I’m often amazed when supposed experts issue opinions on subjects that I actually know something about. It is frightening how often the so-called experts are completely wrong. Here is a recent example.
I usually try to limit political comments in this blog since it is primarily intended to be a training and guideline update source designed to help loan officers originate and close FHA loans. However a June 21, 2008 editorial in the Wall Street Journal entitled “The FHA Time Bomb” has such a smörgåsbord of misinformation and misdirection that I feel compelled to comment.
On Thursday June 19, 2008 HUD issued a press release indicating that they were sending out letters to 675,000 “at risk” homeowners. As has been the case with most of HUD’s efforts for troubled borrowers, the gist of the letter leads this writer to believe that HUD is really going after borrowers with good credit. Syndicated author Peter Miller agrees with this viewpoint in his Friday post on FHA Mortgage Guide. As he notes, many of these borrowers might well have qualified for an FHA loan in the first place.
In response to my post “Warning: Why HUD May Stop Your Loan From Closing“, HUD has now waived their anti-flipping rule in certain circumstances. (Just kidding about them responding to my post, but they have taken action.)
Many new loan officers are streaming into FHA loan origination. Their FHA loans are being turned down left and right by frustrated underwriters who can’t believe such junk was put on their desk. It was not their intention to submit junk. The problem is that they are accustomed to the conventional mortgage submission process, not the FHA manual submission process.
Here are five quick tips loan originators can use to help prevent FHA mortgages from falling through during processing. For some mortgage originators these tips will seem ridiculously basic. Unfortunately, conversations with FHA underwriters show me that many loan officers haven’t caught on to these ideas yet.
1. Make sure the loan you are submitting makes common sense.
Incredibly, this is one of the most common mistakes made by originators who entered the mortgage business within the last 5 to 7 years. Subprime programs generally only required that the loan fit into their matrix and never cared about the reasons the person had credit problems. Make sure that you can verbalize a good case that it makes sense to believe that this borrower can reasonably be expected to make the payments on the loan. Often this requires asking a lot of uncomfortable questions of the borrower to make sure that you truly understand their situation. Even when your submission is approved by the automated underwriting system and theoretically the underwriter needs only to validate the information and not make a credit decision, the underwriter may well find something wrong if the loan does not make common sense. Lenders are held accountable by HUD for loans that default. They can always find a reason to override the automated underwriting findings if they want to.
One of the primary market benefits of an FHA loan has always been that credit scores were not a factor. A borrower with great credit scores could definitely have their loan approved more easily, but someone with some credit problems could still get approved – provided they had a well documented common sense explanation for their credit problems and could show that the problem had been resolved. In spite of not relying on credit scores, FHA foreclosure rates went down while conventional mortgage foreclosure numbers went up in spite of their almost excessive reliance on credit scores.
First, as a preface for my next update I would like to point you to Peter Miller’s blog FHA Mortgage Guide where he points out reports that HUD itself has been violating RESPA for some time! You can find the post entitled “Fake Morality” by clicking on the links in this paragraph.
Many subprime loans for borrowers with past credit problems have substantial prepayment penalties.
FHA loans do not have prepayment penalties with one small exception. When you pay off an FHA loan through either selling or refinancing the property, you must pay interest through the end of the month in which you are paying off the mortgage. So if you are selling or refinancing to pay off an FHA mortgage, make sure your payoff reaches your lender as close to the end of the month as possible. Otherwise, you will be paying interest for the rest of the month after you have already paid off the mortgage.
Many new loan officers are streaming into FHA loan origination. Their FHA loans are being turned down left and right by frustrated underwriters who can’t believe such junk was put on their desk. It was not their intention to submit junk. The problem is that they are accustomed to the conventional mortgage submission process, not the FHA manual submission process.
