Federal Housing Administration (FHA) should be announcing a tightening in credit standards this week. How will this affect the housing market?

FHA Director David Stevens says, “”Overcorrecting in either direction would be a terrible thing to do right now.”

Yet, it seems that Congress is pressuring him to tighten the easy money standards–standards that once gave home buyers the opportunity to get a home, when there would have been little-to-no-chance of doing so. Even though creating harder credit standards are going to threaten the agencies finances.

The FHA stands behind about half of every new home loans, but if the FHA is forced to raise the bar, the economy might become further endangered (as if it isn’t in enough trouble)!

Stevens is making some alterations to the credit standards for potential buyers which might consist of the following:

* Raising the minimum down payment
* Setting a minimum credit score
* Raising the minimum that borrowers have to pay for mortgage insurance
* Reduce the amount a seller can kick in for covering closing costs

Interestingly, the FHA was created to help mend the housing market in 1934 after The Great Depression, and this has been a great program to help first-time home buyers. Until now, this program has been yielding a profit for taxpayers.

David Stevens bought his first home almost 25 years ago, paying just 3% down with a loan backed by the Federal Housing Administration. “I had no money in the bank,” he says. “If it weren’t for the FHA, I wouldn’t have gotten that home.”

Now, as FHA commissioner, Mr. Stevens has to decide how many others to let through that door. Souring FHA-insured mortgages are threatening the agency’s finances. Congress is pressuring him to tighten the easy-money standards that once helped people like him, and he is expected to announce revisions as early as this week.
[FHAJmpPic] Bloomberg News

FHA chief David Stevens is likely to announce tightened credit standards as early as this week.

But raising the credit bar could have a dangerous side effect. In many of the nation’s hardest-hit housing markets, the FHA backs around half of all new home loans. If the agency pulls back too quickly, the nascent housing recovery could fizzle, endangering the economy.

The dilemma puts the 52-year-old former mortgage banker squarely in the middle of the debate over how much the government should do to prop up the housing market, and how much risk taxpayers should take on to do it.

“How big a role do we need to play to keep the housing system functioning?” says Mr. Stevens, referring to the FHA. “Overcorrecting in either direction would be a terrible thing to do right now.”

Mr. Stevens is finalizing possible revisions to credit standards. Options include raising the minimum down payment, establishing a minimum credit score, increasing the amount that borrowers have to pay for mortgage insurance, and reducing the amount of money sellers can kick in for closing costs.

The FHA, created in 1934 to heal the U.S. housing market during the Great Depression, traditionally has helped first-time home buyers and underserved segments of the market. It doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria, collecting fees for that backing. For decades, thanks to a stable housing market, it turned a profit for taxpayers.
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When the housing market was booming, subprime lenders drew away many of the borrowers who traditionally used FHA-backed loans by offering even more favorable terms. Unlike the FHA, subprime lenders didn’t require borrowers to document their incomes. The FHA saw its share of the mortgage market fall to 2% in 2006.

But when the subprime market collapsed, mortgage brokers began steering borrowers into FHA-backed loans. Politicians and policy makers encouraged the FHA to refinance at-risk borrowers into fixed-rate loans. Suddenly, the FHA had an enormous chunk of the market. Average credit scores of FHA borrowers dropped sharply at first. In last year’s third quarter, the FHA insured 25% of mortgages, according to Inside Mortgage Finance, a trade publication.

“We should not play this large a role,” Mr. Stevens says. “It’s not healthy for the mortgage-finance system, it’s not healthy for the economy, and it’s certainly not sustainable for the long term.”

The FHA, which is part of the Department of Housing and Urban Development, isn’t as nimble as private mortgage insurers. It must get approval from Congress for some major decisions. “They don’t have the horsepower that they should, especially given the size of their operations,” says Ann Schnare, a mortgage-industry consultant.

