When I first took the classes to get a real estate license and later a broker’s license, and then when I started training to become a loan officer, nothing was drilled into my head more firmly than the rule that any payments from the seller back to the buyer to cover down payment money were fraudulent and illegal. Now suddenly this particular money back from the seller was not a kickback as long as the money was funneled through a non-profit organization.

Yet at the same time I saw many deserving families who were ecstatic about becoming homeowners and who were ultimately very successful homeowners. They put up with a whole lot of extra scrutiny to qualify for an FHA loan instead of a subprime loan because owning a home was important to them. In fact, they went through a lot more than most of the high credit score, conventional loan borrowers who sold their previous home and made their relatively painless down payment. As a matter of fact, my personal experience with seller assisted down payment programs is that this is the group of borrowers who most appreciate the opportunity to buy a home and fight tooth and nail to keep it and foreclosures are very rare. This experience shades my view of the program.

On the other side of the coin, past loans where seller paid down payment assistance was involved do have higher default rates. They have had higher percentages of straw buyer fraud than other loans. They have had too many instances where the down payment and transaction fee were just added on top of the listed price. But are these issues with the seller paid down payment assistance programs or are they underwriting and quality control issues.

I don’t know if seller paid down payment programs are the answer or not. Maybe they are, or maybe some program similar to the VA 100% loan program would make more sense.  I do believe that lack of a down payment isn’t the huge factor causing foreclosure that some of it’s critics suggest. I believe the problem is layering of risk – specifically high debt to income ratios. I know of lenders who have studied their own numbers and come to the conclusion that the difference between the default rates on FHA loans with seller paid down payment assistance and FHA loans without it would essentially disappear with some tighter underwriting standards.

I don’t believe the bill which is presently being pushed to restore seller paid down payment assistance has the right guidelines to make the program work. I’m going to discuss this in more detail over the next few posts, but in the meantime let me direct you to some viewpoints on each side of the argument:

• LA Times – Down-payment aid program resurfacing
• Subtly Misleading LA Times Article Distorts In Favor of Seller-Funded Downpayment Programs
• LA Times Glosses Over Critical SFDPA Issues
• Are Seller Assisted Down Payment Programs Bad For FHA?
• FHA Down Payment Assistance On The Chopping Block?
• FHA Mortgage Hysteria From The Wall Street Journal
• FHA Down Payment Assistance – Down But Not Out?

As you can tell by the titles, a few of these articles are from some time ago before seller paid down payment assistance was discontinued, but the same arguments have been going on for ages. My own opinion of this issue has changed over time, I’d love to hear your thoughts about it.

Issue Number 1: FHASecure

Personally, I have pretty much given up on FHASecure. If I find someone who miraculously actually qualifies for the program, their second mortgage holder often insanely refuses to resubordinate their lien.

It is my opinion, though, that the substantial publicity for this loan program has caused more people to look into using the FHA program after they thought they had no way to refinance their mortgage due to falling home values. There has been a real value to that. The standard FHA program already provides a solution for many. They had no other choice but FHA, but they never would have tried FHA without the publicity.

Amusingly, as often occurs in government bureaucracies headed by political appointees, HUD has seemed to be chasing their tail lately trying to put the best spin on the FHASecure program. Now, according to an article by Peter G. Miller in Realty Times, they have come up with the claim that the term FHASecure really applies to any conventional to FHA refinance! Huh? I know what I heard in the conference calls and read in the mortgagee letter, and this is definitely not what it started out as.

You can find Peter’s article at: http://realtytimes.com/rtpages/20080116_hudconfusion.htm. I encourage you to go and read it.

You can also find HUD’s Frequently Asked Questions for lenders about FHASecure at http://www.fha.gov/about/fhasindqa.cfm. You can get detailed answers to a lot of the questions you may have about the FHASecure program guidelines there.

Issue Number Two: Risk Based Mortgage Insurance

There has been a lot of discussion among the sources I read about how the FHA Modernization bill we are all pushing would shoot itself in the foot by adopting risk based mortgage insurance. I partially agree.

I have been in a state of confusion about this because HUD’s original entry in the Federal Register and even their Frequently Asked Questions page both indicate that regardless of FHA Mortgage Reform risk based mortgage insurance was to take effect on January 1, 2008. Yet it seems to have been delayed although I personally haven’t seen any official notification of the delay. I only know that I have just been told by lenders that it is business as usual. This comes from the HUD FAQ:

“In addition, why has FHA waited until now to price for risk, as do other insurers?

