Take a look at the article. It points out how seriously misguided our lawmakers are, and how completely unaware they always seem to be of the unintended consequences of what they do. Whatever proposal comes down the pike, they just can’t resist gutting it and leaving the worst, most pandering, most foolish elements to become law.

If this current proposal makes it through, expect to see the FHA program swirl down the drain just like subprime lending did. FHA rates would end up as high as subprime rates have ever been. I’ve been watching some of the hearings on these issues and it is astounding how misinformed and often just plain stupid our lawmakers are. Anyone who watched them in action with any regularity would definitely never pick calling the government in to solve a problem as their first choice solution.

Our lawmakers spend a lot of time listening to groups like the “Center for Responsible Lending” which, according to Alan Reynolds from the Cato Institute, actually received substantial funding from John Paulson – who just happens to have recently made between $3 and $4 BILLION shorting mortgage backed securities!!!

It looks like the new mortgage insurance rules from the House bill will win out. I just hope that they will make some adjustment to them to allow people with no credit score get maximum financing. The rules originally set forth by HUD, for instance, would allow a young couple with a minimal credit history, or even a few charged off accounts and a marginal credit score of 500 to get 97%loan to value financing while a young couple who had chosen not to use all the credit cards they were sent in college would not even be eligible for maximum financing!

In addition, this story again gives no mention to the possibility of mortgage brokers using bonds to qualify for FHA lender approval. This detail is of very great interest to the mortgage broker community. Guess we will have to wait at least another few days to find out.

Wonder how it will impact the FHA Modernization Legislation. It will be very interesting to watch. I would love to hear your thoughts on it.

In addition, on March 3 the United States District Court for the Eastern District of California issued a permanent injunction to prevent HUD from discontinuing down payment assistance from non-profit groups.

With conventional financing increasingly becoming impossible above 90% loan to value, FHA is more important to mortgage originators than it has ever been!

According to Congressional Quarterly, (in an article highlighted on the KnowledgePlex website since viewing the original requires a subscription) the major stumbling block to moving forward with the bill has been the House of Representatives’ addition of an affordable housing trust fund to their version of the bill. An agreement has been reached to move ahead without either establishing nor pre-empting the fund.

According to the article, the only remaining sticking point is the difference between the FHA loan limits set out in the bills. The House version raises the limits much higher than the $417,000 set out in the Senate bill.

Though it appears the details have been worked out, the article does not address the fact that the House bill allowed for 100% loan to value financing and replaced the net worth requirement for FHA lenders with a bonding requirement. Judging from questions that I receive, there is much more curiosity in the mortgage industry about these two items than there was about the trust fund.

Hopefully, news on these items will filter out over the next few days.

The bad news is that the official HUD Mortgagee letter which will make the increase official in not expected to arrive until March and the major lenders are not expecting to be able to fund loans under the new limits until around May. There are several reasons for these delays. First, HUD is government bureaucracy so their delay is expected. Second, once the limits are officially raised lenders must make arrangements to be able to price and sell the loans in the secondary mortgage markets. It takes some time to set up the “pools” that are used to securitize and provide the money for these fundings. Needless to say, more care is being taken in this process these days due to the ongoing credit crunch.

More bad news might be that FHA interest rates may have to increase to accommodate the increased risk involved in larger loans. We will have to wait and see how this impacts us.

But the good news is that if you are a borrower who can benefit from an FHA loan (meaning you are lucky enough to still have a tiny bit of equity in your home), or a loan officer with a long list of good people you haven’t been able to help then hope is on the horizon.

PS. I apologize for the lack of updates over the last several weeks. I had a family health emergency that didn’t allow for extra time to update FHA Loan Advice, but there will be several updates over the next few days since a LOT of interesting developments have occurred over the last month. I will also be changing the format of the email updates, so don’t be alarmed at the changes.

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.

The House of Representatives version of the FHA Reform Bill included a provision for a trust fund to “boost the supply of housing for low income families.” The Senate version of the bill left this foolishness out, but Congressman Barney Frank has announced his intention to fight to the bitter end for an affordable housing trust fund financed by surcharges on FHA loans, while the White House has announced it will kill the bill first.

“I think the lack of affordable housing is now clear to everyone as a contributing factor to the subprime crisis,” Frank said in an interview with Reuters. “If people want to make that a fight, I think we win.”

Apparently, Congressman Frank has missed lessons from the experiences of the last 40 years when government attempts to provide housing for low income families have created ghettos that whole generations of families can never get out of. He also must have missed the best economics classes at Harvard College where he might have learned the principles which would explain how government removing the risks for financial investors probably lead directly to the real estate bubble that sent prices out of reach of the low income families.

In the same interview, Frank announced his intentions to further “scrutinize” the mortgage industry this year. He is determined to keep on with this self-aggrandizement and grand-standing until he completely destroys the mortgage industry that has been doing its best to put all these people into homes. Of course, now they can’t pay for the homes because they are after all “low income” families and that is the mortgage industry’s fault.