In testimony before Congress last month, HUD Secretary Shaun Donovan acknowledged that the FHA “we inherited” was “not properly managing or monitoring its risk. Credit and risk controls were antiquated. Enforcement was weak. And our personnel resources and IT systems were inadequate.”

Mr. Stevens knows the industry well. He is the first FHA commissioner in nearly two decades to bring extensive private-sector experience to the job. During the 1980s, he was a top salesman of complex adjustable-rate mortgages for World Savings Bank, a California thrift. He went on to hold senior jobs at housing-finance giant Freddie Mac and at Wells Fargo & Co.
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In his off time, he plays guitar, rides his BMW motorcycle and skis the backcountry. On the job, he gets his way through sheer “force of personality,” says Eugene McQuade, once Mr. Stevens’s boss when they worked at Freddie and now chief executive of Citigroup Inc.’s Citibank unit.

When Mr. Stevens arrived in July 2009, the FHA didn’t have anyone in charge of monitoring risk, including whether certain loan products or lenders were exposing the agency to excessive losses.

In his second week on the job, Mr. Stevens suspended the FHA license for Taylor, Bean & Whitaker Mortgage Corp., one of the nation’s top lenders, amid concerns that the company was originating too many bad loans. Taylor Bean closed its doors the next day. In November, he hired the agency’s first chief risk officer and five Ph.D. economists to help evaluate risk. That same month, FHA cut off Lend America, another major lender, which also closed.

But there are still signs of trouble. At about 30 FHA-approved lenders with at least 1,000 loan originations, more than 12% of loans are in default two years after origination, nearly double the national average at the end of November. Last Tuesday, HUD’s inspector general served subpoenas on 15 of those lenders as part of an examination of the practices of lenders with high default rates.

The percentage of FHA-backed loans that defaulted after borrowers made just one payment—typically an indication of poor underwriting or fraud—has started to fall, but not as fast as needed to avoid future loan losses. FHA-insured mortgages made in 2007 and 2008 are largely responsible for the agency’s precarious position, with default rates approaching 24%.

FHA officials concede that the agency offers today’s easiest underwriting standards.

Mr. Stevens, nevertheless, lashes out at critics who say the FHA is repeating the mistakes of subprime lenders. At a conference in November, Robert Toll, chief executive of luxury-home builder Toll Brothers Inc., referred to the FHA as “the new subprime” and “a definite train wreck” that will soon need a bailout, according to a transcript of his remarks.

Mr. Stevens, in an interview, called the comparison “ludicrous,” and said Mr. Toll has “no clue” about the agency’s finances.

The agency is required by Congress to hold enough capital in reserve to cover 30 years of projected losses. An independent audit said reserves at the end of September exceeded projected losses by just $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio.

FHA officials say they have enough cash to cover the current level of losses, and that the agency risks running out of money only if home prices take another big dive. “We’ve learned from recent history that the market is fragile, and we have to plan for the unexpected,” Mr. Donovan, the HUD secretary, said last month.

But some analysts say the agency’s assumptions about home prices and foreclosures are too optimistic.

“FHA is, at best, running on empty, and probably is facing a negative capital situation,” Ms. Schnare, the industry consultant, told a congressional panel last month. If the agency were to run short of cash to cover projected losses, it likely would have to ask Congress for money for the first time ever.

The bad-loan problem stems, in part, from controversial programs that allowed home builders and other sellers to fund down payments for home buyers through nonprofit groups. After a lengthy effort, the FHA prevailed on Congress to shut the programs down in October 2008, but the damage already was done. The FHA’s independent audit concluded that were it not for such programs, the agency’s capital-reserve ratio would have stayed above the 2% mandated by law.

In another troubling practice, by late 2007, institutional investors were identifying at-risk mortgages in their portfolios and refinancing the borrowers into FHA-backed loans, thereby offloading their risk onto the agency. “It was an unintentional bailout of financial institutions,” says David Lykken, a partner at Mortgage Banking Solutions, an Austin, Texas, consulting firm.

