Peter Bell, president of that National Reverse Mortgage Lenders Association (NRMLA),  testified that “a reverse mortgage must occupy the primary lien position on a property. All other liens must be satisfied with reverse mortgage proceeds. If some of the proceeds available from the reverse mortgage are diverted to a tax and insurance escrow, in some cases, there would not be enough money left to satisfy the liens. In such cases, the homeowner would not be able to obtain the reverse mortgage – and probably be forced to give up the home.

“Instead of simply imposing an escrow, HUD (in partnership with a NRMLA Task Force on tax and insurance issues) is looking at utilizing the financial assessment tool to determine if the lender and counselor should work with the borrower to establish an escrow, amend the draw-down schedule, limit payment options, disallow a lump sum payment or take other steps appropriate to help protect borrowers from tax and insurance defaults. One obstacle here is that the HECM statute requires all five payment options available under the program to be offered to all borrowers, restricting HUD and lenders’ ability to take appropriate action.”

You can understand that while the intention here is good the potential outcome is troubling. The idea of not allowing seniors to get a lump-sum withdrawal from an FHA-insured reverse mortgage — what HUD calls a home equity conversion mortgage (HECM) — smacks of paternalism, or maybe some form of inverse paternalism since seniors are tyically the parents….

One solution, which is advocated by Mr. Bell, is more and better counseling for potential reverse mortgage borrowers. Counseling, however, does not resolve the basic problem, the reality that reverse mortgages at this time are a risky product to insure.

Speaking earlier in June, Comptroller of the Currency John C. Dugan said that “while reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages — and that should set off alarm bells.”

The reason to worry about reverse mortgages is because the FHA program pays lenders if such financing goes bad. Unlike regular “forward mortgages,” a reverse mortgage is essentially a huge negatively-amortizing loan — the loan balance increases because borrowers are not making monthly payments — it follows that if the loan balance increases and the value of the property declines then the FHA can be stuck with big insurance claims.

HUD has asked Congress for $800 million to beef up reverse mortgage reserves. Given the current risk represented by reverse mortgages it might be wise for Congress to reject the HUD request. The problem is that these are not usual times and some reverse mortgage borrowers are using their lump sum payments to pay-off forward mortgages and avoid foreclosure. That’s a use we ought to applaud.

Nathan Reynolds writes and says that “when my office began offering low “fixed” rate FHA mortgages we successfully provided relief to 100’s of homeowners. I know this for a fact because by tracking the loans we have originated, there is less than a 3% default rate for a period of almost 3 years now.

“March 15th 2008 almost every lender started requiring Fico scores of a minimum of 580. And now that has minimum score requirement has risen to a 620 Fico score and even this score comes with risk based hits to the yield spread premium thus making the lowest rates unattainable.

“I recently spoke at a Foreclosure Education Summit and had the opportunity to speak with a representative from HUD who informed me she wouldn’t be surprised if lenders increased the minimum to a 680 Fico before years end!”

Judging from various email and comments I have read, I suspect that other loan officers have seen the same trend, the idea that basic FHA requirements are increasingly deemed inadequate by lenders, thus resulting in the denial of loans to otherwise-qualified borrowers.

If you think about this you can see an oddity here: Under the FHA program lenders have no real risk — if a borrower defaults the lender’s loss on the principal is fully covered. For this reason you could say that lenders have no reason to tighten the standards beyond FHA minimums.

The catch is that lenders do have risk if it is found out that they originated FHA loans that did not actually meet FHA requirements. In May, for example, HUD announced that it had taken ”actions against more than 120 lenders for violating FHA requirements. Violations range from failure to conduct sufficient quality control, to failure to continue to meet FHA recertification requirements, to falsifying loan documents.”

Among the lenders cited, HUD says that “102 lenders had their FHA approval withdrawn, five lenders agreed to make indemnification payments to FHA totaling more than $500,000, and 24 lenders were accessed fines or administrative costs totaling more than $1.2 million.”

