Emergency economic legislation temporarily increased the limit on loans insured by the Federal Housing Administration. But that increase is set to expire this year. However, other legislation made permanent increases to maximum FHA loans.   H.R. 5140, the Economic Stimulus Act of 2008, was signed by President Bush on Feb. 13. Among other provisions, it temporarily increased– until Dec. 31, 2008 — the FHA home loan limit in high-cost areas to $729,750. Prior to the legislation, the FHA mortgage loans limit was $362,790.  H.R. 3221, the Housing and the Economic Recovery Act of 2008, was signed by Bush on July 30.

Among its provisions was a permanent increase to FHA mortgage loan amounts — which the U.S. Department of Housing and Urban Development said today would be $625,500 in high-cost areas. In low-cost areas, the limit is $271,050.  Unfortunately many FHA mortgage lenders believe they have been given a “raw deal” after the President signed a bill that mad the higher FHA loan limits permanent.  According to FHA mortgage banker, Pat O’Connell, “The mortgage industry has enough setbacks in the last two years for a lifetime…Homeowners need a FHA refinance loan they can count on.” 

Mortgage limits for FHA home loans for specific areas are set at 115 % of the median house price.  In high-cost areas, the FHA mortgage limit on a duplex is $800,775, while loans on triplexes can go as high as $967,950 and four-unit properties can be financed for up to $1,202,925, according to Mortgagee Letter 2008-36 distributed Friday. In low-cost areas, the maximum FHA loan on a four-unit property is $521,250.

In for Alaska, Guam, Hawaii and the Virgin Islands, the FHA loan limit is set at $938,250 for a single-family residence.  Last month, the Federal Housing Finance Agency confirmed the 2009 conforming FHA loan limit in high-cost areas at $625,500.  This month, HUD issued Mortgagee Letter 2008-35 indicating that a nationwide mortgage limit had been established on reverse mortgage loans at $417,000.

Many people are under the mistaken impression that because Federal Housing Administration (FHA) offers incentives such as low down payments and low credit availability that it will be the new subprime loan. This is not true. FHA home loans remain focused on make sense mortgages and they stress that homeownership is a privilege, not a right. Unlike subprime refinance loans that offer low documentation and no documentation (stated income) loans, FHA loans require full documentation of income.

Other ways FHA separates itself from the subprime mentality include:

o    Abolishing seller-funded down payment assistance and upping down payment requirements to 3.5% (the previous requirement was 3%). There have been even talks of limiting FHA cash out from the now 95% back to 85% LTV ratios. FHA has always verified income and offered traditional fixed rate mortgages.

o    Requiring that your mortgage payment (generally meaning principal, interest, property taxes and property insurance — PITI) to be no more than 31% of your gross monthly income. Those whose PITI is more than 31% are a much greater risk for default, and ultimately, foreclosure.

o    Debt to income (DTI) ratio requirements, which state that your total monthly debt obligation including the mortgage, credit cards, auto loans, student loans, etc., should come to no more than 43% of your monthly income. This is still much more generous than standards set by the government-sponsored entities (GSEs), Freddie Mac and Fannie Mae–conventional loan standards.

FHA makes an exception to the PITI and DTI requirements if you are buying an energy-efficient home. The PITI is increased to 33% and 45% for all ongoing monthly payments. The reason for this is because of the long-term savings in energy costs.

Other FHA Requirements
Credit scores above 620 will probably qualify through the automated application process.  Scores below 620 will be rejected in the automated process and will have be processed manually, including an interview with the applicant.  Cash out refinance loans rarely qualify at 95% any more.  Mortgage lenders contest that FHA likes 85% for cash out refinancing.

With re-established credit, applicants who are still paying on a Chapter 13 bankruptcy filing are eligible after one year and those who filed Chapter 7 are eligible after two years. Conventional lenders typically require a three-year wait after a Chapter 7. 

Applicants who have gone through foreclosure are ineligible until at least three years have passed since the foreclosure date.  In the interim, the applicant must have reestablished good credit.  Any civil judgments must be paid off.  Any delinquency on federal debts such as taxes and student loans will disqualify the applicant.

The FHA’s mission is to help those with lower incomes be able to own their own homes. But, borrowers must qualify for the loans. The days of stated income and non-verifiable income loans have ended. Borrowers must now fully document their income and expenses. There are credit score and DTI requirements. Now, a borrower must prove they are actually able to afford the mortgage loan. Going back to traditional lender underwriting standards is the only way to assure that another mortgage meltdown like this one does not happen again.

