Higher FHA premiums on the horizon

The Mortgage Banker’s Association is reporting that the FHA Reform Act of 2010 passed the US House of Representatives.  This bill was drawn up in response to many of the solvency issues that the FHA began encountering late last year (see HERE).  One of the most aggressive provisions of the bill is that it will allow the FHA to charge up to 1.55% in annual mortgage insurance premiums.  This is up from the current maximum of .55%.  How does this translate into dollars?

Currently, for a homebuyer that buys a home for $250,000 and puts the minimum 3.5% down that is required by FHA financing their monthly mortgage insurance premiums are $110.57.  Their total principal, interest,  property taxes, homeowner’s insurance, and mortgage insurance (PITI) is about $1,737.

With the proposed mortgage insurance the same homebuyer would have monthly mortgage insurance premiums of $311.61 (181% increase).  Their projected PITI payment would be $1,938 (11.6% increase).

The bill has yet to become law but I suspect that it will.  It’s unclear at this point how quickly the new provisions would be put in place.  I’m curious to know how happy the private mortgage insurers are about this.  The increase of mortgage insurance premiums should generate a lot more business for them.

HUD announces important changes to popular FHA program

Two days ago HUD announced changes to the popular FHA loan program.  The changes are designed to “strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for undeserved communities.

If you’ll recall last September FHA announced that their capital reserves (used to insure FHA mortgages) fell below mandated levels.  These changes are designed to raise more money to boost those reserves and tighten their underwriting requirements so that the loans they are insuring are less risky.

These changes take effect for loan applications after April 5th, 2010.  I’ve underlined what I think are the most relevant changes for consumers and real estate professionals to be aware of:

  1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
    • The first step will be to raise the up-front MIP by 50 bps to 2.25% (it is currently 1.75%) and request legislative authority to increase the maximum annual MIP that the FHA can charge.
    • If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP (this will increase monthly payments).
    • This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
    • The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
  2. Update the combination of FICO scores and down payments for new borrowers.
    • New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
    • This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
    • This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
  3. Reduce allowable seller concessions from 6% to 3% (this will make it more difficult for first-time homebuyers to buy-down their rate and/ or require they have more cash to close)
    • The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
    • This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
  4. Increase enforcement on FHA lenders
    • Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
      • This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
    • Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
      • Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
      • This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
    • Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
      • Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
    • HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
      • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
      • Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

Summary of FHA 203B mortgage features

There are a few things to know about standard FHA loans.

*Minimum down payment requirement: Currently homebuyers who use FHA mortgage financing to buy a home can put as little as 3.5% down and borrow the remaining amount.

*Down payment may be gifted: FHA is one of the few programs that allows the entire down payment to be gifted from a family member even if the down payment is less than 20%.

*Seller may pay settlement charges: Currently the seller may pay up to 6% of the sales price towards a homebuyers settlement charges.

*Higher debt-to-income qualifying ratios: FHA is a little less restrictive than conventional financing when it comes to approving an application on the basis of an applicant’s debt-to-income ratio (DTI=sum of proposed housing payment + other monthly obligations/ gross qualifying income).

*Mortgage Insurance: The one major downside of FHA loans is that the associated mortgage insurance is expensive.  Currently purchasers who utilize a FHA loan to buy a home finance an upfront mortgage insurance premium (UFMIP) equal to 1.75 % (as of April 1, 2012) of the base loan amount and still pay a monthly premium that is equal to .1000-.1042% (as of April 1, 2012) of the base loan amount depending on the down payment.  For example, a FHA $200,000 purchase with a 3.5% down payment would carry an UFMIP of $3,378 and monthly premiums of $201.04.  A homeowner with a FHA loan must keep the mortgage insurance for at least 5 years.  After that time they will be eligible to have the mortgage insurance canceled once the loan balance drops below 78% of the initial purchase price (or initial appraisal if it was less).

*Loan are assumable: One of the coolest features about a FHA loan is that it is assumable.  This means that when a FHA loan holder goes to sell their property they can sell the home with the mortgage on it so long as the buyer qualifies for the existing mortgage.  This is a very attractive feature given the current level of interest rates.  FHA borrowers are encouraged to read the small print closely because having another party assume your mortgage may not release them of personal liability.

It is likely that some of these features will change with time so please confirm this information with a mortgage originator when applying for a FHA mortgage.

 

 

The FHA rehabilitation loan

By some estimates as many as 35-40% of homes sold in the Portland-Metro area thus far in 2009 have been bank-owned or short sales.  Often times these sales involve distressed property because the sellers lack financial motivation to provide basic maintenance to the home.

Looking ahead I don’t expect this pattern to change as we head into 2010.  Although reliable data isn’t widely available it is assumed that banks are sitting on hundreds if not thousands of additional homes and foreclosure rates remain high.  This guarantees a steady supply of distressed property on market over the next couple years.

Buying distressed property can create substantial opportunity because with a few repairs and cosmetic touch ups homebuyers can realize immediate equity appreciation.