In other words, one reason why lenders may be looking for higher FICO scores beyond FHA loan guidelines is not because they want to make things harder for borrowers, not because they want to raise interest rates, but because they want to make sure that loan officers and underwriters follow FHA standards.

In today’s world, if you’re a lender and you’re dumped from the FHA program you have lost the ability to offer one of the most appealing and successful loan products now available. That makes it a lot tougher to be a lender.

Are lenders right to tighten standards? The answer is yes given the abuses seen in the private sector during past decade.  Unfortunately, borrowers — as usual — as the ones who will suffer.  9548g7zi3r

FHA and subprime loans are not the same, not even close.

Part of the thinking, such as it is, behind the comparisons is political and philosophical — some folks are opposed to the FHA for the very simple reason that it’s a government mortgage insurance program which competes with mortgage insurance companies in the private sector. This is the moment when you hear talk, oh my, regarding socialism when the more important issue is that the FHA program has helped insure some 34 million loans since 1934.

Subprime Loans

Subprime real estate lending is generally defined as mortgages for individuals with weak credit. If we think of real estate loans in terms of prime financing for those with great credit and ALT-A financing for those with lesser credit or who want to borrow more than prime programs generally allow, then subprime loans are for folks with credit so weak that they cannot get either prime or ALT-A mortgages.

To make up for their poor credit standing, subprime borrowers pay higher interest rates. The irony, of course, is that the people who can least-afford big monthly expenses are the very people most likely to pay such high costs.

One idea is to make NO loans available for subprime borrowers, thus solving the problem of undue lender risk. However, if we have no subprime borrowers we also have fewer home sales. Less demand equals lower home prices, something very few owners favor….

We ought to have subprime loans because over time people can improve their credit standing. That means there is the potential to refinance from subprime into something better, say an Alt-A or even a prime loan.

No Credit Score

FHA loans are different than subprime loans. In basic terms, to get an FHA loan you must have verified employment, income, and assets. Savings are great. You must be able to show that you can pay your mortgage and that you’re financially responsible. As the FHA explains:

“Generally,” says HUD, “to be eligible for an FHA loan, you must have a valid social security number and have lawful residency in the United States and be of a legal age to sign on a mortgage in your state. Lenders will verify income, assets, liabilities, and credit history for all parties on the loan. With an FHA loan, you cannot take an ownership interest in a property without qualifying for the loan. FHA’s mortgage programs do not typically have maximum income limits for qualifying, although you must have sufficient income to qualify for the mortgage payment and other debts. Income limits may be present when qualifying for down payment assistance or other secondary financing programs (including those funded by HUD) that may be used in conjunction with an FHA loan. FHA does not have minimum credit score requirements, although past credit performance serves as the most useful guide in determining a borrower’s attitude toward credit obligations and predicting a borrower’s future actions.”

Once you qualify for an FHA-insured loan you’re getting a better loan product than the typical subprime or ALT-A mortgage. With the FHA there’s no prepayment penalty allowed and no surprise interest-rate hike. Interest rates are generally much lower. You’ll need 3.5 percent down from your own pocket or in the form of a gift and you’ll also need closing costs, but these are reasonable hurdles.

It’s true that the FHA reserve fund has fallen in the face of larger claims, but it’s also true that the FHA has given away billions of dollars to the Treasury Department, money that comes from borrower insurance premiums. If anyone believes that the reserve fund should be enlarged then surely they must also believe that the FHA should not be forced to give away premium dollars.

Money from FHA borrowers is paid for upfront and ongoing insurance premiums. The money collected is held in reserve to pay off claims against the program. For loans originated before December 8, 2004 any excess premium money was returned to borrowers in the form of a rebate once the mortgage was paid off. In other words, the program was a mutual insurance plan.

Bilions Lost

Money which could have been keep by the FHA to bulk up the reserve fund, or money which could have been repaid to borrowers, has instead been sent to the Treasury Department. Why add FHA money to the Treasury? Because that’s one way to hold down debt without a general tax increase. The insurance money paid to the Treasury Department is effectively a tax on FHA borrowers.

