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 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.
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 1st.
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 housing sector may be rebounding but the FHA loan defaults continue to rise. FHA mortgage rates hit record lows this quarter, but the FHA loan reserves hit seven year lows as well. The Federal Housing Administration, which has played a crucial role supporting American home buyers after the collapse of the mortgage market, has burned through a huge cash reserve in less than a decade and could soon wind up with what amounts to an automatic taxpayer bailout if the agency’s fortunes don’t improve, according to a review of FHA loan finances. Senior FHA officials have assured Congress that the agency will not need a bailout, which would be politically sensitive for lawmakers to approve after the government has already spent hundreds of billions of dollars rescuing financial companies. But the agency’s complex funding mechanisms little understood in Washington, including on Capitol Hill do not require the FHA to turn to Congress if the agency cannot cover losses on its outstanding loans. The agency, which collects premiums from borrowers who take out FHA mortgage loans, has been automatically drawing down on money it deposited with the Treasury Department when the FHA was flush with cash. Those funds have dwindled as the FHA’s losses grew. If the losses continue unabated, the FHA would still receive money from Treasury. “It is absolutely a myth that they would have to go to Congress for money,” said Marvin Phaup, a former budget analyst at the Congressional Budget Office and now a budget expert at Pew Charitable Trusts. “The FHA has permanent authority to get money from the Treasury because it is backed by the full faith and credit of the federal government.”
Below the FHA loan threshold
The government is legally required to ensure that the balance in the FHA’s emergency reserve fund does not drop below 2% of outstanding FHA loans. Over the past five years, starting during the years of the housing boom and continuing into the bust, FHA’s reserves have tumbled and are now below that threshold, according to the agency.
Under a 1990 law, the FHA turns over to Treasury each year whatever excess money the agency expects to have left over after it pays losses on insured mortgages from what is known as the financing fund. The excess money is credited to the FHA’s emergency reserve fund. In those years when the FHA underestimates its needs, it automatically gets an infusion from Treasury to make up the difference. FHA officials say it is incorrect to consider these payments from Treasury as a taxpayer subsidy. The agency is in effect tapping money it previously parked with Treasury. But if losses on FHA-backed loans continue, the agency could find itself overdrawn, yet payments from Treasury would not stop. They would automatically continue, rescuing the agency with taxpayer money.
The FHA had been accumulating money ever since its emergency reserve fund was set up in 1992. The premiums collected by the agency from borrowers taking out FHA-backed loans regularly exceeded its liabilities. But the trend turned sour even as the housing market flourished. Leading up to the boom, private lenders started offering no-down payment and low-down payment mortgages to reasonably low-risk borrowers, effectively luring away some of the FHA’s most reliable borrowers with less expensive loans. “FHA could not compete as well for the best borrowers, and it was left with some of the riskier borrowers,” said Mathew Scire, a director at the Government Accountability Office. Some of the FHA loans left on HUD’s books started going bad during the first half of this decade.
In each of the past seven years, the FHA has had to take money from its reserves to replenish the financing fund. In fiscal 2004, it transferred $7 billion in reserves a record high at the time to cover losses on loans from 1992 through 2003. This recalculation prompted a study by the GAO, which attributed the re-estimate to the FHA’s financing of increasingly risky borrowers from 1995 onward as it lost ground to private lenders and loosened lending guidelines. Many of the losses were also attributed to a now-defunct program that encouraged defaults by allowing home sellers to help cover down payments for buyers.
As home prices fell, the downward trend continued. In fiscal 2009, when the agency recalculated its expected losses for loans made in previous years, it found it needed to transfer $10.3 billion from its reserves to its financing fund to cover losses, topping its previous record. Then, when the housing market swooned and prices fell, many borrowers who suddenly owed more than their homes were worth fell behind on their mortgages. Defaults spiked. About 24% of FHA loans were in default in 2007 and 20% in 2008, according to the agency. The agency’s reserves kept tumbling.