Since it appeared unlikely that Congress would appropriate funds for FHA to continue its operations, FHA had a choice: either raise premiums across the board for all borrowers, thereby exacerbating adverse selection, or adopt the risk-based premium structure, with existing caps, that takes effect January 1, 2008.”

Those against the risk based mortgage insurance point out a GAO study done in July 2007 which indicates that when risk based mortgage insurance rules are applied that:

“GAO’s analysis of data on 2005 FHA home purchase borrowers shows that 43 percent would have paid the same or less under the risk-based pricing proposal than they actually paid, 37 percent would have paid more, and 20 percent (those with the highest expected claim rates) would not have qualified for FHA insurance.” (emphasis added)

Obviously, it would completely ruin the effect of FHA mortgage reform if 20 percent of those who would qualify for an FHA loan won’t even be eligible any more. However, there are at least a couple of other factors at work here.

First, is the fact that we don’t know exactly how the final bill will look. The Senate version delays the implementation of the risk based mortgage insurance for a year in order to allow for more time to work on the details. I think this is prudent. So if the Senate version wins out on that issue then it won’t quite be an immediate disaster. The currently published version of the risk based mortgage insurance excludes those borrowers with no credit score from maximum financing. I would hope that the potential delay in implementation could provide time to fight that provision.

Second, according to HUD’s FAQ again:

“…because FHA’s premiums are now based on risk, it can lower the accept/refer cut point to allow a greater percentage of mortgages to receive the accept risk classification with all the associated benefits, e.g., documentation relief.” (emphasis added)

We don’t know, and GAO didn’t know when they did their study last year, what the potential effect of this change might be. I don’t know if it would make up a 20% loss or not. And, honestly … nothing personal if you are one … but I don’t trust the work of government bureaucrat accountants anyway. Government numbers rarely work out as predicted.

What I do know is that FHA foreclosure rates aren’t that bad. Check my earlier posts in the archives for more information on that. So the program doesn’t really need all that much tweaking or modernization. I hope that politics on this issue doesn’t take a good idea and turn it into a disaster. I would love to hear your comments. Just click on the link below that has the word “comments” in it.

I know there was a substantial delay while lenders tried to figure out how to implement the program, and while GNMA got set up to provide the money to lend, but even so the numbers I was hearing were in the 10s of thousands. But I know that word about the program has been out on the street for ages.

So what is the problem?

This program has been widely touted as the answer to the mortgage problem of hundreds of thousands of homeowners. It is one of the cornerstones of the mortgage bailout program we’ve heard so much about in the news lately. Highly disappointing news. Some say the problem is that the rules are too strict to be of use for the average borrower in trouble. Others say the problem is that the lenders can’t sell the loans on the secondary market because investors won’t buy the bonds. Therefore, the lenders are being too strict. Others say that the right borrowers still don’t have any idea the program can help.

FHA Director Brian Montgomery says that although the program has gotten off to a slow start, it is gaining momentum and will still end up helping 60,000 borrowers under present rules and 200,000 plus if the FHA Modernization legislation passes.

I believe that one factor may be that many borrowers are being helped under normal FHA guidelines because they are not yet late on their payments. FHASecure is really only useful for borrowers who are already behind on payments. I guess time will tell.

I still encourage loan officers to get up to date on and become an expert in FHA Lending Guidelines. You may find that you don’t even need FHASecure if you can catch the borrowers early enough.

According to CNN, when asked about the FHA modernization bill, “‘It’s difficult to get anything up for a vote in the Senate right now, including common-sense bills like this one,’ said Jim Manley, a spokesman for majority leader, Harry Reid.” It looks like the bill will not get voted on this year.

Keep in mind that FHA can help many troubled borrowers just the way it is. No changes needed. IF you know what you are doing.

As someone who spends a lot of time training loan officers to do FHA loans, I am finding that many who have done very well over the past 3 or 4 years have never bothered to learn how to do FHA loans. I still see them on the mortgage broker forums asking where they can find stated income programs at high loan to values, and when you ask why they say because the borrower is self employed. They have no idea if the borrower would qualify if they actually analyzed the borrower’s tax returns, because they grew up in the mortgage business during the heyday of stated income, stated asset loans. They have never looked at a borrower’s tax returns before. I also see them wondering how many lates FHA allows within the past twelve months because they are accustomed to grading loans off a subprime matrix that has no room for common sense underwriting.

