In case you’re worried about FHA mortgage lenders being somehow unable to meet the new RESPA requirements, HUD notes that the new rules actually “became effective on January 16, 2009, but provided a one-year transition period for the mortgage industry to incorporate these changes.”

In other words, lenders had a year to plan for the transition to a new Good Faith Estimate form and the equally new HUD-1 closing form.

In fact, lenders have far more than a year to modernize. HUD has been working on the new forms for 14 years — no kidding — and the lending industry has been part of the process at every turn. The last, and final opportunity, to delay the reforms took place this year when the lending industry went to court to try and block the new HUD paperwork. The industry lost and now HUD has rewarded their efforts by stalling the process with a four-month delay.

$700 Savings

Now you may wonder, why on earth do I care? The answer is that HUD says borrowers can save an average of $700 on closing expenses with the new forms. However, if the changes are not enforced — and “restraint” is not the same as “enforcement” — then a lot of people will not be saving $700.

At a time when the nation has an unemployment rate of 10.2 percent, there is surely no shortage of computer programmers and other professionals who can take simple forms and automate them. Indeed, if lenders have no one in-house to do such work, then one might simply want to spend $129 to buy the HUD-1 software plus $99 for the Good Faith Estimate package.

It can’t be that hard to find this stuff. With a 60-second search online (”new hud-1″) I was able to instantly locate a number of vendors. Indeed, it may well be that even cheaper packages are available somewhere.

The bottom line is this: In a period of four months there may well be 1.2 million existing home settlements as well as additional closings for new homes and when properties are refinanced. That means large numbers of people potentially face substantially higher settlement costs because, allegedly, lenders cannot gear up for the minimal changes that they have known about for at least a year.

Let’s see: $700 x 1.2 million = $840,000,000 in potential extra charges for existing home sales alone. Not a bad day’s work for Washington lobbyists.

FHA Market Share Growth May Re-pad Dwindling Reserves

As sub-prime lenders fell by the wayside, homebuyers of modest means turned to FHA loans, which are currently the premier source of home financing for those who can’t pay 10 to 20 percent down plus closing costs for buying a home. Low mortgage rates are enabling more moderate income buyers to qualify for home loans, and these buyers are turning to FHA. The agency insured approximately $360 billion in mortgage loans during fiscal 2009, about five times more than it insured during fiscal 2005. The burgeoning numbers of new FHA home loans,and consequently, the increase in FHA mortgage insurance premiums collected from homeowners, should help rebuild depleted reserves. The question is, how can FHA meet its mission of providing accessibility to home ownership to those who cannot qualify for conventional mortgage loans without losing it all by making risky loans?

FHA Loan Requirements: Time to Reconsider?

The current problems facing the FHA stem from risky loans made under FHA loan requirements that provided home loans to large numbers of homeowners who defaulted on their loans. Whether these borrowers fell behind on payments because they couldn’t afford it at all, or defaulted due to harsh economic conditions is unknown. FHA loan requirements may be too lenient, but what happens to housing markets if FHA guidelines are rewritten to exclude large numbers of home buyers? On the other hand, the US government cannot continue to supply bailouts to dysfunctional private and public entities that can’t survive without billion$ in bailouts.

FHA: Balancing Homebuyer Needs with Responsible Lending

If FHA needs a bailout, it’s reasonable for Congress to attach mandates for review and revision of FHA loan requirements. The elephant in the room remains; with unemployment levels at 10.2 percent and expected to grow, many more FHA insured loans may fail as borrowers lose their jobs and/or exhaust their resources paying for homes they can neither afford nor sell in today’s depressed markets. FHA’s long term solvency could largely depend on the success of government sponsored modification and refinance programs designed to prevent foreclosure, but these programs won’t help those who cannot meet income requirements. Until the US job market improves, FHA will likely continue to absorb mortgage loan losses caused by foreclosure.

However, it appears that many headlines do not reflect what HUD actually had to say about the program. Yes, the capital reserve has fallen to $3.6 billion — BUT there are additional reserves. As HUD explains:

“FHA’s capital reserve ratio, which is determined through findings from the independent actuarial study, measures reserves held in excess of those needed to cover projected losses over the next 30 years.  The review projects the capital reserve ratio to be 0.53 percent of total insurance in force this year, below the two-percent statutory threshold.  This capital ratio fell from 3 percent in the fall of 2008, reflecting difficult conditions in the housing market. The 0.53 percent capital ratio (which represents the funds held in the Capital Reserve Account) is in addition to the auditor’s base case estimate of the 30-year reserves needed to pay for losses on existing loans (which are held in the Financing Account).  Combining those two accounts, FHA holds $31 billion in its total reserves today, or more than 4.5 percent of total insurance-in-force.”

In other words, no bailout is required.

Industrywide

The situation with the FHA is hardly unique — the private mortgage insurance industry lost $5.8 billion in 2008 and the figures for 2009 also look glum.

