It is no secret that the Federal Housing Administration has made significant efforts to make sure that qualified borrowers really want the FHA streamline refinance loan.  Recently, FHA enacted big changes for the FHA streamline guidelines.  Now borrowers that want to lower their interest rate with the FHA streamline must pay for closing costs out of their pocket.  FHA does not allow borrowers to finance any closing costs when streamline refinancing.  That means in most cases that FHA borrowers are covering the $2,000 to $3,000 in lending costs from their savings. 

Did FHA go too far in tightening the Streamline Guidelines? 

The thinking behind the streamline tightening is that by requiring borrowers to pay the closing costs out of their pocket that they will think twice before refinancing and loan defaults will decrease.  FHA streamlines have never allowed cash out and they have not been a problem for defaults and foreclosures.  With depreciating values nationwide it would appear that FHA is protecting themselves and borrowers from increased mortgage balances that would come from a borrower financing the lender fees and closing costs into their FHA streamline loan.  For example, before the streamline guideline change if a borrower had $300,000 mortgage balance, it would be $303,000 after the refinance.  If a borrower refinanced once a year, after a while the balance would be $320,000 and with declining values, this increases the risk as more homeowners would be underwater with their mortgages.

The No Cost FHA Streamline Solution

There are approved FHA lenders that are offering no cost mortgage refinance opportunities for a select group of borrowers.  If you have good income and high credit scores above 700, there is a good possibility that you may qualify for a no cost streamline refinance in which the lender is paying for the closing costs on their end.  This way you do not have to come out of pocket to cover the closing costs and your mortgage balance would not go up because you are not financing fees that FHA will not allow anymore anyways.  Qualifying for no cost FHA streamline loans will take some shopping online to find a credible FHA lender that offers these unique refinancing incentives, but clearly it will be worth it financially in the long run.

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.

• 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.

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.

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.

The energy efficient home mortgage loan is available to borrowers who don’t necessarily need to refinance, but just need help financing some repairs in the home.  HUD insures the FHA loan for loss on any improvements the homeowner makes. This unique FHA mortgage can be as small as $7,500, or as large as $25,000. While this home improvement financing option is helpful to many Americans, it is not for everyone.  These FHA loan programs pose a higher risk to the FHA lender, so in most cases they will require a higher credit score than other FHA home loan products.

The U.S. House of Representatives on Thursday approved a bill to shore up the finances of the cash-strapped Federal Housing Administration while also backing a measure to raise the loan limits for FHA-backed mortgages used to develop some apartment buildings.  In a 406-4 vote, lawmakers approved legislation to strengthen the finances that back the FHA loan programs by giving it authority to nearly triple the annual fees it charges to borrowers, known as mortgage insurance premiums. 

In related news, lawmakers did strike down a proposed amendment to require borrowers who buy a home with a FHA loan to put more money down.  Minimum down-payments will remain still 3.5%, but lawmakers pushed a new plan that would require FHA to examine down-payment requirements every year and submit a report to Congress.  New Jersey Republican Representative Scott Garrett introduced a new proposal to increase the down-payment minimums to 5%.  This provision had not been expected to pass but did force members of the committee to vote against tightening FHA guidelines.  This could pose a political problem for the members who voted against raising FHA lending standards at a time when the mortgage industry is under scrutiny to improve its credibility nationally.  The FHA is required to maintain at least 2.0% in capital reserves, but FHA reserves equal to just 0.53% of the value of the thousands of outstanding FHA home loans that they insure.

The new bill gives the FHA authority to increase annual FHA mortgage insurance premiums that are paid out by the borrower over the term of the home loan to a maximum 1.5%. That’s up from the current 0.55% maximum, though the FHA says that if the measure becomes law it would gradually raise the premium–first to 0.85% or 0.9%.  To become law, the measure still faces approval by the Senate before President Barack Obama could sign it into law. A Senate version has not yet been introduced.  If the FHA is granted authority to raise the annual premium, FHA has said it would lower a separate upfront premium from the current 2.25% to offset those costs. The upfront premium is paid all at once at the time the loan is issued.  HUD has made a concerted effort to tighten FHA home loan programs and it appears they will continue to make changes until the FHA loan default problem goes away. 

Representatives Anthony Weiner, a Democrat from high-priced New York and Republican Gary Miller from high-priced Southern California, sponsored the amendment, approved by voice vote, to increase the loan limits for buildings to be developed into rental apartments. 

FHA Commissioner David Stevens has repeatedly expressed confidence that the agency’s Capital Reserve Account would return to levels above 2% as recent changes to FHA underwriting standards would bring an additional $5.8 billion to FHA coffers.  Since over 75% of the FHA loan business comes from first-time home buyers most of the down payments are made at the 3.5% minimum.  The government has made FHA the center focus in their efforts to help the housing sectors rebound. Since the 2006 mortgage crisis, FHA has increased their mortgage market-share over 30% of for home financing but the FHA reserves have dropped to dangerously low levels.  .

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?

A popular alternative to a home equity line of credit is the FHA 203K.  A few years ago HUD rolled out a new type of FHA refinance.  The 203K enables FHA borrowers to get access to funds for home rehabilitation to pay for the proposed home improvements.

Like FHA loan programs, the FHA 203k loan has its limitations and is subject to FHA loan limits is the lowest of these three calculations:

          Borrowers existing mortgage on the property plus rehabilitation and certain closing costs.

          Present property value plus rehabilitation costs.

          110% of the improved value multiplied by FHA’s 96.5% maximum loan-to-value ratio.

FHA mortgage rates are subject to change and the borrower is subject to FHA loan requirements.

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.