Revising Revisions: Changes Delayed as FHA Reconsiders Condo Guidelines

Highlights of the original proposal include:

• No more than 30 percent of units within an FHA approved complex could be insured by FHA. This reduces the current percentage of FHA mortgages allowed within approved condominium developments from 50 percent. Condo developments consisting of 3 or fewer units would only be permitted one unit insured by an FHA mortgage or refinance.
• The new requirements would no longer allow “spot loans” within condo complexes awaiting FHA certification. All condominium loans would have to be made on units within FHA approved complexes.
• Most problematic for lenders is the proposal requiring all FHA approved condominium complexes to be recerrtified every two years. In its announcement of the delay of changes to its requirements for insuring mortgage loans secured by condominium units, FHA indicated that it would review this requirement. This move could prevent delays in approving loans within condo complexes due for re-certification. FHA lenders with direct endorsement authority would retain authority to certify condominium projects, which could aid in avoiding delays in approving FHA mortgage loans in condominium developments due for re-certification.

Loosening these guidelines could be good news for those seeking an FHA mortgage loan or refinance on a condominium unit, as delays can cause problems for homeowners, buyers and sellers, particularly if mortgage rates rise while borrowers await mortgage or refinance approval.

Condominium Units Offer Affordable Alternative

First time buyers may find condominiums more affordable than single family homes, and can more easily get approved for mortgage loans under FHA qualification requirements. Any significant restrictions placed on approving FHA mortgages secured by condominium units could place additional hardship on first time buyers. FHA mortgage loans provide access to condo ownership for people who may be first time buyers, facing credit challenges, or those who need low cost, low maintenance housing. Condominium units are popular starter homes for first time buyers, and also provide affordable homes for empty nesters or seniors desiring a smaller home with less maintenance.

These buyers and others could be impacted if FHA holds its ground on its revised requirements for home loans secured by condominium units.

Instead, this morning, HUD has sent reporters a note saying that “last evening, the independent auditor that prepares the FHA’s actuarial study notified HUD and FHA that the report will not, in fact, be final in time for today’s press briefing. Therefore, we are postponing the briefing and all related communications.

“HUD and FHA leadership will meet with the auditors today to ensure that we can report to Congress in a timely and accurate manner.”

Critics will look at this postponement as evidence that the FHA has something dark and woeful to hide while supporters will be thankful that someone in government is trying to get their facts right, a new concept in the Nation’s capital.

Realistically you don’t have to be Nostradamus to figure out what lurks ahead for the FHA. Here’s what we have been seeing during the past year — and what we can expect.

First, risk has been reduced by getting rid of seller-funded, third-party, downpayment assistance plans. Whether one likes or does not like such programming, HUD says they are a major cause of FHA mortgage foreclosures. Speaking last May, HUD Secretary Donovan said that “seller funded downpayment assistance loans accounted for 14 percent of all FHA loans outstanding, but generated 31 percent of all FHA foreclosures and 31 percent of all losses on foreclosed-properties. Looking forward, we estimate that without the elimination of this program, FHA would have needed an FY 2010 appropriation of over $2.5 billion. Instead, we project that FHA will return to the tax payer over $1.7 billion.” The bottom line: Buyer assistance programs are not coming back.

Second, the amounts available for FHA reverse mortgage borrowers have been scaled back. This will cut losses because the reverse mortgage program — NOT the forward lending program — is where the FHA is really running into difficulties. Look for the FHA to continue efforts to reduce HECM volume.

Third, the FHA is reducing risk by getting better-qualified borrowers. Typical FICO scores have risen during the past year from 660 to 689. This is particularly impressive when you consider that much of economy is in the dumper.

Volume

Nobody is going to fool substantially with the FHA mortgage program regardless of what an auditor says. Why? Because the FHA as it is now operating is simply too important. The Mortgage Bankers Association says that more than 30 percent of all loans are no FHA-insured.

Any effort that results in fewer forward FHA mortgages (reverse mortgages are a different story) is going to significantly — and negatively — impact the real estate marketplace, a marketplace which is recovering in a few areas but is dicey in most. Politically and economically big changes are just not going to happen.