“After a record drop in the housing market,” says HUD, “the FHA is now helping to facilitate the market’s recovery.  The volume of FHA insurance guarantees has increased since 2008, as private sources of mortgage finance have retreated from the market.  Nearly 80 percent of FHA’s purchase-loan borrowers in 2009 were first-time homebuyers.  In the second quarter of 2009, nearly 50 percent of all first-time buyers in the entire housing market used FHA-insured loans.  The new lending is being done as FHA has halted the seller-financed down payment assistance program, tightened underwriting standards on streamline refinances, increased oversight of lenders, and is considering additional prudent measures. The quality of new loans insured by FHA has improved on several metrics including average borrower credit score; the average borrower FICO score today is 693 compared to 633 two years ago. Additionally, FHA insured more than 835,000 refinances in FY 2009 to lower interest rate loans, enabling borrowers to save an estimated total annual savings of $1.3 billion.”

Savings

To understand why some in the financial community are so opposed to the FHA notice the last sentence: the “FHA insured more than 835,000 refinances in FY 2009 to lower interest rate loans, enabling borrowers to save an estimated total annual savings of $1.3 billion.”

Can you imagine how many loans would not be refinanced if the FHA did not exist? Can you imagine how many of those new private-sector loans would have had prepayment penalties and other costly gimmicks?

FHA Loans Provide Funding for Moderate Income Buyers

The loss of FHA home loans could spell disaster for moderate income homebuyers who cannot qualify for home loans under stringent conventional mortgage lending requirements. Buyers with steady jobs, documented income, and acceptable credit are often roadblocked by required down payments of 10 to 20 percent of home value. Although home values have fallen sharply in some areas, finding several thousand dollars for a down payment and closing cost can be the line between buying a home and remaining renters.

Low Interest Rates, Lower Home Prices, and FHA Loans: Combination for Opportunity

Moderate income home shoppers continue to enjoy the combined positive effects of low interest rates, lower home prices (although there are signs of change), and flexible FHA guidelines for loan approval. In years past, mid six figure home prices, higher rates, and a variety of sub prime loan products led many homebuyers straight into the nightmare of foreclosure.

Extension of Tax Credit and FHA Home Loans: More Benefits for Buyers

In a move intended to bolster the US housing market, Congress extended the federal tax credit for first time homebuyers, and also expanded eligibility to some current and former homeowners. Buyers who are prepared to qualify for FHA loans may gain the benefits the unprecedented intersection of favorable home prices, interest rates, comparatively lenient FHA guidelines, and a tax credit of up to $8000 for first time buyers or $6500 for eligible current and former homeowners.

Congressional Balancing Act: Reconciling FHA Financial Worries with Housing Market Needs

If Congress acts to limit FHA home loans, housing markets would likely suffer another set back. FHA loans now account for about 25 percent of the market share. If borrowers eligible for FHA loans, but not able to qualify for conventional mortgage loans are denied financing, the pool of qualified buyers will shrink. A detailed analysis of foreclosed FHA loans may yield sufficient information to revise FHA home loan programs to better protect reserves and reduce the need for a public bailout for the FHA.

“The percent of American single-family homes with mortgages in negative equity(1) fell to 21 percent in the third quarter, down from 23 percent in the second, as home values stabilized in the short term and more underwater homeowners lost their homes to foreclosure, according to the third quarter Zillow Real Estate Market Reports.

The idea is not so much that home prices are rising but rather than declines are becoming less severe.

“Year-over-year home values in the United States declined for the 11th consecutive quarter, falling 6.9 percent to a Zillow Home Value Index of $190,400,” says the company. “However, the rate of year-over-year decline shrank for the third quarter in a row, meaning home values did not decline as dramatically year-over-year in the third quarter as they did in the second or the first.”

In addition to Zillow, the S&P/Case-Shiller report reaches the same conclusion:

Data through August 2009, says S&P/Case-Shiller, shows that “approximately seven months of improved readings in these statistics, beginning in early 2009.”

“While many of the markets remain down versus this time last year, the relative rate of decline has shown some real improvement,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “California, in particular, has seen some real positive prints in recent months. We see this general trend whether you look at the as-reported data or the seasonally adjusted figures.”

Looking Ahead

It’s not possible — or wise — to suggest that our long national real estate nightmare is coming to an end, but before you can have rising prices you first have to stop declining values.

For FHA mortgage borrowers — and for the FHA itself — the idea of marketplace stabilization is enormously important.

The one sure way to get buyers back into the marketplace is to have rising prices. Everyone likes a winner and no one likes to be left behind or left out. In other words, there’s a marketplace psychology at work when prices rise or fall.

For the FHA, more equity translates into lower claims against its reserves. Foreclosure is not actually a problem for insurance programs IF the value of the property is larger than the outstanding mortgage balance and foreclosure costs. Thus, for the FHA, the more equity the better.

Looking toward the future, we don’t know if today’s relatively good news will continue. The rising rate of unemployment is worrisome and destabilizing — people without incomes cannot buy homes nor long maintain their mortgage payments. The direct result of higher unemployment levels is a larger number of foreclosures — and big foreclosure inventories push down local home values.

Still — under the theory that any port in a storm is good news — we now have some positive data. It’s not much, but it’s better than the alternative.

