In the last two years, FHA introduced several loan modification plans and mortgage relief programs, like FHASecure and Hope for Homeowners and today they announced a third attempt with a new FHA loan modification program. These past FHA home loan modification performed well because they never really got off the ground with the participating FHA mortgage lenders. At press time, FHA mortgage rates remained at record low levels.
Most of you will remember how FHASecure was pushed out by the Bush Administration in an effort to salvage homeowners stuck in an ARM that was about to reset to a higher interest rate. This FHA loan program was intended to enable delinquent borrowers a mortgage refinancing option with low fixed FHA rates. FHA Loan Pros discussed it in a recent article; HUD claims that “FHASecure has helped more than 100,000 borrowers remain in their property, but the reality was only 3,800 delinquent homeowners received specific aid from the FHASecure program in 2008.
Then late last year, FHA announced the lending savior, Hope for Homeowners that was designed to do what FHASecure was not able to accomplish. The press ate it up and FHA was the home financing talk on airwaves for months. Unfortunately as of June 30th for the Hope for Homeowners program could account for 949 mortgage applications but only 1 Hope for Homeowner loan could be documented. FHA remains determined to extend a loan modification to distressed homeowners, so hopefully this new FHA initiative will succeed.
The New FHA Loan Modification Program
o FHA announced their new mortgage relief program to help distressed FHA borrowers.
o The FHA home loan is refinanced and 30% of the FHA mortgage is placed into an interest-free second mortgage that must be paid back when the home is sold or refinanced.
o Borrowers can qualify with ratios of 31/55. The first ratio says that up to 31% of the individual’s monthly income can be used for housing costs and that 55% can be used for housing costs plus other monthly debts.
o The homeowners must be able to document a hardship (ie. an income change, loss of employment etc.) and it must be deemed as a long term hardship.
The Associated Press released a story yesterday reporting that the Bush Administration ignored in-house warnings of an impending mortgage collapse in 2005, delayed enacting proposed rules for a year, and bowed to lobbyists in stripping out the harshest of the proposals. According to an AP investigation of regulatory documents: In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky home loans. FHA loan programs seem to have attempted to provide financing with bailout bad credit mortgage refinancing like the FHASecure Refinance and the Hope for Homeowners, but if mortgage lenders like Countrywide, Chase, and WAMU tweak the guidelines beyond the level where the average distressed homeowner would qualify, then what is the point. Today, we find ourselves in foreclosure crisis and in the middle of the worst housing recession in a generation, the proposal reads like a list of what-ifs:
—Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
—Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.
—Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
—Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
Those proposals all were stripped from the final rules. None required congressional approval or the president’s signature. “In hindsight, it was spot on,” said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky mortgage loans.
FHA has received a lot of press in the news lately mainly because of the two foreclosure rescue programs: FHASecure and HOPE for Homeowners. But, did you know the FHA has several other refinance loan programs available to those looking to buy a home and those looking to refinance? Here are some of those programs:
- 203(b) – this is the standard single-family home loan program. It’s the loan most people have heard of because it’s the most common purchase loan program.
- FHA/VA 203(v), also known as the FHA/VA Tandem Loan – Most people haven’t heard of this one because it’s only available to veterans. Those who have used their VA eligibility or those who want to use their VA certificate later on can use it. The FHA/VA loan doesn’t involve the veteran’s entitlement, and there are no limits on how often the loan can be utilized. Veterans can only finance single-family homes with this loan. They are not allowed to finance duplex or other multi-family properties.
- The FHA Adjustable-Rate Mortgage (FHA ARM) combines the three-percent down payment guidelines of the standard 203(b) program with the features of an ARM. But, unlike the subprime ARMs and exotic hybrid ARMs (interest only and negative amortization loans), the FHA ARM does not allow negative amortization, and maximum interest rate increase caps are limited to 1 percent per year and 5 percent over the life of the loan.
- Section 245′s FHA Graduated Payment Mortgage (GPM) plan allows a borrower to pay lower initial monthly payments during the early years of the loan. Mortgage payments are structured to rise gradually for a set period of time, generally from five to seven years, and then remain fixed for the remainder of the loan. This enables borrowers to grow into higher monthly payments as their income increases.