U.S. Department of Housing and Urban Development Secretary Steve Preston today announced that 400,000 families have refinanced their mortgages with HUD’s affordable mortgage insurance program. Since expanding its refinance program in September 2007, HUD’s Federal Housing Administration (FHA) has helped more distressed homeowners keep their homes by utilizing FHA’s safe and affordable mortgage refinancing and home loans.

FHA mortgage refinancing is on pace to help 500,000 families by the end of this year.“Thanks to FHA’s expanded programs, hundreds of thousands of families now have peace of mind knowing they have a stable, more affordable mortgage,” said Preston. “Today, we are proud to say that FHA home loans have helped more than 400,000 struggling families keep their homes while also creating greater liquidity in the mortgage market.”

Since its creation in 1934, FHA has helped more than 35 million families become homeowners. Nationally, the number of mortgage loans insured by FHA was nearly three times higher in the third quarter of calendar year 2008, compared to the same time last year. By requiring full income and employment documentation, FHA loan programs are underwritten to ensure borrowers have the ability to repay the loan. FHA home refinance products continue to provide unprecedented loss mitigation assistance to homeowners. FHA’s loss mitigation efforts have helped about 300,000 families keep their homes over the last three years through the foreclosure prevention programs.

Timeline: Expanding FHA’s Refinance Loan Program is rolled out to help families stay in their homes with a foreclosure prevention program

August 2007 – President Bush launched a new initiative at HUD’s Federal Housing Administration (FHA) called FHASecure loans which have helped hundreds of thousands of struggling homeowners – especially low-income families and minorities avoid foreclosure. This product expanded FHA’s ability to offer mortgage refinancing to homeowners who have good credit histories, but cannot afford their current mortgage payments after their adjustable rate reset.

May 2008 – FHA helped 200,000 families refinance their mortgages since September 2007.

July 2008 – HUD expanded the FHASecure to help homeowners with adjustable rate subprime mortgages who can no longer afford their mortgages and missed up to three monthly mortgage payments over the past 12 months. Rather than go into foreclosure, eligible borrowers can refinance with FHA lenders that voluntarily write down the outstanding subprime mortgage principal balances and help with loan modifications.

August 2008 – FHA helped 300,000 families refinance their mortgages since September 2007.

October 2008 – HUD launched the HOPE for Homeowners program to refinance mortgages for eligible borrowers who are having difficulty making their payments, but, after a write-down in principal, can afford a new loan insured by HUD’s Federal Housing Administration (FHA).

October 2008 – FHA helped 400,000 families refinance their mortgages since September 2007.

Federal housing officials have compiled a list of lenders participating in the HOPE for Homeowners (H4H) program. The list was last updated on October 17th, and they plan on updating it each Friday. The H4H program was signed into law under the Housing and Economic Recovery Act on July 30, 2008. It is designed to help homeowners avoid foreclosure by refinancing bad credit loans into new 30-year fixed-rate mortgage loans insured by the Federal Housing Administration (FHA). The program was launched on October 1, 2008 and ends on September 30, 2011.

“For families struggling to keep up with their mortgage payments, this program will be another resource to refinance into a loan they can afford,” said HUD Secretary Steve Preston.  “FHA home refinancing remains a safe and affordable alternative to the high-priced mortgage loans that threaten homeowners’ ability to retain their homes.  We strongly encourage borrowers to work with their lenders to determine if HOPE for Homeowners is the right program for them.”

According to the FHA, Borrowers are encouraged to contact their lender to determine eligibility, but may be eligible if, among other factors:

• The home is their primary residence, and they have no ownership interest in any other residential property, such as second homes.
• Their existing mortgage was originated on or before January 1, 2008, and they have made at least six payments.
• They are not able to pay their existing mortgage without help.
• As of March 2008, their total monthly mortgage payments due were more than 31 percent of their gross monthly income.

Lender participation in the HOPE for Homeowners program is voluntary, and the lender must be willing to write down the loan to 90% of the home’s current value. Junior lien-holders have to take a total loss on the loan because they are required to release their lien on the house in order for the borrower to participate in the program.

When contacting any of the HOPE for Homeowners lenders on the list, you “are strongly encouraged to contact your servicing mortgage lender and any subordinate lien holders since their participation is vital for you to refinance into a HOPE for Homeowners mortgage,” HUD advised.