Unfortunately buying distressed property is problematic. Often times conventional lenders will not approve loans secured by property with “below average” condition and the banks and cash-strapped sellers who own the home are generally unwilling to invest in repairs.

However, the FHA’s 203K streamline program is a great solution.  This program enables borrowers to finance the purchase (or refinance) of a home and the cost of its rehabilitation through a single mortgage.

Here are a few bullet points about the FHA 203K streamline loan:

*Eligible properties: Existing homes that have been completed for at least one year (no new construction).

*Down Payment: Homebuyers must have at least 3.5% for their down payment.  The 3.5% is based on the initial purchase price.  This may come from a gift from a qualifying family member.

*Maximum Loan Amount: The maximum mortgage loan amount may not exceed 110% of the after-improved value of the home.

*Maximum Rehabilitation Amounts: The maximum amount for repairs and improvements is $35,000 (this must include a 10% contingency reserve).  The homebuyer may combine the $35,000 streamline maximum with an $8,000 energy efficiency provision for a maximum of $43,000.  There is no minimum amount.

*Eligible Improvements: This program is intended to facilitate uncomplicated & cosmetic rehabilitation and/ or improvements.  Therefore, structural repairs and changes, luxury items (i.e. hot tub), and additions are not allowed.  Examples of what are acceptable are roof repair/ replacement, window repair/ replacement, and weatherization.

*Eligible Expenses: Eligible expenses are material, labor, overhead, and construction profit, plus expenses related to the rehabiliation such as permits, fees, inspection fees, licenses, and lien protection fees.

*Contractor or Self-Improvement: In most circumstances self-improvement is not permitted.  Therefore, homebuyers must hire a qualifying contractor.

*Qualifying for the loan: In general, the qualifying factors for the streamline 203K is the same as the standard 203B loans.

*Transaction process: Homebuyer is pre-approved for 203K loan, finds home and reaches agreement with seller (be sure to have FHA Amendatory Clause and Real Estate Certification signed with purchase agreement), homebuyer must hire licensed/ bonded contractor to get estimates on repairs, loan application along with HUD form 92700 is submitted to lender, appraisal is completed, loan is approved and funded, rehabilitation amount is funded into escrow account, 50% initial disbursement is made to contractors, contractors complete work, final inspection may be required, and final payment is made to contractors.  Because of the additional paperwork and underwriting requirements associated with the rehabilitation work we recommend 60 day closing schedules.

*Interest rates and closing costs: Because of the limited supply of wholesale 203K loan offerings and because of the recommended extended close times the interest rate for a 203K loan will be about .125%-.375% higher than the standard FHA loan.  A homebuyer can also expect an additional $500 in closing costs because of more extensive appraisal and additional administration requirements.

This post is meant to provide a concise summary of the 203K loan program.  Please contact me directly for further information and necessary paperwork.

HUD makes it hard to FLIP OFF FHA!

I was recently asked by a real estate professional about FHA’s anti-flipping rule.  Since I did some digging on the subject I thought I would post what I found because I suspect many others are coming across similar circumstances.

HUD say's "FLIP OFF!"

What is the anti-flipping rule?

It prevents homebuyers from obtaining FHA financing when they write an offer to buy a home within 90 days of the seller obtaining ownership.  In other words, if Bill buys a home today and immediately puts it back on the market tomorrow a homebuyer using FHA financing would not be able to write an offer to buy it until 90 days has gone by.  There are a few exceptions including when ownership has transferred via foreclosure or via the distribution of an estate.

Why does FHA have this rule?

FHA originally put this rule into place to prevent fraudulent property flippers, lenders, and appraisers from churning a property and cashing-out nonexistent equity.  These schemes actually took place during the boom years and ended up costing FHA millions.

What else does a homebuyer need to know?

The anti-flipping rule doesn’t totally prevent the usage of FHA financing to acquire a legitimately “flipped” home.  The homebuyer must wait until the 91st day of the seller’s ownership to write an offer to buy the home.  Furthermore,  if a sale takes place within the first year of a seller’s ownership a FHA underwriter is likely to require 2 appraisals no matter what the circumstance.  If the seller has improved the property and is selling the home at a premium from the price they paid then the FHA underwriter will also likely request seller-provided documentation to justify the increase in the homes value (i.e. receipts from contractors for services and materials).

FHA tightening on the horizon….

The Washington Post published this article stating that FHA is expected to announce changes to the popular FHA loan program tomorrow in an effort to shore up the agencies finances.  The objective of the changes is designed to have homebuyers put more “skin in the game” so that walking away from their home is less attractive.  Here is a summary of the proposed changes the article makes comments on (please note that the article is only speculating on changes):

*Higher minimum down payment requirements.  Currently the FHA program only requires a 3.5% down payment.  The article speculates that they may raise this amount to 5%.

*Limit seller concessions.  Currently the FHA program allows the seller to pay up to 6% of the sales price towards the buyer’s settlement charges.  According to the article FHA may reduce this amount to 3%.