Two things need to happen right away. The first is that the Senate needs to get off the mark and do something about FHA modernization and quit sitting around playing politics while people lose their homes when they don’t need to. The second is that loan officers need to break out the books and do what it takes to really learn how to do mortgages. Not just how to fax applications over to their account rep.

Just my $.02 for the day.

In addition, Commissioner Clark relayed the latest news about the FHA program’s default rates. With nationwide foreclosures hitting new records every month, the astonishing news from FHA is that their program has experienced a drop in its foreclosure rate from 1.74% in 2004 to 1.45% for fiscal year 2007 which just ended. This is a strong argument that the FHA underwriting and loss mitigation models are holding up under severe pressure from a declining housing market.

Come on Senators, don’t you think maybe it’s time for the Senate to make some progress on the FHA Modernization Act which has been languishing without even being assigned a bill number since September 19, 2007?

Commissioner Clark attributes this success in dropping the foreclosure rates to HUD’s extensive foreclosure mitigation program. “In fiscal year 2007, FHA provided loss mitigation support to 91,000 borrowers, 86,500 of whom were able to keep their homes.” said Clark. “While not every one of these borrowers will be successful in the long term, historically 89% of all borrowers who benefit from loss mitigation still have active loans 2 years after the assistance.”

This is a unique opportunity to take one federal program which actually does seem to be working and use it to help out many homeowners facing financial ruin. There is some bad news in the report as Commissioner Clark also pointed out that industry sources indicate that more than 40% of delinquent borrowers fail to respond to contact from the lender until it is too late.

Borrowers – Please, if you are having difficulty with your payments, don’t hide your head in the sand. Lenders are under considerable pressure to cooperate and work something out with you. HUD has set up the HOPE NOW Alliance with the participation of most major lenders and offers counselors to help you work with your lender. They are just now ramping up operations, but already have counselors available. The number to reach them is 1-888-995-HOPE. As you can see HUD has considerable success helping out borrowers in financial distress.

The full text of Commissioner Clark’s testimony is available here.

Free Foreclosure Search

This in no way guarantees that any of the programs will still be around after March 2008.

On the semi-good news front, David Nason, assistant secretary of the Treasury for financial institutions, called on Congress yesterday to speed up passage of several pieces of legislation intended to help borrowers in trouble with their mortgages. One of the pieces of legislation he was talking about is the Senate version of the House’s H.R. 1852 which will raise FHA mortgage limits among other things. In addition, Congress’s Joint Economic Committee issued a statement last week expressing the importance of passing the legislation to modernize FHA.

My own $0.02 is that I am ready for them to stop issuing statements and start taking some action!

Carl Pruitt is a 22 year veteran of the real estate/mortgage businesses and specializes in FHA mortgages and FHA loan officer training resources.

Over the years the percentage of mortgages closed under FHA’s insurance program has slowly dwindled down because the FHA loan limits are below normal loan amounts in many areas. In addition, FHA’s 3 percent downpayment requirement and strange fee structure have not made FHA mortgages a competitive program in the marketplace. Had FHA loans been a more competitive product, many of the borrowers who have risky subprime mortgages would have used FHA instead.

A bill (H.R. 1852), has been introduced that would increase the FHA loan limits nationwide and in high cost areas, eliminate the 3% downpayment requirement on FHA loans for first time homebuyers, extend the loan term to 40 years, allow FHA to risk-based price their products, eliminate the cap on the number of reverse mortgages that FHA can insure, and streamline usage of the FHA condominium loan program. It would also allow excess FHA funds to be put into an affordable housing fund, rather than go to the US Treasury. Reciting the list all at once leaves you out of breath. Good grief! That’s more real change to the FHA loan program in one bill than has happened since the 1930’s all combined.

Of course the benefit of raising the maximum mortgage amounts is obvious. The elimination of the down payment requirement and extension of the mortgage term to 40 years will make the program competitive with Fannie Mae’s MyCommunity Mortgages and Freddie Mac’s HomePossible program. Except it may be the equivalent of those programs on steroids because FHA doesn’t have the same income limits that hold those programs back. Many of the problems crushing the real estate market now are caused by borrowers who could once get no down payment loans with affordable payments being forced out of the market recently. Estimates have been that as much as 15% of potential homebuyers have been shut out from buying homes by recent guideline changes. Passage of this bill could put them right back into the game.