If you are experiencing difficulty in communicating with your current servicing lender and/or subordinate lien holders, you may wish to contact a housing counseling agency to ask for advice and assistance in reaching a mutually agreeable solution, like a loan modification that helps borrowers avoid foreclosure.

Under the HOPE for Homeowners Act of 2008, new mortgages that are offered by FHA-approved lenders will refinance abusive loans at a significant discount for homeowners facing difficulty meeting their mortgage payments. The HOPE for Homeowners act will make it possible for certain homeowners to refinance their existing mortgages with a 30-year, fixed-rate FHA loan of up to 90% of their home’s value.  FHA home loans have saved many homeowners from foreclosure with competitive fixed rate loans and FHASecure.

Eligible homeowners are those who originated their FHA loans before January 1, 2008, spend more than 31% of their monthly income on their mortgage, and are currently in danger of foreclosure.

Important Notes:

• The program is completely voluntary. The decision on whether to write such a loan remains up to banks, which would have to be willing to take a loss on the existing loans in exchange for avoiding an often-costly foreclosure.

• If you sell your home after you refinance, you will have to split the equity earnings with the FHA, on a sliding scale basis.

HOPE for Homeowners comes at a time when Wall Street financial institutions are taking huge hits because of their investments in mortgage-backed securities. Many in the housing industry say the law won’t have much impact on the foreclosure rate because FHA lenders are not obligated to participate in the program. However, there is a way to better encourage the lender to accept the program: 

“Be proactive early if you’re getting in trouble,” says mortgage broker Drew Sakson. “Be extremely proactive, and be very early. If you can see that you’re not going to be able to make a payment, call them first.”

FHA loans may not be the cash cow that “Option Arm’s” were for mortgage brokers a few years ago, but with FHA, brokers and loan officers can actually feel good about financing they provided to the consumer.  In most cases, FHA lending companies provide the full array of government loans, like the FHA Streamline and FHA Secure.

FHA loans have no pre-payment penalties for refinancing or selling the home. FHA home loans offer a true fixed principal and interest rate that enables a borrower to own their home after thirty years by simply making the payment each month.

·         Multi State HUD Approved Lenders

·         Low Rate Home Refinancing

·         FHA, VA, Conventional

·         Quick Government Closings

·         Credit Scores as low as 530*

·         FHA Secure Refinance

·         No YSP Disclosure

·         Loan Volume Incentives

The subprime market, which has been blamed for sparking the current financial and credit crisis, is pretty much dead and gone. FHA home loans have now become the primary home financing tool for lenders nationally.  FHA has upheld their promise to lend to people with little money for down payments and credit blemishes.

The FHA requires a 3 percent down payment (due to raise to 3.5% beginning next January), compared with 20 percent for some conventional mortgages. The FHA also doesn’t require a minimum credit score, although lenders typically have minimum standards in place. But these minimums are nowhere near as stringent as those of conventional loans.  For a conventional loan, you need a credit score of at least 660 if you’re putting 20% down and at least 700 if you have less than 20% startup equity. Most lenders who have a minimum credit score requirement for FHA loans will approve someone who has a score of as low as 500, but typically the required minimum is 580. But, that’s a lot less than what conventional lenders are asking for.

On top of that, the government has substantially increased the amount of money that can be borrowed through FHA loans, And, for the first time, FHA is allowing homeowners who are behind on their monthly payments to refinance through the FHA.  Nationally, the FHA is insuring more than $24 billion in mortgages a month, up from about $6 billion a month a year ago, a figure that includes purchases and refinances. In metro Atlanta, the number of FHA loans is on pace to more than double this year.

“All of a sudden, FHA has come back in a big way and is a much bigger piece of the pie,” said Walter Moody, a Macon broker who is president of the Georgia Association of Mortgage Brokers.  Jan Wagner, president of Canton Street Mortgage in Roswell, said her company began handling FHA loans only this year. But now, nearly one in three of her company’s mortgages are backed by the FHA.

Unlike the subprime market, FHA has measures in place to minimize lender risk for foreclosure.  FHA mortgage lenders continue to praise HUD’s commitment to homeownership.  “We have consistent guidelines in that we do require borrowers to document income and their ability to pay,” said Charles Gardner, director of the FHA’s Atlanta homeownership center.  Subprime loans would allow people to borrow based on what they claimed their incomes were. The Federal Housing Administration (FHA), an arm of the U.S. Department of Housing and Development (HUD), requires borrowers to verify income and submit income tax records. Like conventional loans, FHA is a full documentation loan.