*Higher mortgage insurance premiums.  Currently homebuyers who take out a FHA loan putting the minimum 3.5% must finance an upfront mortgage insurance premium equal to 1.75% of the base loan amount AND pay monthly mortgage insurance premiums equal to .55% of the base loan amount.

*Higher credit scores.  This proposed change is irrelevant because virtually all lenders already impose overlays that meet the new credit score requirements.

*Lastly, Lenders who work directly with FHA would have to have higher net worth’s to support possible fraud charges.  Currently the minimum is $250,000 and under the proposed changes the minimum net worth would be $2.5 million.

Signs of more loan tightening

Wells Fargo announced a key change to their underwriting guidelines today.  The reason I am blogging about them is because a) they are fairly big changes & b) Wells Fargo tends to be a bellwether for our industry.  Therefore, if Wells Fargo is announcing this today it won’t surprise us to see others following suit in the near future.

The change involves FHA Streamline refinances.  One of the big advantages of a FHA loan is that when a homeowner has one and interest rates drop they can qualify for a streamline refinance where they don’t have to re-qualify for a mortgage by supplying proof of income & appraisal to the underwriter.  So long as they have made their existing payments on time they qualify.  In Wells Fargo’s announcement they will now require FHA streamline refinance applicant’s to supply proof of employment, income, and assets.  This is sounding less and less like a streamline.

Refi’ing a FHA loan? Make sure your lender knows the rules

For all the benefits of FHA loans (i.e. low interest rates, low down payment requirements, assumability) there are also drawbacks (i.e. extensive paperwork requirements, upfront mortgage insurance premiums, etc.).

When it comes to refinancing an existing FHA mortgage homeowners need to be aware that one of the drawbacks is that FHA loans require a full 30-day pay-off no matter when a loan is refinanced.  Why is this a drawback?

Let me illustrate.  Let’s assume that a homeowner has a $200,000 FHA loan which is a fixed rate @ 6.50%.  On the 15th of any given month they look into refinancing an determine that they can refinance into a new fixed rate @ 5.50% if they lock for 30 days.  If they lock and proceed with their loan application they would fund their new loan on the 15th of the following month.

If their existing loan was a non-FHA loan then at closing their existing lender would collect 15 days worth of interest (1st-15th or $541.67) and the new lender would collect 16 days of interest (15th-31st or $458.33).  The total amount of interest collected at closing would be $1,000.01.

However, because their existing loan is a FHA loan then the existing lender would actually need to collect interest for the entire month.  Therefore, when these homeowners go to close they would find that the existing lender was collecting interest for the entire month (1st-31st or $1,083.34).  Meanwhile, the new lender would still collect interest for 16 days (15th-31st or $458.33).  Therefore, the total amount of interest collected at closing is $1,541.67.  In essence, the fact that the existing loan is a FHA loan adds $541.66 to the closing costs.

A homeowner with a FHA loan can mitigate the additional expense by ALWAYS CLOSING ON FHA REFINANCES ON OR NEAR THE LAST DAY OF THE MONTH.  IF they are working with an experienced and knowledgeable mortgage professional they should account for this when advising whether or not it makes sense to refinance.

If you’d like a no obligation refinance analysis completed for your FHA loan please click on the “Work with Evan” tab to the left.

FHA announces new rules Sept. 18th

As a supplement to this post and this post, WSJ.com published this article a few minutes ago in which they report that the FHA will tighten credit standards in order to improve it’s mortgage insurance performance.  No details on when these new rules will become effective.  Here is a quote from the article in which new measures are outlined:

Under planned new rules, the FHA said lenders making FHA-insured loans will need to show net worth of at least $1 million, up from $250,000, and further increases may be sought later. The agency is seeking to ensure that lenders will have funds available to compensate the FHA if their loans fail to meet quality standards.

The FHA also will stop certifying mortgage brokers to handle FHA loans. Instead, the lenders that underwrite and fund those loans will be responsible for policing brokers and paying for any failures to meet standards.

For refinances of FHA loans, the agency will make new requirements for verifying income and other quality-control checks. It also will impose a maximum loan value of 125% of the current estimated home value on refinanced loans, in line with government-backed mortgage investors Fannie Mae and Freddie Mac.

The FHA plans to make its rules aimed at averting pressure on appraisers more consistent with those adopted earlier this year by Fannie and Freddie. Mortgage brokers or bank employees paid on commission won’t be allowed to order appraisals. Appraisals will be valid for no more than four months, down from six to 12 months previously.

FHA solvency update

Last week I had blogged this post regarding mounting losses at FHA.  Today, WSJ.com had a follow up with this article.  The bad news is that the FHA reserves level will drop below congressional mandated levels.  The good news is that the FHA has forecasted out 2 years from now and is projecting those reserves will rebound above that level with out any bailouts.  We don’t expect any changes to FHA loans at this point.