After the subprime mortgage crash, FHA took on more lending with their FHA loan programs than any other type of home loan in the mortgage business. FHA guidelines have always kept an open mind in that they look at the borrower rather just the borrower’s credit score. This type of underwriting worked great when the FHA loans were performing, but as soon as FHA loan defaults rose to record levels in 2008 and 2009, something needed to be done to the FHA loan requirements to prevent the foreclosures and diminishing FHA reserves.
HUD decided to raise the FHA requirements and make some other changes with FHA guidelines in an effort to prevent the bad mortgages that first the first time since 1934 put the government loan program in jeopardy. The first change HUD made was to increase the down-payment requirements for home buying. The new FHA loan requirement for a down-payment was raised to 3.5%. HUD also limited FHA refinancing to 96.5% rather than 97%. Then the government agency decided it was not fair to roll lending fees into the FHA streamline loans. Next change came from FHA lenders who were starting to require higher credit scores. One good thing HUD did in 2010 was to keep the FHA loan limits unchanged.
We understand HUD’s moves to minimize the FHA loan defaults, but going away from the FHA credit guidelines and allowing FHA lenders to dictate higher credit scores may significantly reduce its appeal to home buyers and consumers looking to refinance into a more affordable fixed rate. Credit scores can be very misleading and someone needs to give these borrowers another shot.
It is no secret that the FHA loan programs have struggled with loan defaults over the last few years. Later this year there will be more government initiatives rolled out to help prevent foreclosures with possible principal reduction incentives offered to distressed homeowners who lost their home equity. The first plan will reward loan servicers to lower loan balances for delinquent borrowers when that is more advantageous to mortgage investors than reducing interest rates. Principal reduction would be available for eligible borrowers who owe more than 115% of their home’s current value. The balance would be forgiven as long as the homeowner makes timely payments for three years.
The second mortgage relief initiative will allow some homeowners who are not behind on their home loans but have seen their home values drop, to refinance into FHA loans worth no more than 97.75% of their home’s price. This new FHA loan program is set to start in the fall. If the borrower has a second lien, the total mortgage debt could not exceed 115% of the property’s value. Homeowners, however, must meet FHA requirements and have a credit score of at least 500. Their new monthly payments would be no more than 31% of their monthly income.
FHA loan reserves have become a growing concern for the government mortgage program. The FHA reserves were finally addressed by the House Financial Services Committee. Government representatives confronted the challenges of balancing the FHA reserves by revising FHA guidelines so that less borrowers default. FHA continues to play a major role in offering FHA home loans to first time homebuyers. Even as FHA rates have recorded record low, the reserves have fallen to approximately .53% of the value of FHA insured home mortgages, well below the legally mandated level of 2%.
FHA reserves are getting dangerously low agian. In an effort to bolster FHA reserves while minimizing the impact on borrowers of FHA home loans, the Committee approved allowing FHA to raise the annual mortgage insurance premium from its current level of .55%. This move is designed to move some of the cost of mortgage insurance from the up-front mortgage insurance premium (UFMIP) paid at closing to the annual portion of the premium, which is pro-rated monthly and added to monthly mortgage payments.
HUD continues to review new proposals to raise the minimum FHA down payment amount from 3.5% to 5% and eliminating seller contributions to buyer closing costs were defeated by the Committee. According to the FHA Loan Pros, “These FHA mortgage proposals may have been well intentioned toward raising FHA reserves, but have endured hardships for the first time and homeowners who depend on FHA loans” for home buying and lowering interest rates with refinance loans. HUD has made it no secret of their plan for FHA to begin increasing the annual mortgage insurance premiums from their current rate of .55% to 1.5%.
FHA mortgage loan applications saw a 68% increase in March compared to February FHA applications. Over two-thirds of the applications, 163,467, were for the purpose of purchasing a home while 75,541 were requests for refinancing. 7,398 were applications for Home Equity Conversion Mortgages (HECMs) or reverse mortgages. In February those numbers were 97,171, 51,425, and 6,643 respectively.