- The FHA Growing Equity Mortgage (GEM), under Section 245(a), is designed to allow the borrower to grow equity in his or her property at a faster rate than with the traditional 30-year mortgages, while at the same time keeping payments low during the early years of the loan. With the GEM, payments increase between 2 percent and 7-1/2 percent each year (depending upon the particular plan), with the increase being applied directly to the principal balance. The loan is thereby retired in approximately fifteen years, dramatically reducing the overall cost of the mortgage.
- Section 203(h) is available to anyone whose home has been destroyed or severely damaged in a federally declared disaster area. The funds can be used to rebuild the home or purchase a new one; however, the borrower’s application must be filed with the Department of Housing and Urban Development (HUD) within one year of the President’s declaration of the disaster. Under this program, 100 percent loans can be obtained (including closing costs). The borrower can pay prepaid expenses such as property taxes and insurance, or the lender can premium price the loan (charge more interest) and pay the prepaid items for the borrower.
- Section 203(k) insures loans used to rehabilitate existing residential properties that will be used for residential purposes, or to convert non-residential buildings to residential use or change the number of family units in the dwelling. The 203(k) provides the borrower with interim and permanent financing in one loan. The loan amount, which is based on the property’s after-renovation value, cannot exceed the current FHA maximum mortgage in the borrower’s area.
- FHA Title I program – this is similar to the 203(b) program, but it’s for manufactured housing. A borrower can receive financing for the purchase of a manufactured home and land. The program can also be used to buy just the home if land is already owned, or land if the borrower already owns the manufactured home.
Are you looking to buy a home? If you already own a home, are you looking to refinance? FHA is the best loan option available. Unlike conventional lenders stuck in the credit freeze, FHA home loans are available. Credit underwriting for these loans is quite reasonable, too. FHA home refinancing is flexible and funding is much faster than it used to be. Fill out the loan quote form on this page for more information.
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.
Freddie Mac announced Tuesday morning that it will not purchase mortgage loans in the state of New York that fall under the state’s new definition of “subprime”. “The state of New York has enacted legislation that creates a ‘subprime home loan’ category of mortgages,” wrote vice president of customer outreach Patricia McClung in a memo to sellers and servicers. “Freddie Mac will not purchase New York subprime mortgages with note dates on or after September 1, 2008 that fall within the law’s definition of ‘subprime home loans.’”
What does this mean to home borrowers?
“Mortgage lenders will just decide to stop lending in certain areas,” said one source, a banking executive that asked not to be named. “We could end up with an entire class of borrowers that I call ‘the unlendables.’”
This exemplifies the position that conventional home lenders are taking. They are tightening their belts on lending practices to the point where it’s getting to be nearly impossible to qualify for a home loan. Fortunately, however, the FHA has stepped up to the plate. Under the Housing and Economic Recovery Act of 2008, just recently signed by President Bush, the FHA is being modernized to help with new home purchases and bring hope to those facing foreclosure.
The FHA Modernization Act of 2008 raises the FHA home loan limit. The current loan limit is $362,790. Under the new legislation it will be raised to $417,000 in certain parts of the country. In less expensive markets, the limit would be raised from 48 percent to 65 percent of the conforming loan limit, or an increase in the ceiling from $200,160 to $271,050 under the bill. It also does away with seller-funded down payment assistance programs like AmeriDream. But, since many lenders have already done away with these programs, it’s inconsequential. And, you can still get down payment assistance from family, friends, employers, churches and city-,county- and state-funded down payment assistance programs.
HOPE for Homeowners Act of 2008 was put in place to bring hope to those facing foreclosure due to skyrocketing mortgage payments as a result of subprime adjustable mortgage rates resetting to record high levels. This program allows these people to refinance into a fixed-rate FHA home loan.
FHASecure is not part of the new legislation. It was put in place earlier this year to address the rising foreclosure rate. It allows people facing foreclosure to refinance their mortgage loans into FHA fixed rate mortgages. This program is due to expire on December 31, 2008. The new HOPE for homeowners act will pick up where FHASecure leaves off.
Even if you’re not facing foreclosure, you can still refinance your home through FHA–just not through the HOPE for Homeowners or FHASecure programs. Fill out the free loan quote on this page or call us at 800-606-5143 to find out if you qualify for a FHA refinance loan.
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