FHA is not really the government lending money. It is the government providing an insurance program to encourage lenders to loan money to borrowers they might otherwise not consider. Up to this point, FHA loans have required the same level of mortgage insurance whether someone had perfect credit or they were just a couple of years into rebuilding from a Chapter 7 bankruptcy. A textbook example of how the market can get distorted by bureaucracy sometimes. This bill will allow FHA loans to base the mortgage insurance requirements on the actual risk level of the loan. People with better credit will get lower mortgage insurance prices. People with credit problems will still get loans. They will just have to finance in a little more mortgage insurance. This will help guarantee that the program stays well funded into the future.

The fastest growing segment of American society is the group approaching retirement age. Reverse mortgages have been an excellent way for many of those people to safely take advantage of all the equity they have built up in their homes without creating an undue financial burden during retirement. At present, there are caps on how many reverse mortgages can be insured. This has kept some potential borrowers from benefiting from the program. H.R. 1852 seeks to solve this problem by eliminatingthe cap on reverse mortgages. Likewise, many retired Americans who wish to purchase condominiums so that they can spend more time relaxing and less time painting, cutting grass and cleaning out gutters could use the FHA condominium loan program. However, at present it is a bureaucratic nightmare to deal with. H.R. 1852 seeks to remedy this.

There is a lot of promise in this bill. Of course, we never know how a bill will end up by the time our elected officials get through grandstanding and paying off special interest groups with changes to the proposal. Also, at present there is no corresponding bill being promoted in the Senate.

I encourage everyone to contact their Congressmen and Senators to help push these changes through.

The HUD Mortgagee Letter states:

If the new maximum FHA loan is not enough to pay off the existing first lien, closing costs and arrearages, the lender may execute a second lien at closing to pay the difference. The combined amount of the FHASecure first mortgage and any subordinate lien may exceed the applicable FHA loan to value ratio and geographical maximum mortgage amount.

As usual with HUD this is left open to interpretation. Of course it has been allowable for quite some time under the standard FHA guidelines to have a second mortgage resubordinate even if the second mortgage is above 100% of the value. This has been valuable when the borrower has two mortgages, however there has been a decided and foolhardy lack of cooperation evidenced by the second mortgage holders. They often refuse to resubordinate with the result being a default on both mortgages. The second mortgage holder definitely ends up on the short end of the stick then.

With FHASecure, my bet is that bigger lenders who also do FHA lending will refinance their own subprime loans and hold back seconds for the balance. If only to avoid a default on their own books. However, there are a lot of subprime note holders who do not do FHA loans, or are even out of business. It will be really interesting to see how these lenders interact with other lenders and brokers trying to refinance these loans.

FHA encourages all approved lenders to use FHA’s TOTAL Mortgage Scorecard to obtain risk classifications on each mortgage originated under the FHASecure initiative. If TOTAL renders an “accept/approve,” the mortgagee’s underwriter need not perform a personal review of the borrower’s credit history and capacity to repay. However, in the more likely event that the risk class is a “refer,” the underwriter must:

Total Mortgage Scorecard is FHA’s automated underwriting system. It analyzes all the factors of the loan and either approves it or refers it to an underwriter for manual analysis. Borrowers with upcoming rate adjustments should move heaven and earth to keep their credit clean during the time before their ARM adjusts. Total Mortgage Scorecard has been known to approve mortgages with debt ratios that substantially exceed the standard guidelines when the credit is clean for the past 12 months.

1. Determine that the homeowner has the capacity to make future mortgage payments as well as pay all other obligations. The payment-to-income ratio and debt-to-income ratios remain 31 percent and 43 percent, respectively. Compensating factors are to be provided by the underwriter when the ratios are exceeded.

If borrowers do not take the time to clean up their credit ahead of time, the underwriter will be very reluctant to allow those debt ratios to be exceeded.

2. Analyze the homeowner’s overall credit history, especially payments on the existing mortgage. The underwriter must determine that the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due and that other recurring obligations were paid on time. If the borrower was offered partial forbearance after interest rate reset, the underwriter must determine that he/she has made payments under the forbearance agreement in a timely manner.

