Chapter 13 Banker

The use of FHA mortgages is increasing at a phenomenal rate, something probably not seen since the FHA program began in the 1930s.

For the second two seeks of October, HUD reports that:

___99,197 would-be borrowers applied for FHA loans, up 79 percent over 2008.

___55,923 borrowers used FHA loans to purchase homes, a figure up 231.0 percent from last year.

___27,661 borrowers refinanced with FHA mortgages, an increase of 150.5% when compared with last year.

Meanwhile, in case anyone missed it, RealtyTrac.com reports that homeowners received 279,561 foreclosure filings in the month of October. That’s up 25 percent when compared with October 2007.

While foreclosure numbers are going through the roof — or they would go through the roof if more people had such things. HUD reports that during the last two weeks of October it refinanced 54 — FIFTY-FOUR — delinquent conventional borrowers, about one per state.

As for the Hope for Homeowners program, it too is a disgrace. HUD says that it received 111 H4H loan applications to date and has approved, well, er, um, NONE. Not one. Nada. Zilch. Zero. Goose egg.

The growth of the FHA program is hardly a surprise — where else can borrowers go? Option ARMs are gone, interest-only financing is dead, stated-income loan applications are finished, deals with no-money-down are history (except for VA financing) and a bunch of lenders are gone or going.

This is not to say that the FHA program has evaded the real world economics we all face.

HUD says that 260,366 FHA loans are delinquent as of September — that’s up 28.8 percent when compared with last year.

In a sense the race is on — more FHA endorsements but also more delinquencies. The good news, at least, is that the FHA has a generally strong record of helping troubled borrowers.

What’s also interesting is that government programs — essentially FHA and VA loans — have more than doubled their market share in the past year. The Mortgage Brokers Association says “the government share of originations more than doubled to 11.8 percent in the first half of 2008 compared to 5.7 percent in the second half of 2007.”

In a strange way, you could argue that the marketplace is returning to “normal” — normal in this case meaning sale levels and home prices that have not been hyped with fraudulent mortgages, predatory loan terms and fake loan applications.

FHA home loans are available from a number of sources, both from retail and wholesale lending institutions. While some may prefer the idea of a brick and mortar bank such as Bank of America or Well’s Fargo, many individuals still rely on wholesale channels to fulfill their mortgage needs. Recently, FHA has gained in popularity and finding the right FHA wholesale mortgage broker is more important than ever. While borrowers can often rely on the household name of a retail bank, finding a reliable wholesale lender can be a more involved process. 

Individuals who prefer wholesale mortgage origination find that mortgage brokers can often provide more loan options, more convenient processing, and a more personal touch to the mortgage process.  Even those who prefer retail lending often explore the wholesale channels as a way to gauge what else is in the mortgage market. Whichever your reason, here are 3 tips to help you find a mortgage broker who can take care of your FHA needs.

1. FHA Approved Mortgage Brokers

In order to originate FHA approved loans, mortgage brokers need to meet specific licensing and approvals depending on their area. If mortgage brokers are not FHA approved, some will channel their FHA loans through an intermediary source. Ask your mortgage originator if they are FHA approved or if they will be going through a third party for their FHA loans. In some cases, borrowers may face higher closing costs to cover this servicing channel. In addition, the extra party involved can sometimes slow the mortgage process and make it more difficult for direct communication.  In either case, ask this question when shopping brokers, as it can be helpful to find out how your FHA loan will be processed.
 

2. FHA Experience

FHA loans are a breed of their own and not all loan originators are experienced in this area of lending. Aside from different qualification guidelines, there are specific processing methods which your originator needs to be familiar with. With FHA gaining in popularity, there are a number of mortgage brokers who are still learning how to originate FHA loans. While they may be able to get the job done, an experienced FHA originator will save you time and make the process much smoother.

3. Avoid the FHA Bandwagon Folks

As alternative financing options are limited by this credit crunch, more brokers are shifting towards FHA as necessary move to keep their business alive. Unfortunately, this translates into inexperienced FHA lending as well as some brokers carrying previous lending ideals into FHA. We’ve already commented on the fact that some people are calling FHA the new subprime, but the truth is FHA was never intended to be the new subprime. With brokers suddenly shifting to FHA, a lot of “garbage” is slipping through FHA and you need to make sure you avoid it. These folks will serve you a subprime loan, a conventional loan, or a FHA loan as long as they get their money.  There’s nothing wrong with changing business models to change with the times; it’s the brokers who work solely for your money and ignore the consumer’s best interest that you want to avoid.