• Moderate income: FHA allows higher housing expense to income (31% or more) and debt to income (43% or more) ratios than conventional mortgage lenders. These ratios, sometimes called front-end and back-end ratios, are determined by dividing borrowers’ estimated housing expenses by gross income, and dividing total installment debts by gross income. FHA also allows non-resident co-borrowers (such as parents) to sign for primary borrowers needing income assistance. FHA guidelines are generally more lenient than conventional lending requirements.
• Non-traditional income: FHA can accommodate borrowers with cash-based income and small business owners who deal mostly in cash. Income verification is required, but FHA provides more options for verifying income than conventional loan requirements allow.
• Bad credit: FHA guidelines allow borrowers to carry more debt than conventional lenders, and also qualify borrowers with bankruptcy filings a minimum of two years prior to applying for an FHA loan and foreclosures occurring a minimum of three years prior to applying. FHA does not require a minimum credit scores, but instead focuses on borrowers’ demonstrated ability to pay their debts successfully.
• Low down payment: FHA loans require as little as 3.5% down for home purchases, and down payment funds can be provided by family members, employers, and housing assistance programs. The source of down payment funds is subject to verification, but FHA loan requirements are “friendly” toward first time buyers and others with low cash reserves. FHA guidelines allow for closing costs and the up-front mortgage insurance premium to be added to the home loan amount; borrowers may also elect to pay higher mortgage rates and have their lenders pay closing costs.
• Rehab loans available: FHA can provide mortgages based on a home’s potential value after it has been refurbished; this provides upfront funding for renovation expenses. Ask FHA lenders for details, or check out basic FHA guidelines for this program.

When getting quotes for FHA loans, compare the APRs in addition to mortgage rates. This can help you find savings on closing costs. The APR incorporates the mortgage interest rate and closing costs, so if you have two quotes offering the same mortgage rate, the lower APR indicates lower closing costs.

In real terms there was no other choice. Politically, areas with expensive homes need as much help as possible to maintain prices. Economically, FHA loans are now a huge part of the market and no one wants to fool with something which is successful.

“Given the lack of a private secondary mortgage market, FHA, Fannie Mae and Freddie Mac are pretty much the only game in town,” says Robert E. Story, chairman of the Mortgage Bankers Association. “Extending the current loan limits through 2010 will allow more loans to qualify for these important programs and will help keep mortgage credit more accessible and affordable for qualified borrowers.”

Loan limits used to be universal, one number for the entire country. But now loan limits have become localized. The maximum for a single-family FHA mortgage in the continental US is $729,750 for high-cost areas — but not everywhere is a “high-cost” area.

To find out how much FHA mortgage financing is available for your area either ask local lenders and real estate brokers or go to HUD’s FHA mortgage limit page.

There are essentially four sets of FHA loans limits:

___ The maximum you can borrow for “high-cost” areas.

___ The basic or minimum FHA loan limit.

___ The loan limit for properties in Alaska, Hawaii, Guam and the Virgin Islands.

___ The loan limit for FHA reverse mortgage.

In practical terms, the deal is that you can borrow as much as $729,750 in high-cost areas, at least $271,050 anywhere in the continental US and $1,094,625 in Alaska, Hawaii, Guam and the Virgin Islands. The numbers get larger for properties with two, three or four units — however, to qualify for FHA financing when properties have two to four units borrowers must actually live in one unit.

Continuing Resolution

As of this writing the actual loan limit extension is contained in HR 2996, legislation passed by both the House and the Senate and awaiting the President’s signature. It would surprise everyone if this bill is not signed, so unless you hear screaming from lenders in the next few days the higher loan limits can be regarded as a done deal.

The term “FHA” does not actually appear in the legislation. Like much in Washington, you need a translator of some sort to follow what is being said. For the fun part of the day, read below….

