FHA: Streamline refinancing could help millions

FHA estimates that there are approximately 3.4 million households with qualifying FHA mortgage loans with mortgage rates over 5 percent. The average household could save about $250 per month or $3000 annually using streamline refinancing. Providing homeowners with underwater mortgages an inexpensive method of refinancing can prevent foreclosures and provide homeowners with additional cash for paying bills or meeting essential household expenses. FHA asserts that lowering the MIP rates for streamline refinances will not incur taxpayer expenses or jeopardize its mutual mortgage insurance fund.

Low mortgage rates boosting refinance affordability

Refinancing to a lower mortgage rate provides benefits including lowering your monthly payments paying off your mortgage loan faster, as more of each mortgage payment is applied to your mortgage balance. FHA programs also provides refinancing options for homeowners wishing to refinance their non-FHA mortgage loans. Homeowners without enough equity for conventional refinancing options may qualify for refinancing through FHA, which allows for rolling allowable closing costs into the new mortgage amount and will approve refinance mortgages for up to 97.5 percent of your home’s current value. Contact your mortgage lender or FHA approved lenders for more information about FHA loans and current mortgage rates. Comparing multiple quotes assists with finding your best deal on FHA refinancing.

Columnist Kathleen Pender wrote recently in the San Francisco Chronicle that approving FHA mortgage loans for borrowers who have outstanding debts in collection could increase taxpayer risk if these loans default and FHA doesn’t have enough in its reserve fund for reimbursing lenders’ losses. On the surface this makes sense, but several factors beyond would-be borrowers’ control can contribute to unpaid collection accounts:

• No or limited health insurance coverage: With hospitals billing at thousands of dollars per day, uninsured patients can easily accumulate insurmountable debt.


• Long periods of unemployment/underemployment: The economic downturn is causing many people with formerly spotless credit histories to default on their debts.


• Failure of creditors to remove derogatory credit information from credit reports: Creditors may fail to remove debts discharged through bankruptcy or those repaid long after the original default.

If you’re considering an FHA loan, review your credit reports before applying and address incorrect information through the three credit reporting bureaus. If you have unpaid debts due to a hardship, such as a long-term illness, serious injury or unemployment, the FHA has reportedly indicated that it may be willing to waive the coming debt requirements if the hardship is well documented.

There is a difference between someone who charges a luxury vacation and doesn’t pay their credit card bill and a person who suffers a serious injury or illness while uninsured, unemployed or both. So if you’ve faced a situation in which a hardship led you into debt, be sure to make this distinction to your potential lender before you apply for an FHA loan.

• Home loans being refinanced must be insured by FHA. This makes sense, as eligible refinancing homeowners have met FHA lending criteria in the past, and allows the agency to forgo traditional reams of underwriting paperwork.
• FHA loans owned by Fannie Mae, Freddie Mac, private investors or loans guaranteed by the Veterans Administration are not eligible for streamline refinancing.
• FHA loans otherwise eligible must have been endorsed for FHA insurance no later than May 31,2009. This policy is intended to protect FHA from losses related to high default rates traditionally associated with mortgage loans less than three years old. Skeptics also note that FHA could save additional money, as it offers a partial refund of FHA mortgage insurance premiums for home loans refinanced within the first three years of the loan term. Estimates suggest that 145,000 households financed with FHA loans with interest rates above 5 percent are being denied refinances due to this requirement.
• Homeowners must have made the past 12 consecutive mortgage payments on time.
• Refinance terms must reduce the new mortgage payment by 5 percent of the original mortgage’s monthly principle, interest and mortgage insurance payment.

Cleared the streamline FHA qualification hurdle? Here’s the good news

Qualified homeowners will likely breathe sighs of relief as the “streamline” part of the FHA streamline refinance program kicks in:

• No new verifications of employment or income required
• Up front mortgage insurance premiums (UFMIP) will be reduced to .01 percent of the refinanced loan amount, and the annual mortgage insurance premium (MIP) will be reduced to .55 percent.
• No new credit underwriting required. This means no new credit reports, credit scores or meeting current FHA credit criteria.
• No new physical appraisal of the property securing the refinance mortgage.
• Refinance terms must reduce the new mortgage payment by 5 percent of the original mortgage’s monthly principle, interest and mortgage insurance amount.

These requirements become effective for streamline refinance loans with FHA case numbers assigned on or after June 11, 2012.