To help start your search, take a look at our FHA approved lender directory.

New FHA Loan Limits
Earlier this month HUD had announced the new FHA loan limits set in place for January 1^st 2009. If you’re still not sure about the ceiling and floor limits for your specific area, check out our recent post about the new loan limit guidelines. As we’re nearing the end of the year, some FHA lenders have already started implementing these new changes into their lending guidelines.

FHA Guidelines vs. Lender Guidelines
It’s important here to note the difference between FHA guidelines and lender guidelines. Although FHA has set these changes to take effect on January 1^st of next year, you’ll see lenders preparing for these changes by altering their own guidelines. These FHA approved lenders can make these changes “early” because they are free to utilize their own discretionary lending requirements. As far as FHA is concerned, you just need an FHA case number and credit approval before January 1^st 2009. But if you’re an FHA lender, you’ll be closing the doors early to avoid getting stuck with loans that may not go through. Remember, the FHA doesn’t actually lend money, they only insure the loans made by these FHA approved lenders. 

The Coming Changes
The current FHA loan limits have been temporarily increased since February 2008 when the Stimulus Bill took effect. Although the new changes depend on your specific area, most of the new loan limits are being significantly reduced with the ceiling at $625,500 compared to our current $729,750 ceiling. Borrowers who are in between the current FHA ceiling and the expected ceiling changes for 2009 should seriously consider getting off the fence and make a move soon. 

For example, assume you had a loan amount of $650,000 and lived in an FHA high cost area. Under the current loan limits, you’d still be approved for an FHA loan because you are under the ceiling limit of $729,750. But by January 1^st 2009, FHA will no longer approve these loans because they are above $625,500. 

FHA Lender Reactions
It’s likely that more and more lenders will be transitioning to these new FHA loan limits and you could easily see the markets react well before next year. Lenders could add on higher pricing hits for these “FHA Jumbos” or simply require these loans fund by a specific date earlier than January 1^st 2009. Among other changes for next year is the slight increase of a 3.5% down payment requirement, up from our current 3%.

If you’re a potential buyer or thinking of refinancing into an FHA loan, it’s time to get moving. The window of opportunity is slowly closing, and so far, the expected changes seem convincing for individuals to grab up what’s left of FHA before the year’s end.

Buying homes with nothing down is increasingly rare, a trend which should surprise no one. What should amaze folks is that in that in today’s financial environment so many buyers continue to purchase with no money up front.

The National Association of Realtors is out with the 2008 edition of its home buyers and sellers survey, one of the best real estate studies available. In a typical case, says NAR, buyers are putting down 9 percent when they purchase. The specifics, however, are different.

“One of the most significant changes in the characteristics of mortgage financing has been the sharp drop in the percentage of buyers who financed the
entire purchase of their home, reflecting the tighter underwriting standards that many lenders implemented during the past year. In 2007, 29 percent of buyers reported that they financed their entire purchase with a mortgage compared with 23 percent in 2008. Among first time buyers the share with 100 percent financing fell from 45 percent to 34 percent.”

Imagine that! A third of all buyers are purchasing with nothing down. Other than VA-qualified purchasers with federally-insured loans, you have to wonder how this is possible — and whether lenders have learned anything in the past two years.

The FHA mortgages now require at least 3.5 percent down. This is not a high barrier relative to historic requirements but it at least suggests some ability to save, to budget and to survive a missed paycheck.

In fact, the whole lending system is just-about barrier-free. NAR reports that 93 percent of all borrowers were approved by lenders, 5 percent were rejected by one lender and 3 percent were rejected by two or more lenders.

NAR says 91 percent of the borrowers it surveyed for 2008 financed with fixed-rate loans. This is remarkably good news as it suggests that borrowers are running as fast as possible from adjustable products as well as toxic loans with weird terms and huge penalties. Had folks been this smart for the past six years — and had lenders been as smart — we would not have a mortgage meltdown.

It’s one of those good news, bad news stories.

After much deliberation HUD has come out with a new, better, clearer good faith estimate form, one that it estimates will reduce closing costs by $700 apiece.

The bad news: Lenders need not use the new form until January 1, 2010. Yes. Not 2009, but January 1, 2010.

Let’s figure out what this delay will cost the public.

The National Association of Realtors says that right now we sell about 5.18 million homes this year. Let’s say we have 5.2 million existing home sales in the coming year. At $700 each it means consumers will miss out on savings worth $3,640,000,000.