‘SEC. 166. (a) LOAN LIMIT FLOOR BASED ON 2008 LEVELS.— For mortgages for which the mortgagee issues credit approval for the borrower during calendar year 2010, if the dollar amount limitation on the principal obligation of a mortgage determined under section 203(b)(2) of the National Housing Act (12 U.S.C. 1709(b)(2)) for any size residence for any area is less than such dollar amount limitation that was in effect for such size residence for such area for 2008 pursuant to section 202 of the Economic Stimulus Act of 2008 (Public Law 110–185; 122 Stat. 620), notwithstanding any other provision of law or of this joint resolution, the maximum dollar amount limitation on the principal obligation of a mortgage for such size residence for such area for purposes of such section 203(b)(2) shall be considered (except for purposes of section 255(g) of such Act (12 U.S.C.1715z-20(g))) to be such dollar amount limitation in effect for such size residence for such area for 2008.”

There. Isn’t that clear….

FHA Loan Guidelines Provide Opportunity During Tough Times

Protecting the interest of taxpayers is essential, but is limiting access to home ownership to all but those with 20% and “excellent” credit a reasonable solution? More importantly, what happens to the US housing market if FHA stops making home loans available to borrowers with moderate income and challenged credit? Home prices in many areas of the US average well into six figures, and 20% down is an unattainable amount for many hardworking families. FHA lending guidelines do allow borrowers to have a foreclosure (three years or more prior to applying for an FHA loan) and/or a bankruptcy that occurred a minimum of two years prior to applying. Whether or not two or three years is accurately deemed “recent” doesn’t matter in light of “recent” economic challenges. Plenty of suburbanites ensconced in “good” neighborhoods have seen their 20% down payments disappear along with any additional home equity they had accumulated. Financial security and home ownership itself have gone the way of the passenger pigeon for many.

Refinance Challenge: Low Mortgage Rates, and Blemished Credit

Meanwhile, mortgage rates have dipped to near historic lows, and many people are stuck with high mortgage rates that they can’t refinance due to having little or no home equity. Let’s not forget the layoffs that have cost many “qualified” homeowners their jobs. Homeowners who have neither missed a payment on anything nor carried revolving debt are finding themselves in financial trouble. Formerly pristine credit ratings are looking a bit tattered these days. Refinancing their mortgage loans could help many of these people, but what if they don’t have a solid employment history, or have missed a couple of payments on credit cards, or even missed a mortgage payment? Formerly accommodating conventional lenders can’t help these folks. Getting an FHA refinance may be their only option at competitive mortgage rates.

Let’s recognize that FHA is helping many taxpayers; FHA loans and lenient FHA loan guidelines are providing essential opportunities for home buyers and homeowners who want to buy and/or keep a home for their families.

In a note to lenders, HUD says the new rules will “offer additional leniencies to address the difficult market conditions.”

Translation: The new rules — which were intended to reduce FHA risk — went too far.

In June, HUD announced new FHA mortgage rules for condo financing that would have made FHA-backed loans tougher to get. Among the new standards, HUD was going to require that:

___ At least half the units had to be owner-occupied.

___ Eight-five percent of all units had to be current on their condo fees.

___ No more than 30 percent of all units could be financed with FHA mortgages.

Conflicts

At this writing we don’t know what “additional leniencies” HUD will offer, but there’s a practical conflict here that will be hard to resolve.

HUD cannot make the program too lenient because it then increases the risk of losses. Given that FHA reserves have been falling for the past few years, more risk is the last thing HUD wants.

But, RealtyTrac.com reports that six states make up 62 percent of all foreclosure activity nationwide. Those states are California, Florida, Arizona, Nevada, Illinois and Michigan. The first four states are major condo centers, the very markets where tougher condo rules will only add to local real estate woes.

So what can HUD do that would reduce unsold condo inventories while not increasing risk to the FHA program?

Investors

One idea is to re-think the general FHA ban on investors. You can finance property with two-to-four units with FHA financing as long as you live in one unit, but you can’t be a pure investor and get an FHA loan. In other words, you can’t just buy a house or a condo unit with FHA funding and just rent it out.

Why it makes sense to allow resident investors but not pure investors has never been clear. What is clear is that the program should be changed.

If the FHA program was opened to condo investors it could be done in a cautious manner. For instance, how about investor financing with 10 percent down? Or, what about “blanket” financing for investors, one loan secured by several properties — including the investor’s prime residence? You can bet that not too many investors would want a foreclosure when their own property would be at risk.