So how much has been paid to the Treasury Department? HUD tells me that the total is in excess of $14.4 billion since 2001.

Now the folks at the Mortgage Bankers Association have seen the light and are asking that the FHA be allowed to keep borrower funds. David G. Kittle, Chairman of the Mortgage Bankers Association, told Congress last week that “we need to give FHA the resources it needs to operate in an increasingly nimble and high-tech real estate finance industry. FHA’s market share has risen from 3 to 30 percent virtually overnight, but it’s still hampered by outdated technology and its staff is stretched thin. The result is a diminished ability to detect and root out fraud, remove bad actors from the program, approve new lenders, and process mortgages.

“The solution is fairly straight-forward,” said Kittle. ” Under HERA, Congress has already authorized $25 million per year for staffing and technology upgrades. Now we need to work together to make sure this funding is appropriated. MBA also supports putting FHA on a level playing field with other financial regulators, so it can recruit better talent. And FHA should be able to keep some of the premiums it collects, so it doesn’t have to come begging for funding.”

Return Borrower Money

Not only should the FHA be allowed to keep the premiums it collects when they’re necessary for the system to work, but when the system produces excess money — what private-sector companies would call a profit — those savings should be returned to its rightful owners, FHA borrowers.

If you would dearly like such an arrangement to be widely available, that just isn’t the case today and won’t be the case tomorrow.

To understand why, you have to look at several realities.

First, the FHA is insistent that homebuyers purchase with 3.5 percent down, money which must come from either their own pocket or in the form of a gift.

Second, you can only use the tax credit for a downpayment when the money is advanced to you by a state housing agency or an approved nonprofit. Otherwise the tax credit will go into your bank account sometime after your purchase.

So to buy with FHA financing and no money down several things have to happen. You have to be able to get a “bridge” loan from an approved third-party — that state housing agency or approved nonprofit — AND you can’t borrow more than $228,571.42.

10 States

As this is written we have 50 states and 40 of them have not jumped forward to offer bridge financing. The ten states which have said their financing agencies will provide bridge loans for first-time buyers who use FHA financing include Colorado, Delaware, Idaho, Kentucky, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania and Tennessee. For specifics, speak with lenders.

Okay, so why haven’t more states offered to help purchasers? Let’s logic this out: To provide a bridge loan a lender first has to have money. What is it that state housing agencies sorely lack? You guessed it, extra cash that can be advanced to lucky borrowers. The same is true for nonprofits, organizations not noted for a surplus of capital.

Cash & Risk

As to the loan limitation — that $228,571.42 — it’s easy to figure out — 3.5 percent of that amount is $8,000. In no case is the tax credit more than $8,000 so can’t get a deal with no money down if you need a bigger loan. In most jurisdictions you can’t get FHA financing in any event because state agencies will not provide the cash.

Despite the hoopla and hurrahs from the housing industry, I’m not sure that FHA loans with no money down are a good idea. Less down equals more risk, something the mortgage industry has discovered during the past few years. More risk also means more claims against the FHA reserve fund, something it doesn’t need. Lastly, is a little down too much to ask? Isn’t it just prudent to require borrowers to have something in the game other than the lender’s money and the FHA insurance? Especially today when interest rates for mortgage loans are at the low end of the scale?

The Securities and Exchange Commission alleges that Mozilo and two other former executives had engaged in “securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.”

The SEC also alleges that “Mozilo along with former chief operating officer and president David Sambol and former chief financial officer Eric Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors.”

Mozilo Emails

The SEC has posted some emails sent by Mozilo. In one 2006 email regarding subprime 80/20 loans, Mozilo writes that “In all my years in the business I have never seen a more toxic prduct [sic]. It’s not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400[.] With real estate values coming down…the product will become increasingly worse.”

In another 2006 email, Mozilo said regarding option ARMs that “we have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet. The only history we can look to is that of World Savings however their portfolio was fundamentally different than ours in that their focus was equity and our focus is fico. In my judgement [sic], as a long time lender, I would always trade off fico for equity. The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.”