In addition, of course, we have millions of loans which are refinanced each year, about 8.4 million in 2007 according to the Federal Reserve. Times $700 that means another $5,880,000,000.

So, in total, consumers are losing roughly $9.5 billion because the new form will not quickly go into effect.

Surely lenders are smart enough to know a local printer who can produce a three-page form. Surely lenders are clever enough to program software to fill out the form quickly and automatically.

Do you think it would have taken 14 months to get going with the new form if it meant more money for lenders?

HUD could just as easily have said the new forms will go into effect as of January 1st 2009. But then that would have been reduced consumer costs by $9.5 billion.

Isn’t HUD’s goal to make homes more affordable? Wouldn’t smaller closing costs help achieve that goal? Wouldn’t the FHA mortgage program be more attractive is settlement expenses were reduced?

Ask yourself: If borrowers are not getting that $9.5 bill then who is?

Here’s an idea. The new form is online. Print out your own copy — and ask lenders to complete it.

To get the form, press here.

Anybody notice something peculiar about the new conforming loan limits for 2009?

If you get a bright and shiny conventional mortgage the loan limit in the continental United States is generally $417,000. Go with an FHA loan and in many areas the maximum loan amount will be $625,000.

At first this seems like a complete reversal of the usual way mortgage limits have worked.

In the past the minimum and maximum FHA loan limits were simple to calculate: Take the conventional loan limit and multiply by either 48 percent or 87 percent. In other words, the maximum FHA loan amount was always smaller than the amount available with conforming loans.

But now the deal is different.

As we have pointed out, FHA mortgage limits differ depending on whether you are in a low-cost or a high cost area, or whether you are inside or outside the continental United States.

Now the same concept has been picked up for conventional loans.

Under the 2009 conventional loan limits announced by the Federal Housing Finance Administration (FIFA) the general limit is $417,000. But — and here’s the big news — the concept of one conventional loan limit is gone. Instead, there are now different loan limits for different areas.

As FIFA explains, “regardless of the area median home price, the loan limit cannot, in general, exceed $625,500 (1.50 times the 2009 conforming loan limit). The exceptions are properties in Alaska, Hawaii, Guam, and the Virgin Islands, where that range is 50 percent higher ($625,500 to $938,250). The 2009 conforming loan limit of $417,000 is in place everywhere else. Loan limits for 2-4 unit properties are proportional to the 1-unit limits.”

In other words, the $417,000 conventional loan limit is not always the conventional loan limit.

For example, for a single-family home the maximum conventional loan amount is $625,000 in Los Angeles, $458,850 in Virginia Beach, $426,650 in Providence (RI), $713,000 in Kapas (HI) and $448,500 in Naples (FL).

The bottom line: When someone tells you that the maximum loan amount for an FHA loan is $625,5000 or that conventional loans are limited to $417,000 you have to say: Whoa! Let’s take a closer look.

Here’s where to get more information:

___ The conventional loan chart for high-cost areas can be found by pressing here.

___The FIFA chart for conventional loan limits in all counties is available by pressing here.

___Local loan limits for FHA mortgages can be viewed online by going to HUD’s loan limits page.

Before you go house hunting or consider refinancing, speak with FHA lenders. Why? Because areas can be re-defined as “high cost” at any time so you may be able to get a larger mortgage than expected. Speaking with lenders is the best choice, the one that should account for any loan limit changes, updates or revisions.

With the presidential elections now a week behind us, the public has held high expectations for president-elect Barack Obama. And given the current economy, it’s fair to assume that he has quite a tall order ahead of him. Today, Obama visited the White House and also met with President Bush to begin the highly anticipated transition of leadership. 

With a new presidency in line, I wanted to point out a few mortgage and FHA related items that we might all expect to see in the near future. First of all, with the most recent CNN polls showing a 76 percent disapproval rating of President Bush, it may seem hard for president-elect Obama to disappoint. But, let’s not forget the severity of the current economy we face, with the housing sector as no exception. With that in mind, here are a few key issues that have been recently addressed by Obama: 

90 Day Moratorium on Foreclosures
One of the key issues discussed during Obama’s campaign trail was the proposal of a 90 day moratorium on foreclosures. The intent of this 90 day delay is to give troubled homeowners a chance to find more affordable mortgages and give more time for lender negotiations.  The response to the 90 day moratorium has drawn its share of opposition, with many hinting that it will do little for this economy and simply give these troubled homeowners a chance to live rent-free for 90 days. Obama isn’t the first to suggest such a proposal, as California’s Gov. Schwarzenegger has already proposed an identical moratorium with a 90 day delay as well. 