Note the 6 month time period before the reset in which the mortgage or any forbearance agreement must be paid on time. Again, the key lesson here is to start early to make sure all the correct elements are in place for this program to work. Borrowers should not wait until the last possible minute to begin this process.

3. Provide comments in the “remarks” section of the mortgage credit analysis worksheet that he or she has determined that the cause of the borrower’s inability to make payments was directly related to the increased payment attributable to the reset and not due to a disregard for obligations.

The underwriter must be convinced that the only reason for any late payments was the mortgage payment going up.

• Tax consequences for a borrower when the note holder writes off a portion of the amount to pay off the first mortgage

FHA recognizes that there may be tax consequences resulting from debt relief. However, since FHA does not provide tax guidance, it recommends borrowers—and mortgage lenders—in such situations seek competent tax advice.

At present, if your lender has to write off part of your present mortgage balance in order to fit your loan into this program, the lender will send you a 1099 at the end of the year and you will owe taxes on the money as if it was income you received. Congress is working on changing this in the case of mortgages

• Other considerations of which the mortgagee must be aware when refinancing these mortgages.

The FHASecure initiative for refinancing borrowers harmed by non-FHA ARMs that have recently reset is not to be used to solicit homeowners to cease making timely mortgage payments; FHA reserves the right to reject for insurance those mortgage applications where it appears that a loan officer or other mortgagee employee suggested that the homeowners could stop making their payments, refinance into a FHA insured mortgage, and keep, as cash, the amount of payments not made on time.

As usual, HUD has to protect themselves from scammers working the system to put extra money in their pockets!

Here are the highlights of the eligibility requirements:

• The mortgage being refinanced must be a non-FHA ARM that has reset.
• The mortgagor’s payment history on the non-FHA ARM must show that, prior to the reset of the mortgage, the mortgagor was current in making the monthly mortgage payments, i.e., the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due.
• If there is sufficient equity in the home, under additional eligibility instructions provided, FHA will insure mortgages that include missed mortgage payments.
• Under certain conditions, FHA will insure first mortgages where (1) the existing note holder writes off the amount of indebtedness that cannot be refinanced into the FHA insured mortgage; or (2) either the FHA-approved lender making the new mortgage or the existing note holder may take back a second lien that includes closing costs, arrearages or previous secondary financing if the indebtedness exceeds FHA prescribed LTV and maximum mortgage amount limits.
• Mortgagees must determine, as part of the underwriting process, that the reset of the non-FHA ARM monthly payments caused the mortgagor’s inability to make the monthly payments and that the mortgagor has sufficient income and resources to make the monthly payments under the new FHA-insured refinancing mortgage.

Maximum FHA loan to value ratios

The maximum loan to value limits are shown below and are applied to the appraisers estimate of value, exclusive of any upfront mortgage insurance premium.

For States with Average Closings Costs At or Below 2.1 Percent of Sales Price:

• 98.75 percent: For properties with appraised values equal to or less than $50,000.
• 97.65 percent: For properties with appraised values in excess of $50,000 up to $125,000.
• 97.15 percent: For properties with appraised values in excess of $125,000.

For states with Average Closings Costs Above 2.1 Percent of Sales Price

• 98.75 percent: For properties with appraised values equal to or less than $50,000
• 97.75 percent: For properties with appraised values in excess of $50,000

Calculating the Maximum FHA Mortgage Amount

The amount of the FHASecure mortgage may not exceed either the geographical maximum mortgage limits or the loan to value ratios shown above. FHA will permit the inclusion of the existing first lien, any purchase money second mortgage, closing costs, prepaid expenses, discount points, prepayment penalties, and late charges. FHA will also permit arrearages (principal, interest, taxes and insurance) to be added into the new loan amount.

Subordinate Financing Under the FHASecure Initiative

If the new maximum FHA loan is not enough to pay off the existing first lien, closing costs and arrearages, the lender may execute a second lien at closing to pay the difference. The combined amount of the FHASecure first mortgage and any subordinate lien may exceed the applicable FHA loan to value ratio and geographical maximum mortgage amount. If payments on the second are required, they must be included in qualifying the borrower. If payments are deferred, they must be so for no less than 36 months to not be considered in the qualifying ratios. Borrowers need not yet have missed any mortgage payments to be eligible for this type of subordinate financing.

More information tomorrow on the specifics of qualifying the borrower.