FHA Market Share Falls

Meanwhile, back in Washington, the FHA was getting clobbered in the marketplace. The use of FHA loans fell to less than 2 percent of all mortgage originations in 2006.

How could plain-vanilla FHA mortgages possibly compete with the private-sector loans being offered with no money down, no income check, no savings and no worries about credit scores? The reality is that they couldn’t.

I have no idea whether the allegations against Mozilo are true or not, that’s for a court to decide. But I do know this: The mortgages championed by Countrywide were indefensible from day one. They were lousy loans in concept, loans made worse when minimal guidelines were not followed.

FHA loans could not compete with private-sector lenders for the very simple reason that in too many cases private-sector lenders were offering loans to people who could not pay and with terms that could not be met. Meanwhile, the FHA was insuring mortgages with sane terms for borrowers who had to document their finances. The idea of “paperwork” became an issue when the real concern has always been the threat of foreclosure, the loss of a home and terrible hardship. The FHA was right to maintain its standards, that’s how you protect both the public and your program.

On May 11th HUD posted an official notice for lenders saying that first-time borrowers could apply their $8,000 tax credit toward downpayments. This sounds good at first, but if you look closely at the policy it raises some complex questions.

HUD posted the May 11th notice and then withdrew it. However, everything online remains online eternally, so you can readily read what HUD had to say in Mortgage Letter 2009-15 because it’s been re-posted on a non-HUD site.

Given the current surplus of homes for sale — especially in California, Arizona, Nevada and Florida — any effort which is likely to reduce our bloated housing inventories should be welcomed. But while the thinking here is good, the complications are considerable.

New Policy

Now HUD is back with a revamped tax credit policy and a new 2009-15 mortgagee letter. What the policy says is very different from the original announcement. As HUD explains:

____”Today’s announcement details FHA’s rules allowing state Housing Finance Agencies and certain non-profits to ‘monetize” up to the full amount of the tax credit (depending on the amount of the mortgage) so that borrowers can immediately apply the funds toward their down payments.”

That sure sounds like you can use the $8,000 tax credit toward a downpayment. However, the very same release also says:

___”Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today’s announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate.”

Translation: You still need 3.5 percent down from savings or from a gift if your financing comes from a commercial lender, but if the financing comes from a state housing agency or a non-profit then you can apply the tax credit toward a downpayment.

I have great sympathy for what HUD. They get big credit for trying to help home sellers by making the loan process for buyers more attractive. There is an essential decency to this effort. That said, the idea of purchasers buying with no money down is a part of what got us into the mortgage meltdown in the first place — and that’s not comforting.

For specifics, please speak with lenders and state housing organizations.

The complete news release is below:

DONOVAN ANNOUNCES RECOVERY ACT’S HOMEBUYER TAX CREDIT CAN IMMEDIATELY HELP THOUSANDS OF FIRST-TIME HOMEBUYERS TO BUY A HOME

FHA plan will stimulate new home sales and help stabilize housing market.

WASHINGTON - Speaking to the National Association of Home Builders Spring Board of Directors Meeting, U.S. Housing and Urban Development Secretary Shaun Donovan today announced that the Federal Housing Administration (FHA) will allow homebuyers to apply the Obama Administration’s new $8,000 first-time homebuyer tax credit toward the purchase costs of a FHA-insured home. Donovan said that today’s action will help stabilize the nation’s housing market by stimulating home sales across the country.

The American Recovery and Reinvestment Act of 2009 offers homebuyers a tax credit of up to $8,000 for purchasing their first home. Families can only access this credit after filing their tax returns with the IRS. Today’s announcement details FHA’s rules allowing state Housing Finance Agencies and certain non-profits to ‘monetize” up to the full amount of the tax credit (depending on the amount of the mortgage) so that borrowers can immediately apply the funds toward their down payments. Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate. To read the FHA’s new mortgagee letter, visit HUD’s website.

“We believe this is a real win for everyone,” said Donovan. “Today, the Obama Administration is taking another important step toward accelerating the recovery of the nation’s housing market. Families will now be able to apply their anticipated tax credit toward their home purchase right away. At the same time we are putting safeguards in place to ensure that consumers will be protected from unscrupulous lenders. What we’re doing today will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing.”

