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.
The government approved ameasue to increase FHA insurance premiums for FHA home loans. While this could appear to be a responsible move to bolster FHA lending, it will no doubt prolong the housing crisis, because borrowers will be less likely to buy home if their monthly mortgage payments rise. To a first time home buyer, raising the mortgage insurance premiums is no different than raising the interest rates because either way, their monthly payment rises.
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. .
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?
People have been asking me recently if FHA offers any home equity loan programs for home repairs and improvements. Even in a recession, making home improvements is still important to most homeowners and the FHA 203K loan provides the opportunity for homeowners to finance home improvements. We are seeing a home remodeling trend because homeowners would rather not spend their money upgrading to a more expansive home. In years past borrowers had used second mortgage loans to finance home improvements, but qualifying for an equity loan is difficult. In most cases to qualify for a second mortgage a borrower would need a combine loan to value under 80%. That means that even after the new home improvement loan the borrower would have 20% home equity left in their property. In today’s housing market equity is hard to find.
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.
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 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.
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