Tax Credit Eligibility Requirements Expanded

• Buyers who have owned a home for five of the past eight years are eligible.
• Single buyers may have gross annual income up to $125,000, while married couples may have gross annual income of up to $225,000.
• First time buyers (defined as anyone who has not owned a home within the preceding three years) are eligible for the full tax credit of $8000 while former or existing homeowners qualify for a credit of $6500.

New Tax Credit Qualification Deadlines

Under the new tax deadline, you must sign a purchase contract no later than April 30, 2010, and close no later than June 30, 2010.

No or Low Down Payment? FHA Qualification Requirements May Help

• If you don’t have enough cash to come up with 10% or 20% down, an FHA loan may help. FHA assists in facilitating home ownership by providing loans with low down payment requirements, and allows of as little as 3.5%.
• Source of down payment may include family, friends, employer, charitable organization, or government agency
• FHA Financing offers more lenient credit qualifying requirements than conventional mortgages.
• Closing costs:, FHA loans offer choices for paying closing costs. You can roll many closing costs into your mortgage amount, or have the lender absorb your closing costs in exchange for a higher interest rate. Of course, you may also pay closing costs up front.

FHA Mortgage Insurance

FHA insures mortgage lenders against losses caused by defaults. Borrowers are required to pay for FHA mortgage insurance in two segments: You pay an up-front mortgage insurance premium (UFMIP) at closing. In most cases, borrowers choose to roll the UFMIP into their mortgage amount. You also have to pay annual mortgage insurance premiums that are typically pro-rated on a monthly basis and added to your monthly mortgage payments along with amounts for paying property taxes and hazard insurance. Your FHA-approved lender can explain these costs when going over the “Good Faith Estimate” of loan charges, fees, and costs. If you’re buying your first home, it’s important to budget for the additional costs of owning a home.

Contact an FHA-approved lender to learn more about how combining the benefits of the tax credit with FHA financing can help make owning a home an affordable reality.

When last we left off with the first-time homebuyer tax credit, first-time purchasers could get as much as $8,000 in yummy tax reductions if only they would please, please buy a home and buy one before December 1st. Most importantly, buyers in 15 states could — in some cases — actually borrow with an FHA mortgage and buy with nothing down.

With December 1st soon upon us, the government responded in two ways — it extended the deadline until April 30th AND it improved the benefit. What is did not do was increase the first-time write off to $15,000 from $8,000 as some in the real estate industry wanted.

Okay, so what’s really new here?

Current Buyers

The first-time homebuyer credit is no longer just for first-time homebuyers — think of the term “mission creep.” The program has been expanded to include many current homeowners as well.

The deal for current homeowners works this way: If you have owned a home for five consecutive years out of the last eight and purchase a new principal residence between November 7, 2009 and April 30, 2010, you can get a tax credit of up to $6,500

Income

One of the qualification factors under the 2009 credit was that you could not have an income of more than $75,000 if single or $150,000 if married. The new rule increases the income limits to $125,000 for singles and $225,000 for joint filers to get the full write-off. (You can get some credit — but not the entire credit — with an income of as much $145,000 if single and $245,000 for couples. Above that, nothing.)

In essence, what this does is to open the program to buyers who are looking for more expensive homes and will max out the tax credit. However, the value of the property cannot exceed $800,000.

When

To qualify for the new first-time credit you must purchase between November 7, 2009 and April 30, 2010. However, by “purchase” the government means having a signed contract in hand — you can actually close as late as July 1st, 2010. If you have any concerns regarding deadlines, check with your broker and the IRS.

Which Homes?

Basically the new credit applies to just about any prime residence — think of single-family homes, condos, townhouses, and co-ops. Be sure to first check with the IRS if you plan to claim something unusual as a first-time home — a boat, a trailer on wheels, etc.

How Long?

As before you have to keep the property for at least three years — otherwise you may have to give back the credit money to Uncle Sam.

A lot of people have looked at the first-time homebuyer credit program and discovered that they do not qualify — after buying a home! Be sure to get a copy of IRS Form 5405 and check out related information on the IRS site before considering the credit.

Because the legislation only extends the benefit until April 30th, look for another piece of legislation next year to extend the credit for additional time.

Revising Revisions: Changes Delayed as FHA Reconsiders Condo Guidelines

Highlights of the original proposal include:

• No more than 30% 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%. Condo developments consisting of 3 or fewer units would only be permitted one unit insured by an FHA mortgage or FHA 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 re-certified every two years. In its announcement of the delay of changes to its requirements for insuring mortgages 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 prevent delays in approving FHA mortgages in condominium developments due for re-certification.

Loosening these guidelines could be good news for those seeking an FHA mortgage or refinance on a condominium unit, as delays can cause problems for homeowners, buyers, and sellers, particularly if mortgage rates rise while borrowers await purchase 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 mortgages under FHA qualification requirements. Any significant restrictions placed on approving FHA home loans secured by condominium units could place additional hardship on first-time buyers. FHA mortgages 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 smaller homes 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.