FHA’s reserves were $10.04 billion as of June 30, the lowest level in nearly a decade, according to agency data. Seven years ago, the fund had twice as much cash. It remains in the black only because it has accrued interest. More recent data, due to be released in an audit this month, will show that the reserve fund fell below the federally mandated level as of Sept. 30 for the first time since the fund was set up, agency officials recently said. The excess money in that fund is no longer enough to cover 2% of outstanding FHA loans, as required by law.
This year’s audit was scheduled to be released on Wednesday but FHA abruptly delayed it, citing problems with financial-stress tests it had requested that went “above and beyond” what the audit typically entails. Agency officials declined to detail the nature of these problems. “I don’t know what ‘above and beyond’ economic scenario testing FHA asked [the auditing firm] to do, but it’s pretty easy to envision how a ‘truly stressful’ scenario would wipe out” the FHA reserves, said Thomas Lawler, an economist and housing consultant, in his newsletter last week.
FHA Commissioner David H. Stevens has said that the audit results will appear dire because they offer a snapshot of the agency’s financial standing at the depths of a severe recession without taking into account new mortgage loans the FHA will insure or the fact that many of these FHA home loans have been made to more creditworthy borrowers than the FHA typically caters to. Stevens also noted that the FHA’s financing fund now has about $20 billion, with the reserves as a back-up. But he said agency officials were watching the housing market to see if they have to rethink their calculations. “Any worsening economic downturn, beyond what’s anticipated by the audit, could have a greater adverse impact to capital and would be reason for caution,” Stevens said in an interview.
Covering future losses
Each year, the FHA estimates how much money it will need in its financing fund to cover future losses on all of its outstanding FHA loans and how much, if any, will be left over. Adding up those annual estimates since 1992 shows that the FHA had over time projected its revenue from premiums would exceed costs by $33.8 billion, and this surplus would move into the emergency reserve fund. But almost exactly the opposite happened. The FHA had to shift a total of $34.4 billion out of the reserve fund and into the financing fund to cover losses. If not for the interest it collected over the years, the fund would be $647 million in the hole, instead of $10.04 billion in the black, according to the agency.
A few budget policy experts say the interest payments mask the true cost of the FHA mortgage-guarantee program. But other experts say accruing interest is legitimate and that several federal trust funds operate that way, such as the Social Security and the highway trust funds. They collect taxes from consumers and interest on those taxes. “These trust funds were intended to have a dedicated source of revenues over time, and therefore it make sense to count interest,” said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities. “It’s not phony accounting. If the contributions you put into a trust fund are not earning interest, then you don’t build up an adequate amount to cover future needs.” Article was written By Dina ElBoghdady.
Tennessee mortgage rates remain attractive for borrowers looking to purchase a home with an FHA loan in the South. Qualified Tennessee mortgage applicants may qualify for 30-year fixed rate FHA loan at 4.875%. 15 Year home loan terms are available at 4.5%. FHA refinance transactions remain the hot ticket for borrower looking to lock into a low fixed rate loan. Tennessee home mortgage loans continue to be a vital component in rebuilding the Southern housing sector and the affordable mortgage rates make refinancing and new home financing very appealing. Congress just passed the bill that makes the 2009 FHA loan limits available in 2010. For specific loan restrictions see the Tennessee FHA Loan Limits online.
Time may be limited for funding FHA streamline loans with FHA’s new rules. The FHA-to-FHA Streamline Refinances are effective with case numbers assigned on November 17, 2009. That gives FHA home loan originators only a few weeks to originate loans under the old guidelines. What has changed? Just about everything!
o New FHA seasoning requirements;
o Revised requirements for FHA loan payment histories;
o Required a net tangible benefit to the FHA borrower;
o FHA now has a maximum CLTV;
o Required verification of assets and employment
The latest Zillow Mortgage Rate report indicated that Pennsylvania mortgage rates had increased slightly from 4.87% to 4.88%. FHA mortgage rates ranged from the lowest rate of 4.71% in New Mexico to the highest rate of 5.13% Wyoming. Presently, Pennsylvania mortgage loan application volumes have increased at a rapid pace because borrowers want to lock in while mortgage rates are low. FHA presents a good opportunity for many of the struggling homeowners in the state to refinance into a fixed rate loan that they are happy with.
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