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.

Given HUD’s early June 2008 announcement that it had to withdraw $4.6 billion in May from capital reserve fund to cover unexpectedly high losses which HUD (with bad reasoning in my opinion) blames on down payment assistance programs, I am 100% in favor of driving as many good FHA loans into the system as possible in order to offset the negative effects of those defaults.

FHA approved lenders should be making similar efforts instead of directing all their marketing toward troubled credit borrowers. There are many cases where FHA insured mortgages beat conventional scenarios now for loans above 80% of the home’s value – even for good credit borrowers.

For those interested, here is the text of HUD’s letter to “at risk” borrowers:

Dear Homeowner,

Do you need help with your mortgage?

Your area is experiencing a disturbing home foreclosure rate that has accelerated in recent months. News reports cite the damaging effects of “sub prime loans” as a major factor in the unsettled market. By focusing on education and safe mortgage alternatives, though, the Federal Housing Administration (FHA) of the United States Department of Housing and Urban Development (HUD) is working diligently to address this unacceptable foreclosure trend.

Over the past few months, FHA has worked with mortgage loan servicers to identify solutions for the crisis facing current homeowners. Your current mortgage does not have to be FHA insured for you to benefit from our help. If you are facing financial difficulties due to a recent or imminent mortgage reset, or other housing-related difficulty, I urge you to contact us at 1 (800) CALL-FHA. There you will have the opportunity to learn about foreclosure prevention, legal rights, and credit counseling, among other topics.

Many homeowners may also be able to take advantage of our recently announced FHASecure program. This new program allows eligible homeowners to refinance into a secure, fixed-rate FHA loan even if they are in default.

Additionally, a new partnership between mortgage companies and non-profit housing counselors called HOPE NOW is available to you. Their mission is simple: reach out to homeowners who may be having difficulty paying their mortgages. For more information or to see if your mortgage company is a member of this caring coalition please go to www.hopenow.com.

Again, please contact us at 1 (800) CALL-FHA (800-225-5342). As part of the federal government, the Federal Housing Administration wants to help you protect and preserve the American dream – your home.

Sincerely,

Brian D. Montgomery
Assistant Secretary for Housing
Federal Housing Commissioner

Now if we could just get HUD to look at some of the real causes of these losses, like FHA TOTAL Scorecard allowing debt ratios that are far too high for people in real life to sustain – a problem I plan to address in another post – then maybe FHA could really avoid having to tap into the insurance fund in the future.

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.

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.

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

If you are divorcing or already divorced, and the divorce decree requires that you remove your spouse from the loan on the property AND pay them their equity AND you’ve got a few credit problems, don’t panic. For an FHA refinance, this is still considered a rate/term refinance even though you are paying out cash to you ex-spouse.

This is significant because most other types of loan place a lot of extra restrictions and higher qualifying requirements on a cash out refinance. Using an FHA loan, you can accomplish your goal and still have a low fixed rate mortgage.

On the flip side of this issue. If you are the spouse who needs to be taken off the loan, do not just move on and forget it. If your ex-spouse later has credit problems those problems will haunt you as well. I have many horror stories of unknown foreclosures showing up on a person’s credit report when they get ready to buy a home. Also, if you want to protect your credit score, make sure that you are no longer on joint credit cards with your ex-spouse. If your ex-spouse qualifies, an FHA cash out refinance can be done

Although FHA has fairly stringent guidelines for manufactured homes, a loan officer experienced in this area can guide borrowers through the effort with no more hassle than a traditional mortgage. The major advantage of an FHA loan for this purpose is that an FHA loan gives the best chance to take advantage of today’s low mortgage rates rather than higher conventional rates for manufactured homes.

An FHA loan for a manufactured home has all the same attributes of any other FHA loan, including the option for streamline refinances should interest rates go down. If the property meets the requirements, the loan is processed just like an ordinary FHA loan.

In the next installment, we’ll explore some of the additional property requirements and processing requirements for a manufactured home and how they affect the processing flow.

A free First Time Home Buyer Guide is available here.

Carl Pruitt is a 23 year veteran of the mortgage/real estate industries who specializes in FHA mortgages

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.