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.

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.

• 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.

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.

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%.

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 average mortgage rate for thirty-year fixed-rate mortgages fell to an all-time low of 4.71% the first week in December.  The rate was below 4.875% for seven weeks until Thursday, when Freddie Mac said the average rose above 5%. According to the Mortgage Bankers Association, the low refinance rates have spurred a surge in refinance applications, with 3 out of 4 loan applicants looking to refinance.

The volume of refinance loans would be much higher, experts say, if it weren’t for barriers facing many homeowners:

* Property values hurt by home foreclosures and short sales

* Tighter-underwriting guidelines for credit scores, delinquencies and debt to income ratio.

* Income rules that affect the self-employed.

Conventional lenders used to be able to do ’stated-income’ mortgages. But those have been banned by most banks and lending companies. “I get a lot of self-employed individuals that are 50, 60 years old with 780 credit scores, never made a late mortgage payment in their life, have got $500,000 to $1 million in the bank. But nobody’s going to give them a loan because they’re not showing any incomes on their tax returns.”  That’s what’s happening with the Sullivan’s.  “The only reason I can’t do anything is that I’m self-employed,” Sullivan said. “It’s extremely frustrating and irritating. Every month, I sit down to write that check, and I know I could be saving money. I’d be saving about 40 %.”

1. 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.
2. 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.
3. 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.
4. 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%.
5. Kicking out abusive lenders. FHA has moved swiftly to end relationships with several lenders, including Taylor, Bean and Whitaker Mortgage Company.
6. 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 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.