The settlement comes as the FHA continues to face challenges regarding the agency’s financial reserves, which remain below government-mandated minimums. High rates of default on FHA loans, as was seen among the Citibank loans, have been a drain on the agency’s insurance reserves, which exist to compensate lenders who suffer defaults under the program.
FHA reserves: The bad news and the good news

FHA reserves for reimbursing lenders for losses from defaulted FHA loans remain below the legally required minimum level of 2 percent of its mortgage insurance liability. The FHA reserve fund for paying mortgage insurance claims is self-funded by premiums paid by FHA mortgage borrowers, but due to the unprecedented drain on its reserves, FHA could be forced to seek other funding sources for maintaining its required levels.

The good news is that FHA is slated to receive $1 billion from a recent settlement with four loan servicing organizations. This settlement is separate from the Citigroup settlement.
FHA seeking approval for raising loan limits in high cost areas

In a move that appears counter-intuitive at least and suicidal at worst, the FHA also wants to raise loan limits in high priced areas such as Hawaii and California. The plan involves providing upside-down borrowers in these areas with opportunities for refinancing to FHA loans.

Taking on the additional risk of insuring larger loans when home values continue declining may seem foolhardy, but if approved, time will tell whether this plan stems the tide of foreclosures or further sinks FHA mortgage insurance reserves.

Real estate investors no longer inhibited by FHA rules against flipping, a practice where investors buy homes, repair them and quickly resell them, can take advantage of incentives offered by banks and other institutional lenders attempting to sell off foreclosed homes.

Buyers of homes offered for sale by so-called “flippers” may then apply for FHA mortgage loans. The FHA decision to extend the anti-flipping waiver may instill confidence in investor sellers who don’t want to deal with arbitrary delays in selling homes they’ve renovated to buyers using FHA mortgage loans.

By waiving its anti-flipping rules for another year, FHA can insure FHA loans for first time buyers with little cash to put down. FHA insures mortgages for up to 97.5 percent of a home’s current appraised value. The combination of FHA mortgage loans and availability of renovated homes in moderately priced neighborhoods can potentially increase home ownership and stabilize crime and home devaluation frequently associated with vacant foreclosed and abandoned homes.

Prior to issuing the initial waiver in February 2010, FHA required property owners to hold their properties for a minimum of 90 days before selling them. The key to successful flipping relies on buying homes, quickly renovating them and turning them over. Artificial time constraints can reduce profits when investors are forced to “sit on” renovated properties while awaiting the 90-day waiting period to expire. FHA outlined specific conditions associated with its 2012 waiver of anti-flipping regulations:

• Arm’s-length transactions: Buyers, sellers and others involved in a flipping transaction cannot have an ” identity of interest” between each other.
• Limited seller profit: In cases where the sales price of a flipped property is 20 percent or more than the seller’s acquisition price, the seller is required to provide documentation justifying the selling price.
• No HECM loans: FHA does not allow buyers to purchase flipped homes through its Home Equity Conversion Mortgage (HECM) program. Also known as reverse mortgages, HECM loans provide borrowers with cash drawn from home equity.

Since the inception of its waiver of anti-flipping rules, FHA cites the approximate value of 42,000 FHA mortgages arising from sales by sellers holding properties less than 90 days at $7 billion. These figures suggest that FHA may be on to something, and depending on how the extension of the anti-flipping waiver works in 2012, it could be time to scrap the anti-flipping rules altogether.

The fact is that the loan limits that took effect at the beginning of this month might end on December 31st. That’s because the new loan limit formula is only designed to last three months.

In the usual situation loan limits are announced in November or December, begin in January and then last for a full year. However, since 2008 the loan limit system has been in a shambles and it still is today. The result is that as of January we could see higher limits, lower limits or no change.

Changing FHA limits

Lenders, brokers and homebuilders want larger FHA mortgages for a few reasons: The financing only requires 3.5 percent down and there is no risk to anyone by those who pay FHA mortgage insurance premiums–if an FHA mortgage fails the lender has 100 percent loss protection.

Go back to 2008. The loan limits in place had been set in 2007. In April 2007 home prices reached their peak and then began to decline. Under the usual formula loan limits were scheduled to decline in 2008. Instead, under the stimulus package loan limits were increased. For FHA borrowers within the continental 48 states that meant the largest FHA loan for a single-family home could now be $729,750 instead of $417,000.

The process was repeated in 2009 and 2010. Now, in 2011, we’re trying to figure out what the loan limits should be in 2012 and so we’ve taken a half-step, lowering the limits as of October 1st through the end of the year.

But what will happen in January?

No doubt between now and January we’ll see huge complaints from lenders, brokers and builders, explained in horrid detail, about how the lower loan limits have adversely affected millions of people.

This is nonsense. Fewer than 1 percent of all FHA loans have initial balances of more than $500,000–and remember we’re allowing loans for as much as $625,500 under the new rules in high-cost areas, more in Alaska, Hawaii, Guam and the Virgin Islands.