Currently, borrowers applying for an FHA-insured mortgage are required to make a minimum 3.5 percent downpayment on the purchase of their home. Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today’s announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate. Buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their downpayments via secondary financing provided by the HFA or non-profit. In addition to the borrower’s own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the downpayment. Today’s action permits the first-time homebuyer’s anticipated tax credit under the Recovery Act to be applied toward the family’s home purchase right away. Unlike seller-funded down-payment assistance, which was a vehicle for abuse, this program will allow homebuyers to shop for the best home price and services using their anticipated tax credit.

According to estimates by the National Association of Home Builders, the Administration’s homebuyer tax credit will stimulate 160,000 home sales across the nation - 101,000 of which will be first-time buyers who will receive the credit. Another 59,000 existing homeowners will be able to buy another home because a first-time buyer purchased their home. Given FHA’s current market share, it’s estimated that thousands of families will be able to purchase a home by allowing the anticipated tax credit to be applied toward their purchase together with an FHA-insured mortgage.

Homebuyers should beware of mortgage scams and carefully compare benefits and costs when seeking out tax credit monetization services. Programs will vary from organization to organization and borrowers should consider whether the services make sense for them, as well as what company offers the most suitable and affordable option.

For every FHA borrower who is assisted through the tax credit program, FHA will collect the name and employer identification number of the organization providing the service as well as associated fees and charges. FHA will use this information to track the business closely and will refer any questionable practices to the appropriate regulatory agencies, as necessary.

The original HOPE program was intended to help people facing foreclosure by refinancing homes with lower-cost loans. That’s sounds great, but to get such new
mortgages it was first necessary to have lenders accept a partial pay-off of their original loan, not much of an incentive.

Results

Figures from HUD now show that as of the end of April, 916 Hope for Homeowners applications had been received — but only one H4H loan had actually been approved.

The new program still requires big lender concessions, but not as big as the first version of the program. Here are some of the revisions according to the House Financial Services Committee.

__ Change the upfront fee from 3% to “up to 3%.” Translation: There could be no upfront FHA insurance fee if HUD elects instead of a flat 3 percent fee.

___ Change the annual fee from 1.5% to “up to 1.5%.” Ditto. The annual insurance premium could be reduced to zero if that what HUD wants chooses.

___ Change the provision for HUD to receive 50% of appreciation profit sharing to authorize “up to 50%” of such profit sharing; allow HUD to share this with the existing first or subordinate lienholders to induce loan writedowns; cap profit sharing at up to the appraised value of the property when the existing loan was made. Translation: The original program had an equity sharing provision which would have allowed the FHA to share in any profits from the sale of the property.

As was explained last October, “if the home is sold or refinanced, the homeowner will share the equity with FHA on a sliding scale ranging from a 100 percent FHA share after the first year to a minimum of 50 percent after five years. The lien holder that previously held the highest priority will receive payment up to a proportion of its original interest, not to exceed the amount of available appreciation. This type of delayed payoff will take place until all prior lien holders are satisfied or the amount of available appreciation is exhausted. All remaining appreciation is remitted to FHA.”

Translation: Yes, lenders will still have to effectively short-sell their mortgage to refinance and probably get less interest with any replacement loan (because rates have fallen), but they are now likely to get a share of the equity appreciation, if any.

____ Permit payments to servicers of existing mortgage loans on the property and to underwriters of the new FHA loan for each successful refinance. Translation: We’ll give servicers money for each home they get into the program.

___ Prevent borrowers with a net worth of more than $1 million from participating in the program.

HUD tried to stop the practice with a new rule banned the “required use” of the builder’s mortgage lender, was promptly sued by the home building industry and has now withdrawn its proposal altogether, meaning that new home buyers will continue to have the opportunity to pay more than they should for real estate financing.