Within this proposal is also the power for bankruptcy court judges to modify mortgages on primary residences, a $10 billion fund to prevent foreclosures, and a possible mortgage tax credit worth up $800 for select homeowners.

Refinance Existing Mortgages Through FHA and Fannie & Freddie
Although the Hope For Homeowners program has been off to a sluggish start, Obama points out that making mortgage modifications will be necessary to stimulate this economy. Last Friday, Obama stated “it’s absolutely critical that the Treasury work closely with the FDIC, HUD and other government agencies to use the substantial authority they already have to help families avoid foreclosure and stay in their homes.” Organizations have reported that the Treasury Department may already be considering a new plan for homeowners which would involve the FDIC using $50 billion from the $700 billion bailout bill to modify existing mortgages. 

With the initial numbers from the Hope For Homeowners program barely reaching 50 applications in its first two weeks, the FHA now estimates only 13,300 homeowners will be helped during the first year.  In response, all avenues are now being considered. Ranging from higher FHA debt to income ratios, cutting FHA premiums by up to 75 basis points, or lender equity sharing plans, all are now possible considerations to help fill this void in the credit markets. 

A New Presidency and Many Changes
The next year brings many changes our ways- some which are highly anticipated and some which people have people anxiously standing by to hear. We’ve already caught a glimpse of next years 2009 FHA Loan Limits, as well as the increase in down payment requirements to 3.5%. As of right now though, it seems modifying existing mortgages will be the key focus for both the FHA and president-elect Obama in the near future.

When HUD issued a letter back in April regarding non-traditional credit evaluation, we covered the basics and explained how it was a great solution for many individuals. Today, I wanted to revisit this topic and remind individuals how it applies to our current credit market. Unless you’ve been living under a rock the past year or so, you know that the credit markets are suffering and are responding by tightening up their loan guidelines. 

FHA loans have since filled the void recently, but FHA approved lenders have shown they are just as susceptible to the markets. Specifically, in terms of considering non-traditional credit evaluations, some lenders have either fled away entirely from no credit borrowers or have implemented various pricing hits for these types of loans.  More importantly, these reactions remind us of two key FHA fundamentals and how the FHA operates. 

1. Discerning Lender Criteria From FHA Standards
Since FHA does not directly issue loans and only insures loans, borrowers and consumers are still susceptible to the criteria of specific lenders themselves. In the case of no credit borrowers, these lenders have reasoned the elimination non-traditional credit loans because they simply can’t sell them on the secondary markets. In addition, certain lenders who accept non-traditional credit underwriting penalize borrowers with pricing hits, also known as “add-ons”. It’s a reminder that while FHA has its own set of standards, lenders are still allowed to implement their own underwriting criteria.

2. The Importance of Shopping Around Even With FHA
When considering FHA loans, you should not forget to shop around like you would for any other traditional mortgage. Although the loans are insured by the same government, borrowers need to understand that different FHA approved lenders will mean different loans. While the variations may be ever so slight, like any mortgage, it is still worth shopping around to make sure you get the best deal. In the case of non-traditional credit for example, choosing different lenders could mean the difference between owning a home and being stuck with renting. 

What is Non-Tradtional Credit?
If you’re new to the site and missed our initial post, or still unsure what non-traditional credit means, you can view the entire post here. Otherwise, here’s a quick recap of how HUD considers non-traditional credit for FHA loans:

Nontraditional Credit-Basic Guidance
The following provides guidance in establishing that a borrower has sufficient credit references for evaluating bill paying habits, which include: three (3) credit references, including at least one from Group I, covering the most recent 12 months activity from date of application. Group I references should be exhausted prior to considering Group II for eligibility purposes, as Group I is considered more indicative of a borrower’s future housing payment performance. Borrowers with no Group I trade references will be underwritten using the criteria set forth under “insufficient credit” below.

Group I - rental housing payments (subject to independent verification if the borrower is a renter), utility company reference (if not included in the rental housing payment), including gas, electricity, water, land-line home telephone service, cable TV. If the borrower is renting from a family member, request independent documents to prove regularity of payments, such as cancelled checks.

Group II - insurance coverage, i.e., medical, auto, life, renter’s insurance (not payroll deducted); payment to child care providers - made to a business providing such services; school tuition; retail stores - department, furniture, appliance stores, specialty stores; rent to own - i.e., furniture, appliances; payment of that part of medical bills not covered by insurance; Internet/cell phone services; a documented 12 month history of saving by regular deposits (at least quarterly/non-payroll deducted/no NSF checks reflected), resulting in an increasing balance to the account; automobile leases, or a personal loan from an individual with repayment terms in writing and supported by cancelled checks to document the payments.