Politics

Less visible will be the conversion of the loan limit issue into a political matter, meaning lots of PAC contributions for candidates running in 2012.

In the real world, loan limits for 2012 should actually be even lower than today because home prices continue to fall. The Federal Housing Finance Agency says that home prices as of July remained 18.4 percent below the April 2007 peak.

In practice, the most likely outcome is that the loan limits we have today will simply continue into 2012. That will help FHA mortgage borrowers who need bigger loans while not actually having much marketplace impact. Why? There just aren’t a lot of massive loans among the 7.1 million FHA mortgages now outstanding.

Let’s assume that the new and lower limits become the law of the land as scheduled. Just who will be impacted?

“Congress must act now to prevent the loan limits from reverting to lower levels,” Bob Nielsen, chairman of the National Association of Home Builders, said in a statement. “A drop in mortgage loan limits would reduce housing demand, and place downward pressure on home prices in major markets. This would exacerbate the current housing downturn, trigger more foreclosures, impede job growth and endanger the fragile economic recovery.”

Because of these concerns, the NAHB said it’s “engaged in a major grassroots push and association members are being urged to contact their members of Congress and seek their support for immediate efforts to extend the current loan limits.”

Actually, neither home builders nor anyone else has much to worry about regarding real or imagined terrors from reduced loan limits.

Let’s take a look at FHA mortgages. They can give us a fairly good sense of market demands.

Figures provided to FHALoanPros by HUD officials show there were 7.152 million FHA loans outstanding as of mid-September. If we got rid of all the high-priced loans, how many would be lost?

The new FHA loan limit for a single-family home in a high-cost area is $625,500. The old cap was $729,750. The limit is higher in Alaska, Hawaii, Guam and the Virgin Islands.

As of mid-September, 1.08 percent of all outstanding FHA mortgages had an initial balance between $400,000 and $500,000. Most of these loans–a total of 77,241 mortgages–will be routinely available under the new loan limits because they will finance homes in high-priced areas or outside the lower 48 states.

What about loans with an initial balance above $500,000? The FHA says that such loans represented 0.75 percent of all FHA loan originations. That’s about 53,640 mortgages and–again–virtually all could be made under the new rules.

Where mortgages between $625,000 and $729,750 are needed, there will be cases where FHA financing will be unavailable, but so what? Financing from private lenders will be readily on tap, though perhaps at a somewhat higher cost.

If you’re an absolutist then, yes, some low cost FHA financing will no longer be available once the loan limits fall. But the marketplace impact will be just about zero.

Most people have no loan limit concerns. Falling satellite parts are a bigger worry, and with good reason.

The latest figures show that in July the FHA insured 91,533 single-family loans with a total initial balance of $16.1 billion. In other words, the average loan amount was just $161,001.

No doubt a lot of FHA borrowers are looking at the loan limit debate and saying, “Let the rich folks worry about that stuff. The program works great for me.”

And whether the loan limits are up or down, it does.

The group that operates such mass modifications is called the National Assistance Corporation of America or NACA. It must be doing a good job because it provides about 30 percent of the counseling services available to borrowers with money provided by HUD.

Or it did, until the money stopped.

Modification Day

The way the system works is that distressed borrowers are told to arrive at the locale with certain information in hand–loan numbers, income information, lender names, etc. The counselors then contact the FHA lenders–they have direct connections with virtually all major lenders–and the effort to modify begins. In fact, when navigated by experienced counselors, many borrowers walk out of the sessions with new mortgage loan terms.

Now comes a new debate which should be interesting: HUD has cut off NACA funding. NACA is suing HUD “for what amounts to political retaliation and government interference putting families facing foreclosure at risk.”

NACA says it’s been “outspoken in its criticism of President Obama’s foreclosure prevention programs. The government mortgage programs which constitute 80% of the total mortgages (i.e. FHA, VA, Fannie Mae and Freddie Mac) are the least effective in preventing foreclosures and in restructuring/modifying mortgages to make them affordable. In essence we taxpayers are foreclosing on ourselves.”

This is a big deal because HUD should be encouraging mortgage modifications, not just for FHA mortgages, but conventional mortgages as well. Navigating the loan modification system is tricky.

Audit

A HUD audit report completed in February shows that NACA faced 58 consumer complaints from 59,000 clients. Of the complaints, 17 concerned NACA and the rest involved matters after a modification. This is a ridiculously small number of complaints relative to the size of the program.

NACA provides both counseling services and mortgage brokerage services to its clients, according to the report. But the audit found that NACA had obtained signed disclosures from all clients and that no borrower had been steered to a particular lender, meaning there was no violation of HUD’s conflict of interest standard.

