the new FHA requirements, the government agency is poised to elevate the debt service coverage ratios while reducing the loan-to-value and loan-to-cost ratios.
Will FHA Loosen Loan Requirements for Borrowers?
According to George Kaganovich, a mortgage banker from iServe Lending in California, “Each time FHA tightens the guidelines it seems to pinch consumers as fewer borrowers have the opportunity to refinance into a better loan.” Kaganovich continued, “Many homeowners have come to depend on FHA for fixed rate refinancing so hopefully things will get easier for them soon.
FHA is also requiring additional verification of a property’s financial performance, an expanded review of the borrower’s credit and the pre-screening of certain mortgage applications to prevent certain loans that may not make ever close, but would create a bottle-neck in the processing departments. Many FHA loan companies see these guideline changes as major obstacles for struggling borrowers, but they understand why FHA has raised the standards.
Americans continue to be supported by FHA home loan programs for refinancing and new home buying. FHA loan programs are aggressive with little equity required for FHA refinancing. FHA finance programs have opened up many home buying opportunities because borrowers only need a 3.5% down-payment to become homeowners. FHA credit requirements are considerably more flexible than conventional lending allows. In 2010 FHA guidelines have tightened but FHA loan limits remain robust and underwriters are still able to approve loans based on the borrower’s history rather than just their credit score. FHA refinance loan programs have made an effort to reach out to distressed homeowners seeking a lower fixed rate mortgage payment to help prevent foreclosures.
- FHA Home Loans
- FHA Mortgage Refinance
- FHA Streamline
- FHA 203b for Cash Out
- FHA 203K for Home Rehabilitation
According to Jeff Moran, a FHA loan specialist with Bank of America Home Loans in Orange County, “The Federal Housing Administration continues to reinvent themselves and consumers are benefitting because they can get financed cost effectively with low rate FHA mortgages.”
FHA mortgage rates are available at 4.75% on fixed 30-year loan terms. There is no pre-payment penalty for early pay-off and if the FHA rates drop, you can always utilize the FHA streamline for rate and term refinancing. What are you waiting for? FHA loan programs are more appealing and more affordable than ever.
Congress granted the FHA loan program an exemption that could put the federal mortgage loans at risk. The American Banker reported that the FHA loan volume could see increased market-share boost from regulatory reform, because of exemptions that are tied to FHA mortgage loans. FHA home mortgages are insured by the government and are fully exempt from the recent landmark legislation risk-retention requirement. The mortgage reform bill was finalized by the conference committee last week requires mortgage originators to retain at least 5% of the credit risk in loans they securitize unless the assets meet a “qualified mortgage” test. All loans backed by the FHA, the Department of Veterans Affairs or the Rural Housing Service will automatically meet that test. Senior director of industry relations for IMARC David Kittle said, “FHA loan programs gets a pass.” Kittle continued, “Does it give them an advantage? Well, sure. Anytime you are carved out of something that can be onerous for everybody else, then certainly you benefit.”
Most home mortgages securitized through Fannie Mae and Freddie Mac will also be eligible for securitization without risk retention. Seeing that Fannie and Freddie are holding over 95% of the mortgage notes in America, this hardly seems like reform. Glen Corso, managing director of the Community Mortgage Banking Project said “I believe chances are very good that in the future almost every mortgage that Fannie and Freddie either buy or securitize will be qualified mortgages under the risk-retention provision.” Without an exemption, mortgage companies will have more obstacles when they sell home loans to Fannie or Freddie. Clearly this gives FHA lenders an advantage but doesn’t this make FHA home loans more of a risk? FHA mortgage rates are at record lows and the FHA defaults have been decreasing, so why Congress would give the Federal Housing Administration a pass on risk is beyond me. If the FHA loans fail, the American taxpayers are on the hook, thus jeopardizing the FHA loan program.
The FHA loan defaults have been rising the last few years and the FHA reserves have dipped to dangerous levels. The FHA refinance loans continue to play a major role in helping borrowers with adjustable rate mortgages convert to a fixed interest rate loan that provides a more affordable monthly payment. A lot of work has been done to improve FHA home loan programs and reduce the FHA foreclosures. The Federal Housing Administration have worked with FHA lenders and it appears they have made the necessary changes in the FHA loan programs to reduce the risky FHA mortgage loans and get back on the path for a healthier financial outlook for this government run mortgage program. Last fall industry analysts had forecasted weak performance for FHA loans in 2010, but the portfolio performance has been much better. The Housing and Urban Development Secretary Shaun Donovan made these comments as the Obama administration renewed their commitment to stabilize the housing market.
Notable Changes to FHA Loan Programs
- FHA Streamline Refinance – FHA changed the streamline guidelines to not allow borrowers to refinance lender closing costs. If borrowers want the FHA streamline, they will have to pay for closing costs out of their pocket.
- FHA Home Loan – FHA increased the down-payment requirements from 3% to 3.5%.
- FHA Cash Out Refinance –FHA reduced the LTV from 95% to 85%, so borrowers who want to receive cash in their refinance must have at least 15% home equity left after the refinance loan.
- FHA 203K – Home Improvement Financing has been expanded for home rehabilitation and energy efficient initiatives.
Delinquencies on FHA-backed loans did increase to 12.4% in May from 11.7% in April, but were lower than the13.6% from the previous year. Donovan said, “Overall FHA loan performance is somewhat better than was predicted when the actuarial review was completed” in the fall of 2009.” However, the Home Affordable Modification Program (HAMP), offers incentives to FHA lenders to modify loans for distressed homeowners, has been widely criticized because the results have been so poor. The recent HAMP statistics released Monday show that slightly more than 10% of eligible borrowers received a loan modification that became permanent.
FHA home loans have been an icon for first time home buying since 1934. This government home financing initiative has been bolstering homeownership for decades with low FHA mortgage rates and fair lending criteria for all Americans. The Wall Street Journal reported that the Federal Housing Administration is in serious talks with HUD to raise the insurance premium in an effort to raise the dwindling FHA loan reserves. After FHA loan defaults have dropped for three straight months for FHA mortgage loans. If that trend holds, the agency could avoid burning through the FHA reserves, which are estimated to fall sharply over the coming years. Still, the FHA’s commissioner, David Stevens, says “there’s plenty of room for caution.” Clearly, FHA mortgage financing has not recovered enough to not be concerned about it’s future.
Are FHA Loan Programs at Risk?
As the economy continues to weaken, FHA will likely see more FHA defaults that could drain the FHA reserves even more. I would expect FHA loan requirements to continue the trend of tightening. This will limit the number of eligible borrowers to qualify for a FHA refinance that would lower their monthly mortgage payment and prevent home foreclosures for thousands of distressed homeowners.
Most industry insiders are forecasting additional losses because it has a much bigger exposure to housing today than it did when the housing market tanked three years ago. Even if the HUD continues to amend FHA loan guidelines to stem the FHA defaults, it is likely that the annual audit will uncover the fact that that the Federal Housing Administration continues to operate on low reserves. Let’s face it, if this great loan program was managed by the private sector the FHA loan program would be shut down. One bright spot is that the FHA’s finances are performing better than anticipated. In the last six months, FHA reserves have covered $6 billion that came from the loan defaults, but they had forecasted to pay $8.7 billion for loan defaults. Should we cheer because the FHA loan program is preforming better than anticipated or be critical of a federal loan program that is failing in a failing economy?
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