If you need more specific advice, you can contact an FHA lender in your area using our FHA Lender Directory. And if you have a question for us or simply want to know more about non-traditional credit evaluation in FHA loans, feel free to leave us a comment in the comments section below.

The new FHA mortgage limits for 2009 have been announced by HUD.

Actually there are three sets of limits, a limit for homes in lower cost areas (the “floor”), limits in “higher-cost” areas and limits for areas outside the continental United States: The limits look like this:

Floor

___One-Unit — $271,050
___Two-Unit – $347,000
___Three-Unit — $419,400
___Four-Unit — $521,250

Higher-Cost Areas

___One-Unit — $625,500
___Two-Unit — $800,775
___Three-Unit — $967,950
___Four-Unit — $1,202,925

Alaska, Guam, Hawaii and the Virgin Islands

___One-Unit — $938,250
___Two-Unit — $1,201,150
___Three-Unit — $1,451,925
___Four-Unit — $1,804,375

The FHA loan limits are related to the conventional loan limit which is announced each year by Federal Housing Finance Agency. For 2009 the conventional loan limit will be $417,000, unchanged from 2008.

Which FHA loan limit applies to a property you want to finance or refinance? To answer that question check with a lender. Do not go house hunting until you’re certain which loan limit applies in your situation.

It’s important to check with lenders because the definition of a “high cost” area can change. That is, lenders in a lower-cost area can appeal to HUD to be redefined as a “high cost” housing area and thus qualify for larger FHA loans.

HUD does have an FHA loan limits page online, however borrowers will get far more information from lenders.

The Mortgage Bankers Association is reporting a huge increase in FHA market share.

The Association says “the government share of originations more than doubled to 11.8 percent in the first half of 2008 compared to 5.7 percent in the second half of 2007. The government loans category includes loans guaranteed or insured by the Department of Veterans Affairs, the Federal Housing Administration and Rural Housing Service. The increase in the FHA loan limit, which broadened FHA financing for more borrowers, was one of the factors that contributed to the increased popularity of the FHA.”

The increase in federally-insured loan programs should hardly come as a surprise. The subprime, Alt-A and even the prime market have been impacted by the liquidity crisis, the failure of many lenders and the termination of many so-called “affordability” mortgage programs.

Alternatively, private-sector loans are being made — they represent 88.2 percent of all loan originations. But the loans being made today are objectively better than the junk seen during the past few years because lenders are requiring documentation and dropping option ARMs, interest-only mortgages and other forms of toxic loans.

FHA mortgages make sense because they have no prepayment penalties, no absurd payment increases and sane application requirements. In essence, the private-sector is moving toward the FHA loan model.

Other findings from the MBA include:

___The refinance share of all originations was 61.7 percent in the first half of 2008, compared to 54.8 percent in the second half of 2007. The percent of refinance originations for rate or term purposes increased from 38.1 percent in the second half of 2007 to 48.6 percent in the first half of 2008. The refinance volume also increased 5.8 percent in the first half of 2008, based on data from repeater companies, which are participants that responded to the survey in both halves.

___For first mortgages, fixed-rate loans, excluding interest-only loans, accounted for 78.5 percent of the dollar volume of originated loans in the first half of 2008, compared to 63.6 percent in the second half of 2007.

___In the first half of 2008, 82.7 percent of all origination dollars were for prime loans, compared to 79.0 percent in the second half of 2007, 3.8 percent were non-prime, compared to 7.5 percent in the second half of 2007, and 1.7 percent were Alt-A, compared to 7.8 percent in the second half of 2007.

___Originations of mortgages with deferred amortization (“interest only” or “IO”) continued to decrease significantly for both fixed and adjustable rate products from the second half of 2007. IOs accounted for 10.6 percent of originations in the first half of 2008, compared to 22.4 percent in the second half of 2007.

___In the first half of 2008, first-time homebuyer purchases represented 29.9 percent of the volume of purchase originations, compared to 27.9 percent in the second half of 2007. They represented 32.2 percent of the number of purchase loans in the first half of 2008, compared to 30.2 percent in the second half of 2007.

___Estimates from MBA’s Mortgage Finance Forecast further demonstrate the trends in originations as purchase originations were down by 16.2 percent in the first half of 2008 compared to the second half of 2007. Refinance originations were up 16.3 percent in the first half of 2008 compared to the second half of 2007.