The Department of Housing and Urban Development announced in the monthly FHA Outlook that the FHA home loan applications rose last month for refinance and purchase transactions. The FHA loan report revised the annualized application rate upward from 2.01 million in the last report to 2.38 million based on the March figures The rise in FHA loan applications was believed to reflect the upcoming expiration of the $8,000 tax credit for first time buyers and $6,500 credit available to “move-up” homebuyers. A sales contract must be in place by the end of April and the entire sale finalized by June 30 for homebuyers to qualify for the credit. The surge in FHA loan applications, especially during the last week of the month, may also reflect a race to obtain a home loan before the increase in the FHA up-front premium which took effect on April 5.
FHA endorsed 132,301 mortgages for insurance during March; a total dollar value of 24.1 billion, compared to 131,978 and $24.4 billion in February. March endorsements included 82,879 purchase money mortgages, 43,600 refinanced mortgages, and 5,822 reverse mortgages. Of the FHA refinance loans, 28,596 were conventional to FHA and 15,003 were prior FHA mortgage loans. 10,695 of the FHA refinancing were cash out, 24.5% of the total. Endorsements for FY2010 to date total 935,349 ($171.1 billion) compared to 867,749 ($158.2 billion) at the same time in FY 2009. Purchases account for 550,885 or 58.9 % of those endorsements compared to 444,078 or 51.2% during the similar period last year. FHA is projecting a total of 1.875 endorsements for the entire year. To date 81.4% of FHA endorsements have been for first-time buyers, up from 77.4% during the similar period in 2009.
Thus far in FY2010 FHA has refinanced 339,215 properties, down from 365,782 during the same period last year. 164,185 of these were refinanced from other FHA mortgages while 175,028 were conventional to FHA refinances. Cash-out mortgages represent 18.9 % of refinances thus far in FY2010 compared to 24.6 % one year earlier. In March the average processing time for all mortgages from application to endorsement was 11.1 weeks and 88% were accepted and endorsed using the FHA scorecard (TOTAL). The weighted average FICO score for FHA mortgages in March was 697. At the end of March FHA had 6,114,452 mortgages outstanding with an unpaid principal balance of $805.6 billion. One year ago there were 4,904,167 FHA mortgages on the books with an unpaid balance of $577.2 billion. This is an increase of nearly 25% in the number of FHA loans and almost a 40% increase in the portfolio value.
In March FHA home loan delinquencies dropped slightly from 553,929 to 536,858. The delinquency rate dropped from 9.2% in February to 8.8% at the end of March
FHA refinance loans have helped out millions of homeowners lower their monthly mortgage payment with a fixed interest rate and no pre-payment penalty. Even with having so many FHA loan success stories, it seems there are many unhappy mortgage brokers, borrowers and industry pundits that come off like FHA can’t do anything right. There are several reasons why FHA has taken a lot of heat over the last year.
1. FHA loan defaults have risen dramatically over the last 48 months.
2. FHA mortgage reserves have dropped to dangerously low levels.
3. FHA guidelines have tightened significantly and most FHA lenders require a 640 credit score to refinance.
4. The FHA requirements for FHA streamline programs thus fewer borrowers qualify.
5. The change in the appraisal policy for FHA refinance loans has slowed the process and increased the closing costs for borrowers.
These 5 obstacles FHA has faced this year has brought forth new challenges for government refinance programs, but HUD maintains they are focused on improving FHA home loans for consumers, while increasing the accountability and FHA requirements for mortgage companies that offer FHA mortgage products.
FHA mortgage rates remain low with the 30 year fixed available at 5% and the 5/1 ARM available at 4.125%. The Federal Reserve left interest rates unchanged so FHA rates should continue their trend of affordability. For borrowers with less than perfect credit, FHA introduced a home loan that allows credit scores as low as 580, but requires a higher insurance premium with more equity or down-payment required. FHA refinance applications dropped last month, but that doesn’t mean Americans won’t reconsider FHA if they loosen the FHA guidelines a bit while keeping the rates at record levels.