Meanwhile, if you’re considering the purchase of a condo it might be wise to buy and close before December 7th. You can bet that the replacement rules will not be as tough as the rules which were supposed to start October 1st — but it seems likely that the new standards will be tougher than the benchmarks for condo buyers which are now in place.

FHA Loan Requirements Include Low Down Payment

It’s possible to finance up to 96.5% of the home purchase price (or home value for an FHA refinance) and include some closing costs and the up-front mortgage insurance premium required by FHA. Conventional lenders typically require a minimum of 10% down, and many require 20% down. If you’re short on cash, an FHA loan may help you buy a home or refinance your current home loan. You may qualify for a streamlined FHA refinance if you currently have an FHA home loan.

• Credit Issues: If you an prove that you’ve made your housing payments on time (with no more than one 30 day late payment) during the 12 months preceding your FHA loan application, you may qualify for an FHA loan even if you’ve had a bankruptcy or foreclosure. A bankruptcy may have occurred no less than two years prior to applying for an FHA loan, and a foreclosure no less than three years prior to applying. When reviewing your loan application, FHA-approved lenders will run credit reports, but you will not be excluded from getting an FHA loan based on credit scores alone.
• Debt to income ratios: FHA allows borrowers to have a housing payment up to 31% of gross household income, and total debts (including housing) of up to 43% of gross household income. This allows borrowers to have housing payments and other fixed debts (credit cards, auto and student loans, alimony or child support payments) equal to 43% of their monthly income before deductions.
• Non-occupant co-borrower: Although FHA requires at least one borrower to occupy the mortgaged property as his or her primary residence, FHA permits non-resident co-borrowers. This is handy for buyers who need their parents or other family members to co-sign for their mortgage.

FHA refinance loans also provide a safe home financing alternative for homeowners who cannot qualify for refinancing under convnetional mortgage lending guidelines.

In terms of FHA mortgages, the great idea has been to combine the first-time credit with FHA financing to buy a home with little or no money down. To do this a buyer must do two things:

First, get an advance from a state housing agency or an approved nonprofit.

Second, buy a property that requires not more than $228,571.42 in financing. (The FHA requires a minimum down payment of 3.5 percent of the purchase price and 3.5 percent of $228,571.42 equals $8,000).

No Money Down

For months, though, we have been saying that FHA mortgages with nothing down were likely to be rare. The reason is that fewer than 20 states have programs which make advances, money is limited and few nonprofits have such cash available. (Private lenders can provide advances, but not advances which substitute for the 3.5 percent down.)

While deals with no money down have been rare, what has been common are simply deals where first-timers get that $8,000 credit. The National Association of Realtors says IRS figures show that “1.4 million individuals will receive the benefit of the credit. NAR believes that roughly 355,000 (or 25%) of those sales would have not have occurred during 2009 without the incentive of the tax credit.”

Standards

Now we find that a number of those claiming the first-time credit do not actually qualify.

Basically, to qualify for the credit you must not have owned a home for at least three years. The credit only applies to the purchase of a “main” home — the place where you generally expect to live. You must purchase before December 1, 2009 (stay tuned, though, we expect this deadline to be extended). You must keep the property for at least 36 months. Lastly, you can’t earn more than $170,000 or more if married and filing jointly.

To get the credit you must file IRS Form 5405. In other words, unless you can get an advance from a state program or an approved nonprofit your $8,000 credit comes AFTER you have bought a house.

Not Qualified

It turns out, according to J. Russell George, the Treasury Department’s Inspector General, that a goodly number of those who have applied for the credit may not actually qualify. For instance, 73,799 applicants apparently owned a home within three years of claiming the credit — a big no no. Another 582 taxpayers under 18 years of age claimed the credit, a problem because minors cannot be bound by real estate contracts.

The problem here is not with the IRS — it has a very clear and understandable form. The problem is also not with the program — just look at IRS Form 5405 and you can instantly see who qualifies and who doesn’t. Rather, the problem is that in a huge program with more than 1.4 million participants some folks apparently do not read the form before looking for a property.