Now that we’re done with the investigation, let’s get back to business. HUD needs the counseling services provided by NACA, and NACA must be able to pay its almost 800 employees. So let’s give NACA its funds. It passed the audit, and now it’s time for HUD to pass along the cash.

The new rules under Wall Street reform create a standard for loans. If a loan fits, it is then a qualified residential mortgage (QRM). If it doesn’t fit, then the lender can still make the loan and a borrower can still be dumb enough to accept such financing.

Lenders, of course, are screaming about the new QRMs. They’re telling everyone who will listen that loans under the QRM will require 20 percent, so be very afraid of the new standard.

Why 20-percent down doesn’t apply

This is nonsense. The 20-percent standard does not apply to FHA loans. Or VA financing. Or loans bought by Fannie Mae and Freddie Mac. Or loans lenders hold in portfolio. In other words, the 20 percent requirement does not apply to any safe and sane mortgage. The big down payment requirement does not apply to nearly 80 percent of all loans made today.

As a side issue, lenders are distressed with the FHA.

“We support FHA’s role as a source of financing for first-time homebuyers and other underserved groups,” explains the chairman of the Mortgage Bankers Association, Michael D. Berman. “However, because of the wide disparity between FHA’s down payment requirement of 3.5 percent and the QRM’s requirement of 20 percent, MBA is concerned that the FHA programs will be over-utilized.

“While FHA should continue to play a critical role in our housing finance system, MBA firmly believes that it is not in the public interest for a government insurance program like FHA to dominate the market, especially if private capital is available to finance and insure mortgages that exhibit a low risk of borrower default.”

Since when did the “over-utilization” of a loan program become a problem? Imagine if Target started a campaign on Capitol Hill to limit the size of Walmart because the bigger retail chain was “over-utilized.”

Here’s an idea: If the lending industry wants to make fewer FHA loans, then compete. Come up with something better. Come up with something cheaper.

Digging deeper

The real issue, the one hidden behind fake worries regarding 20 percent down, is that when lenders make terrible loans under the new system, they’ll be required to set aside 5 percent of the loan amount in a reserve fund.

And what happens if lenders must keep 5 percent in reserve? They have lower profits.

So, if we get rid of the 5 percent reserve requirement, then lenders can make more toxic loans. More option ARMs. More loans with no doc loan applications. More interest-only mortgages.

These are loans which should never have been allowed by federal regulators in the first place. Such mortgages are at the heart of the mortgage meltdown and failures on Wall Street. We don’t need these loans again. We do need the FHA.

“The housing market does not need a self-inflicted wound,” said Rep. Gary Ackerman (D-NY), a co-sponsor with Rep. John Campbell (R-CA) of legislation which would keep today’s loan limits in place. “With the economy remaining fragile and the housing sector still struggling to recover, now is not the time to make the cost of mortgages more expensive.”

Under HR 2508, loan limits for FHA and conventional loans would stay where they are until 2013.

Is increasing loan limits a good idea?

For most people it simply wouldn’t matter. Most mortgages are far below current loan limits so the question is irrelevant.

However, the issue is very important for people who live in high-cost areas where it makes a big difference if the loan cap is $625,500 versus $729,750. In these areas there are many homes where prices are so high that financing of $729,750 is actually used.

Another group that would be elated if the loan limits were continued are the nation’s home builders. They’re advocates of higher limits because that makes the sale of McMansions easier to finance.

Change in Washington

The odds of such legislation actually passing, however, are not so great. Here’s why:

The plans for lower loan limits are already in place and it would take new legislation to raise the Oct. 1, 2011 standards. Getting things done in Washington is unlikely, especially since much of the House would not support higher mortgage loan limits and the White House has said it agrees with the lower mortgage limits. Critics of the Federal Housing Authority (FHA), in particular, would not want limits increased because they want to make the FHA mortgage program less competitive in the marketplace.

What’s more plausible is that the conventional loan limits we now have could be continued while the FHA loan limits would be allowed to fall. This would make a lot of people very happy because they object to the FHA’s large market share and a lower FHA loan limit is one way to reduce FHA demand.

What’s missing from the loan limit debate is the fact that bigger loans are available today and will be available after Oct. 1. Bigger loans–”jumbo” financing–are more expensive than “conforming” mortgages which do not exceed the loan limit. In other words, the problem is not that financing will be unavailable, it’s that some of it will cost a touch more.

If the new loan limits go through as expected it means that mortgages above $625,500 in the lower 48 states will be reclassified as “jumbo” financing and thus lenders will be able to charge a higher interest level. Curiously, there doesn’t seem to be a lot of support for a continuation of the higher loan limits among lenders, usually a loud group in Washington.