The government mortgage rules are changing for FHA refinance and home purchase programs. The Federal Housing Administration announced tightening of FHA lending requirements to reduce risk and improve its reserves. The new FHA guideline changes include:
• Borrowers must pay an increased upfront mortgage insurance premium (MIP) of 2.25 % of the loan amount (increased by 50 basis points from 1.75 %). FHA has also requested legislative authority to increase the maximum annual MIP so it can reduce upfront costs for prospective home buyers.
• For borrowers with poor credit (credit score of below 580), they must make a minimum down payment of 10 % (up from 3.5 %).
• Seller credits for closing costs are cut by 50 % and cannot exceed 3 % of the purchase price.
• FHA will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.
With the current recessionary economic state, constricting mortgage availability, and general credit crunch, FHA loans have exploded, with projections of hitting $400 Billion in 2010. FHA loans, featuring low down payments, competitive interest rates, and more forgiving credit requirements, have proven the loan of choice for many first time home buyers and those with marginal credit scores.
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.
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.
FHA loan defaults hit record highs this year while FHA rates hit record lows in 2009. Loan defaults is a major reason why is HUD going to change FHA requirements in 2010. According to a senior HUD official there are a few FHA guideline changes under consideration:
- Minimum down payment will rise. Currently, you only need a 3.5% cash down payment to obtain FHA financing. Legislation has been proposed that would increase this to 5 %, which is the minimum down payment amount required on most conventional financing.
- Minimum credit score for FHA loans will rise. A few years ago, you could get an FHA loan with a credit score of 500. Today, most FHA lenders require you have a credit score of at least 640. This could rise even higher as FHA seeks to upgrade its borrower profile, eliminating loan opportunities for first-time home buyers with thin credit or lower credit scores.
- FHA mortgage insurance premiums will rise. Although FHA mortgage insurance premiums rose in 2009, expect them to rise again in 2010, as FHA seeks to replenish its coffers.
- Seller’s will be able to give buyers less money. Right now, FHA allows sellers to kick in up to 6 % to cover a home-buyers’ closing costs and other lending fees. FHA will likely lower this to 3%.
- Kicking out abusive lenders. FHA has moved swiftly to end relationships with several lenders, including Taylor, Bean and Whitaker Mortgage Company.
- Increasing lenders’ minimum reserves. Currently, FHA requires that lenders have only $250,000 in reserves to use to repay FHA in case of mortgage fraud. FHA is considering raising that amount to $2.5 million. That move will likely limit the number of mortgage brokers who are able to do FHA loans.
FHA loan programs have offered opporunities for millions of Americans over the last few years. 2010 will see new FHA requirements for FHA lenders and qualifying for FHA loans could become more difficult for cash strapped borrowers.
FHA announced new FHA guidelines coming 2010:
– HUD will increase “up front” cash required on a FHA home loans.
– HUD will increase compliance and hold FHA lenders accountable for losses associated with loans that do not meet FHA standards. As of December 8th the FHA this year has suspended eight lenders and withdrawn approvals for 270 others.
– HUD cut allowable seller concessions to 3% from 6% in a move to limit incentives to inflate appraised values. The move reduces the money the seller can contribute to a buyer’s closing costs, discount points and other concessions without impacting the buyer’s mortgage.
– HUD is raising the minimum credit score for new loan applicants. The FHA has yet to determine the minimum “FICO” and may factor in the down payment.
– The FHA will develop a “lender scorecard” on HUD’s website that summarizes performance of FHA lenders that make FHA loan offers.
– FHA proposes to increase the required lender net worth to ensure accountability. HUD is proposing an initial increase in the net worth requirement, from $250,000 to $1 million in the first year, and at least $2.5 million after three years.
– A proposed rule would hold approved FHA Lenders responsible for loans originated by mortgage brokers. Brokers will no longer receive independent FHA approval for origination eligibility.
– The FHA is requiring that FHA lenders submit annual financial statements.
– It is bringing streamline refinance loans into line with other FHA origination guidelines. Changes include requirements for payment history, income verification and capping the 125 % loans for LTV.
– The FHA will reduce the period for which an appraisal is valid to four months from six to 12 months.
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