What happens if you apply for the $8,000 credit and are, in fact, unqualified? If buyers have to pay back the government immediately, that will be fine for those who held onto their $8,000. But for those who were less prudent, big problems loom ahead.

Less than 20% Down? FHA Home Loans Can Help

Current mortgage rates are a strong incentive for first time home buyers, and there are no guarantees about how fast and how much rates will increase. FHA mortgage rates are competitive and can help first time buyers get into a home or home owners with little equity refinance their home loans.

Understanding Private Mortgage Insurance and FHA Mortgage Insurance

Mortgage lenders consider home loans with a loan to value ratio (LTV) of more than 80% a higher risk, and require borrowers to pay for mortgage insurance (MI). This insurance reimburses the lender for losses associated with mortgage default and foreclosure. If you’re buying a home with less than 20% down, you’ll be paying for MI. FHA insures its approved lenders against losses in much the same way by charging borrowers an up-front mortgage insurance premium (UFMIP) of up to 1.75% of the mortgage amount at closing. The UFMIP is typically rolled into the mortgage amount. FHA guidelines require homeowners to pay MI premiums until their LTV ratio reaches 78%. FHA mortgage insurance costs can be lower than for MI premiums charged by private mortgage insurance companies, depending on your loan amount and the size of your down payment.

FHA Loan Requirements More Flexible

MI companies insuring conventional mortgage loans are tightening credit requirements for insuring conventional loans; minimum FICO scores of 720 may be required regardless of other lending guidelines. If you’ve had good payment records for the past year but have had past credit problems, an FHA refinance or home loan may meet your needs. Borrowers with a foreclosure a minimum of three years ago or a bankruptcy discharged at least two years ago may be eligible for FHA home loans.

An FHA refinance can assist homeowners who want a lower mortgage rate but don’t have enough home equity or cash to meet conventional lending requirements. If you’re shopping for a new mortgage loan, consider getting FHA mortgage loan quotes.

“The RESPA rule,” says a coalition of industry associations, “is scheduled to take full effect on January 1, 2010 – less than three months from now. Despite the best motivations of HUD, and the sincerest efforts of the industry, there are simply too many unresolved issues to allow the industry to be fully RESPA-compliant by the first of the year. HUD’s guidance has come far too late in the process and has been inadequate and often contradictory. Due to unresolved issues and critical unanswered questions, many lenders and settlement service providers are unprepared to comply. This, in turn, will cause very inconsistent implementation and confusion for consumers seeking to purchase a home.”

But there is nothing sudden about these proposals. HUD has been trying to make changes in the way that loan terms are disclosed since 1995. There have been seven different versions of the new Good Faith Estimate, none of which meet the lofty standards of the lending community.

So what’s the big deal?

First, under the new rules mortgage brokers would have to plainly disclose the yield spread premiums that they earn from each loan they originate.

Second, no lender would be allowed to steer “consumers to transactions that are not in their interest in order to increase the mortgage broker’s or loan officer’s compensation.”

Third, the new forms would make it easier for borrowers to compare loans in several ways:

___Improve the disclosure of the annual percentage rate (APR) so it captures most fees and settlement costs paid by consumers;

___Require lenders to show how the consumer’s APR compares to the average rate offered to borrowers with excellent credit;

___ Require lenders to provide final Truth in Lending Act (TILA) disclosures so that consumers receive them at least three business days before loan closing; and

___ Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages.

The lending industry is not against confusion in general , it’s only against “confusion” when it means borrowers will better understand the costs and consequences of individual loans.

The good news is that we already have loans which offer clear terms. FHA mortgage financing is plainly understandable, does not allow pre-payment penalties, requires real appraisals and bans “gotcha” clauses.

Claims that the lending industry cannot adopt the new rules by January 1st are absurd. They certainly had no trouble making instant credit card adjustments before new rules went into effect — rules which raised consumers costs. You can bet that if changes scheduled for January 1st resulted in larger industry fees that there would be no trouble at all making the deadline and that all claims of “confusion” would magically disappear.