In recent FHA news, the House just passed HR 3288, home loan legislation which would continue 2009 FHA loan limits through 2010 for owner ocuupied purchase and refinance loans. However, the bill did state that HUD will be reducing loan limits for FHA reverse mortgage loans that are available to senior homeowners who are at least 62 years of age. 

HUD is now approved to insure FHA home loans worth up to $400 billion. This is a significant rise from $315 billion last year.  The mortgage bill also mandates that FHA mortgage loan limits from fiscal 2008. This means the FHA loan limits will still allow loan amounts up to $729,750 in certain areas.

Gone are the days when HUD could copy Fannie or Freddie when setting FHA loan limits for the counties in the 50 states.  No more can HUD say “ditto” when it comes to home loan limits, because Fannie and Freddie are silent and appear to be disenchanted with the government bail-outs that have ran-sacked the mortgage industry over the last 3 years. So with 2010 FHA loan limits all set, consumers looking to FHA for home financing have real numbers to work with. It also helps FHA lenders and brokers, because banks usually won’t roll out new loan programs with government loan limits up in the air. Consumers have been blessed with record low FHA mortgage rates in 2009 and this is clearly good news for FHA rates in 2010.  When considering refinancing or a purchase mortgage, check with HUD for local loan limits set by county for each state. 

The Federal Housing Administration plans to make it tougher for borrowers to refinance a loan and take out cash as the agency tries to “limit its exposure to undue risk,” according to a letter that went out to FHA lenders this week. The decision comes at a time when defaults are rising in HUD’s flagship, FHA home loan insurance program, especially among borrowers who failed to make more than a single payment. The Washington Post reported recently that the quick loan defaults almost tripled in 2008 alone and more than quadrupled among FHA home refinancing.

FHA refinance loans now make up two-fifths of all the agency’s instant defaults, according to the Post analysis, and some lenders have singled out cash out refinance loans as especially risky. With conventional loans, many lenders now offer cash out mortgage only to borrowers with high credit scores and significant equity in their homes. The fear is that borrowers might otherwise take the cash and walk away from the mortgage.

Until now, the FHA has approved cash out refinancing for homeowners who have at least 5% equity in their properties and at least a one-year track record of on-time payments.  Starting with mortgage applications that FHA lenders receive April first, this type of mortgage refinancing will be restricted to borrowers with at least 15% equity in their homes.

The change will be temporary “while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken,” said the letter, signed by departing FHA Commissioner Brian D. Montgomery.  The FHA does not lend money directly. It provides mortgage insurance for borrowers working with HUD-approved FHA mortgage lenders and uses the premiums to cover its losses.  The quick defaults suggest that some borrowers are taking out loans they do not stand a chance of repaying, raising questions about whether the abusive lending practices that helped topple the subprime mortgage industry are making their way into government-backed FHA lending.

The agency has come under increased scrutiny in the past years because its share of the mortgage market has shot up from about 2% three years ago to nearly a third of the mortgages made after the subprime market vanished and its loans became the only option for many borrowers who lack a hefty down payment or stellar credit.

But even before the FHA loan policy change, many lenders had moved beyond what the agency requires and instituted tougher qualifying standards for borrowers, especially those looking for cash-out refinance deals. Bank of America, which adopted tighter standards in the summer, yesterday applauded the agency’s decision.  “Safeguarding the FHA through this economic cycle is paramount to maintaining the liquidity FHA offers for home buyers today,” said Allen Jones, a government lending executive at Bank of America.

Hope for Homeowners is the widely discussed FHA refinance loan that requires lenders to reduce the principle mortgage balances down to 90% of today’s appraised value.

Fox Business New’s Rich Edson reports on Rep. Barney Frank’s work to overhaul the Hope for Homeowners program.  So far, this FHA loan program has been unsuccessful.  FHA lenders offering the H4H home refinancing product would have to reduce the mortgage balance to 10% below the current market value. 

Government eliminates some liability for mortgage lenders who participate in this FHA loan program design to minimize the foreclosure crisis with a loan modification type solution for struggling homeowners. 

