Obama has made clear that he understands how paramount the FHA mortgage loan system is for revitalizing the housing markets from a local and national level.  Low interest rates and comprehensive FHA loan programs are essential for America to rebuild its credibility with homeowners and new homebuyers.  Most mortgage insiders believe that Obama understands the importance of recapturing property values that will help many families get back on their feet.   The Obama Administration will likely move quickly to reestablish credibility for American home financing.  FHA mortgage rates remain at the lowest levels ever.  Today a qualified borrower could take out a FHA mortgage with a fixed interest rate for thirty years at 4.75%. 

Many believe that Barrack should review a few of the FHA home loan products and provisions to see which loan programs are succeeding and which products are missing the mark.  Hope for Homeowners was a program passed over the summer as part of the FHA mortgage reform package. In a recent report, FHA loan pros said that as of “October 1st and HUD has allegedly allotted 22 people to the program.”  They would not confirm it, but clearly their reports and articles were blowing much needed whistles on the government loan relief programs that were supposed to be saving homes and giving new opportunities to homeowner that were able to qualify for home refinancing.

According to congressional testimony by James A. Heist, HUD’s assistant attorney inspector general for audit, “it is our understanding from the Department that funding for 22 staff positions and approximately $20 million for system improvements have been made available for the Hope for Homeowners program.”  Mr Heist does not say HUD has actually deployed 22 people to work on the H4H program, he only says “it is our understanding” that money has been made available for this purpose. This is hardly re-assuring and, in fact, there is no evidence that anyone at HUD is actually doing anything. How do we know? Well HUD’s figures as of December 31st — three full months after the H4H program began — show there have been 370 program applications but that “no Hope for Homeowners cases have been insured to date.”  Look for Congress to investigate the Hope for Homeowners program and while they’re at it expect them to review the FHA Secure loans as well.

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 Mortgage Bankers Association has come out with a new study which speaks loudly about FHA home loans.  FHA loan activity has risen significantly with average loan amount sizes increasing as well. The 2008 MBA Cost Study indicates that average FHA loans originated five years ago have were $162,454 loan amounts and they increased to $195,227 in 2007.  

According to economist Jared Bernstein from 2000 to 2007 household income has actually dropped by $324 when factoring in buying power.  FHA mortgage refinance activity continues to dominate the loan application volumes. According to MBA, in June 2003 a standard thirty year fixed rate mortgage loan could be locked at 5.21%  plus .5 points.  The mortgage rates rose, but not by much. According to Freddie Mac as of the start of October rates for fixed-rate conventional home loans stood at 6.10% plus .6 points.

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.

Last week it seemed that Bush may have opposed the FHA loan expansion programs. Ironically, the FHA was born in 1934 during the great depression in an effort to stabilize the housing market with the mission of HUD’s fair lending policies.  The thirty-year mortgage loan featuring a fixed interest rate was a FHA initiative.

Secretary Paulson informed Congress to forget about passing a Democratic bill that would create a special Federal Housing Administration fund for refinancing one to two million homeowners with home mortgages that were greater than the home’s value.   According to mortgage banker Bryan Dornan, “FHA has clearly been the savior for home financing products for the mortgage industry in 2007 and 2008.”  Dornan continued, “Having the ability to offer Americans a quality home loan with an affordable rate is critical during these uncertain financial times.”

Under the proposal sponsored by Rep. Barney Frank, D-MA and Sen. Christopher Dodd, D-CT., FHA mortgage lenders would have to write down the mortgage to 85% Loan-to-Value. The FHA loan proposal would give lending-investors the option of taking a “quick hit or a slow bleed,” one pundit of the bill remarked.  It might also offer homeowners a new opportunity with an affordable FHA mortgage and a fresh start.  Recently we were told that Housing Dept of Urban Development has been working on a similar mortgage product. But the Bush administration does not want Congress to tinker with it, because it would be available faster by using FHA’s existing authority to mold the loan products for today’s circumstances.

Negotiations over an unprecedented $700 billion bailout opened on Sunday between Congress and the administration of President George W. Bush. The idea of this intervention is to revive the U.S. financial system, which includes a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.

Mortgage rates remained low, but home lending guidelines continue to tighten.  Most brokers are reporting that FHA home loans have taken 75% of the market share.  According to Nationwide Lender Jeff Moran, “FHA mortgage products are most attractive because they underwrite loans beyond the credit scores.”  FHA mortgage guidelines promote fair lending with underwriting practices that encourage qualifications based on compensating factors like, equity, assets, benefits and likelihood of the proposed borrower making the loan payment on time each month.

The sweeping proposal would have the Treasury buy up bad mortgage-related debts from financial institutions, including U.S. subsidiaries of foreign banks, to try to stem the worst financial storm since the Great Depression. This is supposed to leave banks with more money and fewer problems, according to two sources familiar with what was said at the meeting.

The Securities and Exchange Commission (SEC) is considering further limits on short-selling, a practice that allows investors to bet on a decline in a company’s stock price, according to a person familiar with the matter. Critics of the practice say short sellers are driving down the share prices of financial companies, thereby contributing to their destruction. So, short sales could very well be out of the housing market picture in the very near future.