There have been a lot of unethical, unprofessional people that entered the mortgage business over the last few years. They have really taken advantage of a lot of people. Of course, many of those people could have easily avoided being misled by doing even a nominal amount of checking around for more information and then insisting on understanding the documents they were signing.

Not to mention the many hundreds of thousands of people who are successful home owners due to all the programs everyone is complaining about now. Everyone seems to forget that there are still more of them than borrowers in trouble.

The terrible secret that no one wants to talk about is that the rising foreclosure rates are NOT yet being caused by “toxic” subprime loans. A very large percentage of the defaults are occurring before any adjustment is made to the loans involved and an even greater proportion of the defaults are occurring in areas like Michigan and Ohio where other non-mortgage industry related economic problems are occurring. Many others are occurring because of massive amounts of mortgage fraud that was perpetrated as much by the borrowers as anybody. California and Florida are prime examples of this and the reason I say not “yet”. Option ARMs (which are prime loans, by the way) may end up adjusting themselves into massive problems there.
It also is not the mortgage industry’s fault that this generation of Americans has no conception of waiting until they can pay for something before they buy it. People get in their new homes in spite of their credit problems and then they get offered consumer credit and then they buy everything they can get their hands. When they can’t pay for all that stuff, they go back and blame the mortgage broker who got them into a home they wanted, and they picked out, and qualified for without all that debt. And they knew all along that they would need to refinance in 2 or 3 years.

How many people are having trouble now after doing 3 or 4 cash out refinances over the last few years because rates were lower and they could get cash out and still lower their payment? Started out paying $100,000 for their house and now they owe $250,000 and are having trouble? This is an excellent strategy for someone with the discipline to put the money in a good investment so they have both their same house payment and new liquid reserves that can be accessed in an emergency. Instead most of them paid for trips, or big screen TVs, and SUVs and now they don’t have ten cents in the bank.

This machine gun litany of blame is not for the purpose of finding a scapegoat or trying to say the mortgage industry has no blame. The point of it is that most of these problems can be traced back to the unintended consequences of government actions in the first place. I know that it is a natural thing for politicians to feel that they are smarter and more capable of solving our problems than we are. Otherwise they probably wouldn’t be politicians in the first place. But these problems are too complicated and have too many interactions to be effectively micromanaged by bureaucrats. We do not need anything from the politicians to fix this problem except for them to make some simple minor straightforward adjustments to the standard FHA program.

You can count the changes needed on the fingers of one hand. We need the FHA mortgage limits raised just a little. We need to be able to get borrowers into houses without a down payment as long as they have a job and a decent debt ratio. We need to adjust the mortgage insurance so that FHA doesn’t lose money by insuring loans to the riskier borrowers and the good borrowers get rewarded with lower mortgage insurance. We need to do that without penalizing young borrowers who don’t use credit and don’t have credit scores. And that’s about it.

Politicians – please quit making the problems worse with your petty politics and try to be part of a real solution.

P.S. By the way, Happy New Year!

The purpose of this change is to make the FHA loan program available to more borrowers. I am all in favor of that.

I was waiting for the Senate version to pass before I gave the issue much more thought. The Senate version fails to address this provision at all. However, according to a post that I just read on the Active Rain website by Eleanor Thorne of New Garden Mortgage in NC there is no opposition to that provision in the Senate and it will likely be included in the final reconciliation of the bill .

I sincerely want the FHA opportunity to reach as many borrowers as possible. However, I am seriously worried about the risk involved in potentially letting the same group of money hungry animals that lead us into the subprime mortgage abyss get their paws into the FHA cookie jar. Some of the subprime mortgage programs in trouble now started out as real benefits to borrowers who needed help and deserved to own a home, but couldn’t yet qualify for FHA. However, subprime lending rapidly degenerated into a free for all of fraud and constantly easier guidelines devoid of common sense. Many among the group of mortgage brokers so hungry to get into FHA lending now were leading that charge.

On the other side, I know many fine, upstanding, honest and professional mortgage brokers who don’t yet have the required net worth and can’t afford to pay astronomical fees for CPA audited financial statements needed to meet FHA approval requirements. The reasons for that run from lack of business caused by excessive honesty to ordinary prudence in not wanting to tie up substantial personal assets in a risky business like originating mortgages. Nonetheless, many of this group would make excellent additions to the FHA lending ranks.

All I can do at this point is wait to see how the final reconciled bill will turn out and in the meantime encourage everyone who is serious about FHA lending to make sure they get all the education on the subject they can find.

Details still to be worked out include the increasing of loan limits, term (up to 40 years), risk-based MIP pricing, lowering the down payment requirements and a few other details, but is expected to happen quickly. This is good news for the industry, consumers and FHA, as we battle with increasing pressure from the sub-prime fallout.

I expect the bill will be reconciled fairly quickly, and signed quickly by the President as well, however we may face a delay while the lenders figure out what to do with it. FHASecure has had the same problems as many lenders took months to put the program into effect and some haven’t yet.

Here is a link to statement just put out by Barney Frank:

http://www.house.gov/apps/list/press/financialsvcs_dem/press121407.shtml

Either way, this can really help a lot of borrowers.

More to come very soon!