FHA home loans will be the only opportunity for non-prime refinancing, but even the FHA loan guidelines are tighter in 2009.  HUD requires 2 full URAR appraisals for FHA cash out refinance loans that exceeds 85% loan to value.  Borrowers can still use FHA loans for cash refinancing up to 95%, but two appraisals slows the process down and increases the closing costs as well.  Many FHA lenders are reporting minimum credit score requirements implemented for higher risk FHA home mortgages.  FHA mortgage rates for purchase or refinance are being reported with fixed rates as low as 4.5% on thirty year home mortgages.

Metro Housing of Flint is a non-profit agency. If you’re about to refinance, they suggest waiting until Wednesday before locking in your mortgage rates. “It’s going to be an impact day, and you’re going to see the interest rates hover and loan officers remain excited because of the significant amounts opportunity for home refinancing. It’s going to be a big day,” Crews predicted. If you have bad credit, or if your mortgage balance is greater than what your house is actually worth, qualifying for a refinance loan will be impossible.  Mortgage rates are low, but lending guidelines are tighter than ever.  Mortgage refinancing can be tricky, but not impossible. “Every time there’s a strategy. What happens is we don’t want to do the strategy, and we want to do it now, but we have to take the steps and get there,” Crews advised. 

To ease the confusion, Metro Housing is offering free seminars titled “Know Your Loan, Save Your Home.”  “We need to know what your rates are. We need to be able to look at your credit, and what the recapture period is. Then we can figure out what products can get you back to a safe place,” Crews explained.  If mortgage rates drop again on Wednesday, there’s no way of knowing just how long they will remain that low. Metro Housing’s best advice is to get your act together now, before you miss your opportunity and it’s too late.  “Know your mortgage. If you don’t take action, it will pass you by,” Crews said.

Why the Fed Meeting Matters so Much…

Former Dallas Fed President Gerald O’Driscoll talks about what to expect from the next Federal Reserve meeting.

U.S. Housing and Urban Development Secretary Steve Preston will address the Mortgage Bankers Association meeting in San Francisco today alongside Karl Rove, President Bush’s former deputy chief of staff and senior adviser, and George Mitchell, former Senate majority leader.  Preston took the reins at HUD in June after previous secretary Alphonso Jackson stepped down in April amid allegations of cronyism.

HUD oversees the Federal Housing Administration, a Depression-era agency created to stimulate home ownership. FHA home loans remain the focal point of many efforts to help struggling homeowners with foreclosure prevention solutions and is playing a more significant role in the home mortgage market this year after Congress allowed it to insure larger jumbo loans up to $729.750. 

Question: Hope for Homeowners, or H4H, the $300 billion FHA mortgage refinancing program for struggling homeowners authorized by Congress this summer, took effect Oct. 1. How willing are lenders to participate, given that they must write down a loan to 90% of a home’s current value?

Answer: FHA lenders continue to sign up. We have seen many of the lending companies begin to work through the process. It’s too early to tell what the volume will be. It’s important to note, this is just another tool in the toolbox. It’s specifically designed for the most urgent cases, people who have a loan greater than the value of their home. Mortgage lenders need to take dramatic action to participate. In addition to revising and writing the loan down to 90%, they need to assure that the resulting mortgage is affordable and based on sound lending criteria.  Many of the larger lenders informed HUD that they will take a piece of their portfolio and put them into H4H. HUD urges all homeowners who thinks they could have a problem paying their mortgage to get to a counselor sooner rather than later. HUD recommends discussing your situation with a FHA lender about your options.  Shop around with other mortgage lenders to fully understand your refinance options.

Question: Some of the government’s other programs include the FHASecure refinancing product and the HOPE Hotline, in partnership with large lenders. What are other ways to help homeowners avoid foreclosures?

Answer:  You’ve laid out the bigger federal programs. The next step is the $700 billion TARP (Troubled Asset Recovery Plan) program. It has a provision to advance foreclosure prevention activities. There is work in progress right now to begin to design those programs. FHA is coordinating with them at HUD to design those initiatives. Also, Fannie Mae and Freddie Mac announced that they are buying (troubled) mortgages. That will give us an opportunity to advance foreclosure mitigation actions. Potentially that gives us an opportunity to reach those homeowners directly because we would own those mortgages.

Question: The Housing and Economic Recovery Act authorized HUD to distribute $3.92 billion to states and cities to help combat blight, and assist low- and moderate-income buyers. The money was allocated based on foreclosure rates. California received $529 million, second only to Florida with $541 million. How do you expect state and local governments to use these grants?