People are withdrawing money from money-market mutual funds. Banks are refusing to lend to one another. Several large financial companies need money to stay in business, including the bank Washington Mutual, which is seeking a buyer. Regulators and the banking industry are increasingly concerned about customer withdrawals from money-market funds. Crane Data, which tracks the industry, said total deposits in money-market funds fell Wednesday by at least $79 billion, or about 2.6 percent.

Money-market funds are particularly important because they buy short-term debt, which is used by financial companies and other corporations to finance day-to-day activities.

“As of now, the Bush administration has only offered a concept with a staggering price tag, not a plan. Even if the U.S. Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering,” says Democratic presidential candidate Barack Obama.

If a plan does move forward, Democrats may try to demand concessions from the suddenly humbled industry, said Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, including support for a proposal to permit bankruptcy judges to modify mortgages for distressed borrowers. Currently, judges may set new terms for mortgages on second homes but not on primary residences.

At this point, all of this financial turmoil seems only to affect conventional loans. Credit is pretty much frozen.  FHA Lenders don’t even want to lend to each other much less borrowers, which is why FHA, VA and other government-backed Ginnie Mae loans are being extended (particularly for refinance loans) at a record pace. What’s happened so far is that interest rates have dropped lower than they’ve been in a year.

With sellers having to deal with a huge inventory of houses on the market and declining prices, they have to make what they have for sale stand out in the marketplace. One of the ways is to be open to FHA home refinancing and other government-backed loans. It may take a little longer to process the loan, but at least loans are being extended through the government-backed channels rather than being stagnated as are conventional loans. It’s better to jump through a couple of extra hoops in getting your house sold than to let it sit while all this financial mess is sorted out by investment bankers that adversely affect lenders and their ability to lend.

If investment banks aren’t making any money, they can’t fund loans. So, until investment bankers can make money to fund lenders, conventional lenders won’t be able to extend loans, so FHA and other government-backed loans are pretty much the only players in the housing market. Sellers need to accept FHA home loans, and borrowers need to apply for them to buy houses. This financial mess has made FHA not only the refinance loan of choice, but also the purchase loan of choice.

FHA lending standards are still reasonable, and FHA only requires 3% down. However, the down payment requirement will be going up to 3.5% in January of next year. But, that’s still a lot better than what conventional loans have to offer. And, at least you can get a FHA loan. Not too many people can get conventional loans right now, and they probably won’t be able to for quite some time to come. If you’re looking to buy while housing prices are low, FHA and other government-backed loans are the best way of securing financing for your new home. Otherwise, you could be in for a long wait, especially if you’re a first-time buyer who can’t afford a 20% down payment.

Accepting these new criteria was hardly voluntary. The Fed warned the banks:  “Did You Know? Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions.”

FHA mortgage refinance tends to follow the most flexible underwriting criteria permitted under with government and FHA guidelines.  When necessary — in cases where FHA loan applicants have no established credit history, for example — FHA allows nontraditional credit, a practice now accepted by most government lending institutions.

Credit History: When considering past credit problems FHA mortgage lenders should review isolated circumstances. For lower–income applicants in particular, unforeseen expenses can have a significant effect on an overall good credit history. When looking at a refinance transaction that pays off past collections and high rate credit card debts, the debt to income ratio would be reduced significantly.  

Sources of Income: In addition to primary employment income, FHA, Fannie Mae and Freddie Mac will accept the following as valid income sources: overtime and part–time work, second jobs (including seasonal work), retirement and Social Security income, alimony, child support, Veterans Administration (VA) benefits, welfare payments, and unemployment benefits.

Credit scores. While credit scores can be an analytical tool with conforming loans, their effectiveness is limited with Community Reinvestment Act loans. Unfortunately, Community Reinvestment Act loans do not fit neatly into the standard credit score framework…Given these mortgage lending practices mandated by the Federal Reserve and encouraged by FHA Fannie Mae and Freddie Mac, the resulting financial problems for financial institutions such as Countrywide, Indy Mac, Bear Stearns and WAMU are not that shocking.

FHA agreed to provide mortgage insurance to buyers financing homes that were recently foreclosed on. Bloomberg believse this to be a sign the president may be ready to assist as the home sales continues to decline.

HUD agreed to insure home mortgages for low and moderate income borrowers, bad credit applicants and first-time buyers.  The first step was FHA waiving a 90-day waiting period for insurance on foreclosed property. “A glut of foreclosed and abandoned homes harms neighborhoods, frustrates homebuyers and delays a community’s recovery,” Federal Housing Commissioner Brian Montgomery said in the release.

The temporary one-year policy for foreclosure insurance indicated the US government may be easing its opposition to using taxpayer money to rescue lenders and investors in favor of letting the mortgage industry modify home loans to stimulate a deflated real estate market. The Democratic-controlled Congress has proposed a measure that is similar to the FHA insurance program. House Financial Services Committee Chairman Barney Frankintroduced legislation that would create a $15 billion loan-and-grant program to help states buy and rehabilitate foreclosed homes. The U.S. House of Representatives approved the measure last month. 

According to Realty Trac, banks repossessed twice as many homes in May and foreclosure filings rose 48% from athe previous year.  Declining property values have backed borrowers in to a corner with home loans that they didn’t have the ability to repay when the rates adjusted. 

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