FHA is still the best option for cash-strapped first-time buyers and those who have a credit score of less than 700. Fill out the free loan quote form to see if you qualify for a FHA purchase loan or refinance. Interest rates are low right now, so it’s a good time to refinance, especially if you currently have a subprime adjustable rate mortgage (ARM) or exotic hybrid ARM interest only or negative amortization loan.

The Housing Wire reports that the Standard & Poor’s Ratings Services lowered Fannie and Freddie’s preferred stock rating to ‘BBB-’ from ‘A-,’ while cutting a host of other ratings as well, and warning that further cuts may be coming in the future. The ratings agency said it cut the ratings over “increasing uncertainty about whether government support will extend to these securities in the context of further deterioration” in each GSE’s assets. It further reports that it’s becoming clear that holding preferred interests in either GSE is going to be hazardous to Q3 earnings.

Shares of the two mortgage financing giants each hit a new 52-week-low. They’ve lost more than a fifth of their value on Wednesday as fears mounted that the companies will soon need government support. Regional banks and insurers hold the majority of Fannie and Freddie’s $36 billion in preferred stock, and any bailout would hang these stockholders out to dry.  Many financing experts wonder why Fannie and Freddie have not moved to a insured home loan platform like FHA.  The government has backed FHA home loans and FHASecure for fixed rate refinancing and foreclosure prevention

Dow components Bank of America (BAC, Fortune 500) fell nearly 4% while Citigroup (C, Fortune 500) was down 2.5%. Wachovia’s (WB, Fortune 500) stock fell 7%. And shares of the investment bank Lehman Brothers (LEH, Fortune 500), which is facing its own concerns about the need for more capital, plunged 9%.  “There’s a big negative feedback loop and there’s no way out of it,” Friedman, Billings, Ramsey & Co. analyst Paul Miller said in an interview. “As the stock falls more and more, it’s more likely the government steps in and more likely equity holders get wiped out.”

It’s looking more and more like the government bailout of Fannie Mae and Freddie Mac will become the taxpayers’ burden. JP Morgan Chase & Co.’s CEO, Jamie Dimon said in a Q2 earnings call that prime mortgages looked “terrible.” This is an indicator that it’s not just sub-prime mortgages with bad credit that are going sour. Even with all of the loan modifications, the home foreclosures are not stopping.

Fannie Mae has reported a loss for the past two quarters while Freddie Mac has posted three consecutive quarterly losses. Both companies are expected to report a loss in the second quarter as well.  Fannie Mae’s chief executive sought to reassure investors that no bailout is imminent. They haven’t offered anything and we haven’t asked for anything,” Fannie Mae CEO Daniel Mudd said in a public radio interview Wednesday morning. “I don’t anticipate that they will do that.”

Armando Falcon, who served for six years as Fannie and Freddie’s chief government regulator, expects a full-fledged government takeover before year-end. The companies’ financial picture is far worse than they have acknowledged, he said, particularly for riskier mortgage loans they purchased as investments.

Government-insured mortgage applications tripled in the past year according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Of all mortgage applications accepted during the month of July 2008, 29.1 percent were for government-insured loans (consisting of mostly FHA loans) compared to 8.4 percent in July 2007.  FHA home loan volumes continue to rise as conventional lending continues to tighten.

Data from the U.S. Department of Housing and Urban Development (HUD) show that the level of conventional to FHA refinance applications has increased 317 percent on a year over year basis in July, the bulk of which is likely from subprime ARM products. Similarly, the level of conventional to FHA refinance endorsements has increased 260.8 percent on a year over year basis. Based on the MBA survey, application volume for government-insured loans was up 133.9 percent in July from a year ago.

In March of this year, the Economic Stimulus Act of 2008 temporarily raised the FHA and conforming loan limits for most areas in the country, which broadened FHA financing options for more borrowers. The Housing and Economic Recovery Act of 2008, passed in July 2008, permanently raised the lending limit, not quite as high as the Economic Stimulus Act, but high enough to still broaden the reach of FHA mortgage loans.

FHASecure, under the Economic Stimulus Act of 2008, provides holders of subprime adjustable rate mortgages (ARMs) the opportunity to refinance their loans to more affordable fixed-rate loans. This program is due to expire on December 31, 2008. The other foreclosure bailout program will begin before the expiration of FHASecure. HOPE for Homeowners will be initiated on October 1, 2008. Like FHASecure, it allows holders of subprime ARMs to refinance into more affordable fixed-rate mortgage loans.