Answer: HUD has a lot of latitude. They can buy foreclosed homes. They can buy and demolish blighted properties. They can offer down payment and closing cost assistance to low- and moderate-income buyers. We had a massive housing summit in Washington, D.C., earlier this month to teach people how to use these grants and to have other communities teach about best practices.

Question: What were some best practices you identified?

Answer:  Bringing in local not-for-profits that have a specialty in buying houses and turning them into affordable housing projects. Some smaller recipients talked about partnering with two or three local communities in the area to pool administrative resources, to maximize the amount of money they put to work. Some talked about how to focus on the visual uplifting of a community to make it more attractive to home buyers. HUD is putting together an idea-sharing Web site for best practices.

Question: Until recently, FHA was a minuscule part of the mortgage market here in pricey California because it could only insure low-cost loans. In February, Congress temporarily raised the FHA cap to $729,750 until the end of the year; in July, Congress permanently raised the limit to $625,500; both increases are only for high-cost areas. How has that affected FHA loans in California?

Answer: The program has gone from being a nonfactor in California to a quickly growing tool in the California market. For the most part, our low caps previously made the product almost ineligible for the market; now we’re seeing some really nice growth. We have more than 2.5 times the volume in the Bay Area this year compared to last year. For fiscal year 2008, which ended Sept. 30, HUD had over 5,000 loans for the Bay Area, up from 2,000 in FY 2007.

Question: Of course, FHA volume is increasing around the country as well as in California. How is FHA ramping up to handle that big additional workload?

Answer: People, process and technology. We’ve expanded the operation in terms of physical bodies. HUD is redesigning internal processes to improve their productivity. They have expanded the physical capacity of their system to handle volume.

Question: How can HUD improve lending standards and forestall inappropriate loans?

Answer: HUD continues to work very hard to finalize RESPA – the Real Estate Settlement Procedures Act – which would provide mortgage borrowers with information to evaluate the cost of their mortgage. When people go into a mortgage, they will have a statement that shows exactly how much they will have to pay, whether it will reset, and what other costs are associated with it. We’re hoping to get it done by the end of the year. It would be comprehensive but also simple.

Question: When do you think the housing market will hit bottom?

Answer: Six weeks ago, HUD was hoping to see us come out of the slump toward the back half of 2009. But in the past few weeks, we have had what could be a game-changing event with this severe shock to our system of liquidity. We have to understand what will happen to the broader economy before we get a sense of what it means for home prices.  One critical factor in keeping the wheels of the housing market turning is to ensure that liquidity is out there. Essentially that is how FHA works for mortgage lenders who adopt these programs that help borrowers understand we’re out there if they need help. Liquidity is a real enabler for purchasing.

The House on Thursday passed a contentious foreclosure-prevention package, which still faces a veto threat from the White House and an uncertain fate in the Senate.  In a 266-154 vote - with 39 Republicans voting in favor - lawmakers approved a proposal, to let the FHA insure up to $300 billion in new loans over four years if FHA lenders agree to reduce the mortgage principal.

To qualify, the FHA mortgage lender would have to cut the debt to no more than 85% of a home’s current appraised value. If the FHA refinance loans went into default, the FHA would pay the home loan lender the remaining principal owed.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers. The CBO estimates the FHA expansion program would cost taxpayers $1.7 billion. “This bill is very time limited and limited in specifics to a subset of mortgages and meant to mitigate a market failure,” Frank said during the floor debate on Thursday.

Opponents of the FHA expansion contend it’s a bailout for lenders, investors and “speculators” who took on imprudent risk. And because participation in the program would be voluntary on the part of lenders, critics contend lenders would only unload their riskiest loans into the federally backed program.

Supporters note that the program is limited to loans for owner-occupied residents, not speculators. They also make the case that lenders and investors would be taking a loss on every loan, and that the borrower would be paying higher-than-usual premiums to the FHA to insure the loan and would share equity in their home with the government. “No borrower who goes through this process will say at the end of it, ‘Boy, that was fun. Where do I buy a ticket to get back on Space Mountain?” Frank said.

Supporters also say if the borrower still can’t afford the loan when it’s written down to 85% of appraised value, their loan won’t qualify for the program. If the bill is a bailout for anyone, they say, it’s a bailout for communities across the country, which suffer when home values and property taxes go down because of foreclosures.