It may seem improbable, but the HUD notice in the Federal Register is fascinating reading. For instance, it says that:

“It is HUD’s view that, especially given the attention focused on HUD’s concerns through this rulemaking, the prior definition of ‘‘required use’’ can be used to address some deceptive referral arrangements, even though it does not achieve the enhanced consumer protections that HUD sought with
respect to mortgages involving affiliated business arrangements. HUD will
continue to seek consumer protections, especially as mortgage products
continue to change, often becoming more complex and challenging buyers’
understanding of the costs and nature of mortgage transactions. HUD is not
abandoning its goal of providing greater protections to consumers in real estate settlement transactions, but remains open to different means of achieving this goal.”

HUD also says that it “reiterates its commitment to fair real estate settlement practices that are not misleading, prevent abuse, offer proper disclosures to homebuyers, and promote choice and competition. HUD’s
intent in revising the definition of “required use” was to clarify its
interpretation of RESPA’s requirements with respect to transactions involving affiliated businesses in order to promote more competition among settlement service providers. After further evaluation and consideration of the concerns voiced by consumers and industry participants from various fields about the application of the revised definition of “required use,” HUD has concluded that all would benefit by HUD withdrawing the revised definition and addressing “required use” through new rulemaking.”

Disappointment

You might have thought with a new Administration that the deal would change and that borrowers would get a fairer shot in the marketplace, but not so. HUD bought such arguments as the idea that “builder affiliated lender model has efficiencies which are passed on to consumers” and that builder-affiliated companies “help prevent mortgage fraud.”

Right.

As yourself a question: How often do you think a builder’s lender says “no” to a builder’s client?

If builders only served-up FHA loans with full appraisals, fair terms and fully-documented loans the matter would be less serious. Let’s have a survey and see how many recent new home buyers are in trouble — and where they got their loans.

HUD is right. New rulemaking is needed. Real rulemaking that protects the public.

The plan was launched last October with high hopes but little sense. The idea was to refinance troubled mortgages with FHA loans, but to participate borrowers had to obtain huge and costly concessions from lenders. Lenders, as you might guess, were not thrilled with the idea and the result was a virtual nationwide boycott of the program. HUD reports that as of April 15th it has received 888 H4H applications — and approved just one.

The Hope for Homeowners concept was hobbled from day one because Congress could not craft a program which was satisfying to the banking industry — you remember, the very same folks who got us into this mess in the first place. Indeed, President Bush threatened to veto any plan with the possibility of value. The result is now a program with $300 billion in funding that has largely been un-spent.

Your Government At Work

I say the money was largely unspent because, in fact, HUD under the last Administration managed to gnaw through $29.5 million to administer the Hope for Homeowners program. Yup, that’s right, that’s $29.5 million in costs per refinancing approval under the program.

In contrast we now have some real numbers and real results from a program that shows some signs of life: Ocwen Financial Corporation reports that it “completed 20,651 loan modifications despite a slowdown in late March as additional details and specific guidance related to the Home Affordable Modification Plan (HMP) emerged.” This is the program funded with $75 billion under the Obama Administration.

Ocwen, of course, is just one lender. There are huge numbers of lenders nationwide participating under the Home Affordable Modification Plan. It would be great to get some total numbers for the program.

Savings

The good news, of course, is that if we’re not going to spend $300 billion on the Hope for Homeowners plan then we may as well do something useful with the money. We could restore the FHA reserve fund by replacing money taken from it and delivered to the Treasury during the past eight years — that’s about $14 billion plus interest. We could lower FHA mortgage insurance premiums to make the program more attractive and affordable. We could expand the FHA program to bring back downpayment assistance plans. We could again make the FHA plan into a mutual insurance program as it was between 1930s and 2004. As a mutual insurance program unused premiums were refunded to borrowers and not just given to the Treasury Department.

The end result is that of the $300 billion we might want to use $25 billion for the FHA. The remaining $275 billion in savings could be used by the government to reduce its debt, to audit every “nontraditional” loan that has been foreclosed during the past three years and every foreclosed loan that relied on a stated-income loan application.

Finally, the people would get something for their money.