The news isn’t so great for conventional mortgage applications, the MBA reports that those fell to the lowest level in 6 years. Application volume for conventional loans was down 50.2 percent. Refinancing activity led the downward charge last week, according to MBA data, dropping 3.7 percent to 34.8 percent of total applications down from 35.2 percent the previous week. Purchase applications fell 0.4 percent, despite mortgage rates that appear to have eased somewhat during the week. The MBA’s preliminary rate survey found that the average contract interest rate for 30-year fixed-rate mortgages decreased to 6.47 percent from 6.57 percent; formal rate surveys are due out Thursday.

“With two more weeks left until the unofficial end of summer and mortgage rates threatening six-year highs, little on the horizon suggests any reversal of the current seasonal trend through the end of 2008,” said Mortgage Maxx publisher Paul Descloux.

The recent influx of activity for FHA home loans underscores the need for modernization of FHA’s lending guidelines. The new FHA Modernization Act of 2008 proposes to make the much-needed modernizations, which will be tested as more and more applications for government-backed loans keep coming in. The massive shift from conventional to government loans is due mainly to the fact that conventional lenders have tightened down lending standards to the point where only those with high credit scores and very low debt-to-income ratios can qualify. FHA’s standards are more reasonable, and allow those who have some credit challenges the opportunity to be a homeowner and to refinance troubled loans.

Even if a borrower doesn’t have a troubled loan, they are afforded the opportunity to refinance their existing loans into competitively priced FHA home loans. If you’re interested in getting a FHA loan or refinancing into one, fill out the free loan quote on this page, or call us.

According to the Santa Cruz Senteniel Selected and approved banks and mortgage companies originate, approve, fund and service FHA mortgage loans. The FHA insures home loans that lenders do not have to worry about whether or not there will be a market to sell these loans.

FHA loans have been popular throughout the United States where home prices were low enough to take advantage of the $362,000 maximum loan amount that FHA previously allowed. With the president signing the Economic Stimulus package in February, the FHA limit was increased to $729,750 for high priced areas like Santa Cruz.

This potentially brings the FHA loan within reach of the majority of homebuyers and homeowners in Santa Cruz County. Unfortunately, this higher loan limit will go away as it is scheduled to sunset on Dec. 31 of this year, when the limit is scheduled to go back to the $362,000 level. We all hope that Congress will grant an extension of this incredible opportunity.

According to FHA Home Loan Services in a recent article in Forbes magazine, FHA loans had a 12 percent market share of mortgages in the U.S. in 1994. By the subprime era of 2005-2006, FHA loans had only a 1.8 percent market share. This was due to the fact that subprime mortgages filled the need for those borrowers with less than ideal credit and small down payments and much less stringent underwriting than FHA. In 2007, 425,000 FHA loans were originated and that number is expected to more than double to 1,100,000 loans in 2008. FHA appears to be filling the need that the subprime lenders had been filling prior to the mortgage meltdown.

The obvious benefits to the FHA loan include down payments as low as 3 percent, which can be all gift, competitive 30-year fixed rates, and the fact that borrowers can qualify for an FHA loan without stellar credit.

Perhaps one of the most important aspects of an FHA home mortgages that co-signers can help the primary occupants qualify. That means, for example, that a borrower who does not make enough money to qualify for the mortgage can get help from a family member who is willing to sign on as a co-borrower. conforming home loans used to allow this but no longer do.

The one aspect of an FHA mortgage that is important to note is that income documentation is required; FHA does not accept “stated income” loans. Although there are exceptions, the borrowers’ debt-to-income ratio needs to be below 43 percent.

Not all home loan lenders or mortgage brokers are approved or can be approved to do FHA loans. The approval process is strict, it requires audited financial statements and requires the loan originators to be W-2 employees of the lender. Be sure you speak with a knowledgeable and approved FHA mortgage professional before you make a decision regarding refinancing or purchasing a home.

Peter Boutell is a mortgage consultant with a local mortgage company. Send questions to ‘Lending a Hand,’ 1535 Seabright Ave., Santa Cruz, CA 95062 or fax 425-1044. E-mail may be sent to Peter@SantaCruzHomeFinance.com. Archived columns are available at www.peterboutell.com