Last week, the US Senate Special Committee on Aging introduced an $800 million HUD bill to resolve some of the growing concerns over the FHA home loans created specifically for Seniors older than 62 years of age.  These FHA loans are also known as reverse mortgages, but the real concerns are that these loans may be leaving senior citizens and American taxpayers liable for millions of bad mortgages that may not perform. Clearly the fact that FHA insures these reverse mortgage loans adds to the concern for liability and stick Americans with more mortgage related debt.

Peter Bell, president of that National Reverse Mortgage Lenders Association testified that “a reverse mortgage must occupy the primary lien position on a property. All other home loans must be satisfied with reverse mortgage proceeds. If some of the proceeds available from the reverse mortgage are diverted to a tax and insurance escrow, in some cases, there would not be enough money left to satisfy the liens. In such cases, the homeowner would not be able to obtain the reverse mortgage – and probably be forced to give up the home.  “Instead of simply imposing an escrow, HUD (in partnership with a NRMLA Task Force on tax and insurance issues) is looking at utilizing the financial assessment tool to determine if the lender and counselor should work with the borrower to establish an escrow, amend the draw-down schedule, limit payment options, disallow a lump sum payment or take other steps appropriate to help protect borrowers from tax and insurance defaults. One obstacle here is that the Home Equity Conversion Mortgage statute requires all five payment options available under the program to be offered to all borrowers, restricting HUD and lenders’ ability to take appropriate action.”

FHA home loan programs have supported lenders and mortgage brokers nationwide for purchase, refinance and rehabilitation.  For several years there has been a big battle in Washington regarding the way in which new homes are financed. Basically, builders often give “incentives” if only you will use their lender. Their FHA lender, of course, is unlikely to be the world’s cheapest source of financing, thus you may get upfront benefits but may also pay extra over time. 

The Department of Housing and Urban Development has tried to stop the practice with a new rule banned the “required use” of the builder’s mortgage lender, was promptly sued by the home building industry and has now withdrawn its proposal altogether, meaning that new home buyers will continue to have the opportunity to pay more than they should for real estate financing.  It may seem improbable, but the HUD notice in the Federal Register is fascinating reading. For instance, it says that: “It is HUD’s view that, especially given the attention focused on HUD’s concerns through this rulemaking, the prior definition of ‘‘required use’’ can be used to address some deceptive referral arrangements, even though it does not achieve the enhanced consumer protections that FHA sought with respect to mortgages involving affiliated business arrangements. HUD will continue to seek consumer protections, especially as mortgage products continue to change, often becoming more complex and challenging buyers’ understanding of the costs and nature of mortgage transactions. HUD is not abandoning its goal of providing greater protections to consumers in real estate settlement transactions, but remains open to different means of achieving this goal.”

According to the FHA Mortgage Guide, HUD says that it “reiterates its commitment to fair real estate settlement practices that are not misleading, prevent abuse, offer proper disclosures to homebuyers, and promote choice and competition. HUD’s intent in revising the definition of “required use” was to clarify its interpretation of RESPA’s loan disclosure requirements with respect to transactions involving affiliated businesses in order to promote more competition among settlement service providers. After further evaluation and consideration of the concerns voiced by consumers and industry participants from various fields about the application of the revised definition of “required use,” HUD has concluded that all would benefit by HUD withdrawing the revised definition and addressing “required use” through new rulemaking.”

In a recent Washington Post article written by Kenneth Harney last weekend introducing new mortgage fee increases, for FHA loans and stricter down payment rules and higher credit score requirements from HUD, Fannie Mae and Freddie Mac as soon as April 1st.  According to the article, “Most major FHA mortgage lenders are already pricing in these higher fees, effectively raising costs to borrowers immediately and reducing the impact of housing stimulus efforts from Congress and the Obama administration.”

Falling FHA Mortgage Rates

The new FHA loan guidelines mean that even borrowers with good credit scores will be charged more for a mortgage loan unless they can make a down-payment of 30% or more.  Even someone with a 739 FICO -- once considered a platinum guarantee of the best rates available -- will get dinged with a quarter-point add-on.  Harney points out, fico scores in the upper 600s were deemed good enough for prime rate home financing just a couple of years ago. Now some borrowers with credit scores of 720 to 740 may not be enough to prevent an add-on fee to their FHA home loan, especially if they are buying a condominium or town home.

Potential home-buyers need to do all they can to increase their credit score and to accumulate enough funds for a more substantial down-payment, both moves which make good financial sense anyway.  But the best home loan solution is the basic FHA mortgage: Apply for an FHA loan, which requires a down-payment of just 3.5% and in most cases has lower credit score requirements.  FHA mortgage rates remain at record levels with national lenders reporting interest rates as low as 5.25% on 30-year fixed rate mortgages.

“In today’s weakened economy where access to credit is being restricted, we need to make home mortgages more available to households throughout the country, and especially in high-cost areas,” said Preston. “These new FHA loan limits will ensure HUD can to continue aid distressed homeowners with safer home refinancing featuring secure fixed rates from affordable government-insured loans that enable many first-time buyers take advantage of today’s buyers market”

FHA mortgage loan limits were increased recently back to 2008 FHA loan limits in high cost housing areas, too -- to a maximum of $729,750 in some areas. Visit the FHA website to check the FHA loan limits for your area.  This website enables consumers to look up the maximum FHA mortgage limits for your area or several areas, and then list them by state, county, or Metropolitan Statistical Area.