One of the raft of measures Mr. Stevens is considering to protect and replenish the agency’s reserves is raising the minimum down payment. The current minimum of 3.5% is far lower than what private lenders offer, making FHA-backed loans one of the last low-down-payment options left. Last year, through August, nearly seven in eight new FHA-backed loans carried down payments of less than 5%.

Home builders are worried. “It would be a game changer for the industry” if down payments were raised, says Eric Lipar, chief executive of LGI Homes, a Texas-based builder of entry-level homes.

Not everyone believes that such low down payments are good. In markets where home values are still falling, buyers who put little money down could see their equity wiped out quickly. The FHA is “just manufacturing more upside-down homeowners by the truckload in Arizona, California, and Nevada,” says Brett Barry, a Phoenix real-estate agent who specializes in selling foreclosed homes.

If the agency were to raise down payments sharply in those markets, price declines would become a “self-fulfilling prophecy,” says Mr. Stevens. “If you stop lending, you’re going to perpetuate the declines.”

Mr. Stevens says first-time buyers are key to clearing inventory in markets such as Las Vegas. James Smith, a 42-year-old air-conditioning repairman, might not have been able to buy a $188,000 home out of foreclosure recently in Henderson, Nev., were it not for the low FHA down payments. To make the 3.5% payment, he used around $4,300 of his own money and borrowed the rest from this father-in-law.

“It was actually a great thing,” he says. He repaid his father-in-law after receiving an $8,000 tax credit for first-time home buyers. Mr. Smith, who earns around $50,000 annually, makes monthly payments of $1,466.

Mr. Stevens says he expects to get heat from industry and consumer groups no matter what he decides to do to tighten credit standards.

Even as the FHA considers how to scale back, some members of Congress are pushing it to expand its role. In 2008, in the midst of the credit crisis, Congress temporarily raised the maximum FHA loan from $362,790 to as high as $729,750 for the most expensive housing markets. Lawmakers have introduced a bill to make that increase permanent.

“A $500,000 loan in Massachusetts is like a $300,000 loan in Nebraska,” says Massachusetts Democratic Rep. Barney Frank, who favors raising limits to $800,000 in the most expensive markets. “All we’re trying to do is control for geography.”

Mr. Stevens argues the expanded limits should stay temporary, in keeping with the FHA’s traditional focus on first-time buyers.

The FHA says the loans it is guaranteeing these days will turn a profit because the credit profile of its borrowers has improved. The average credit score for FHA borrowers has risen to 681, from 630 two years ago. The median U.S. score is about 720. Much of the improvement came as the FHA’s lenders raised their own credit standards.

Mr. Stevens, for his part, is painfully aware of how far the housing market is from recovery. He listed his Northern Virginia home for sale last fall and already has slashed the asking price by $100,000, to $1.4 million. Before Christmas, he pulled the five-bedroom colonial off the market with plans to relist it later this year. He says he wants to live closer to Washington. “The commute is very hard,” he says, “and the hours are very long.”

Write to Nick Timiraos at nick.timiraos@wsj.com

The link below is a FAQ type document issued by HUD a few minutes ago. You may want to take a minute and read this. Nothing in it is earth shattering news but it attempts to explain HUDs position on recent changes.

http://portal.hud.gov/portal/page/portal/HUD/federal_housing_administration/docs/fromthe%20deskofJanuary.pdf

Starting January 1, 2010 HUD implemented a new RESPA rule to standardize the GFE and HUD-1 issued to borrowers for the purpose of a home loan.  Now unless you have been researching this information, are in the process of securing a home loan or work in the industry, that last sentence was most likely read like a law student’s text book and made absolutely no sense.  So, let’s break this down.

HUD stands for the department of Housing and Urban Development, and is the government agency that oversees the Federal Housing Administration (FHA).  The FHA is the specific department that insures home loans made by private lenders.  HUD passed some new regulations regarding how borrowers are informed of the details of mortgage loans back in November of 2008 and some of these changes are now being fully implemented.  (Some things take time.)  These rules are part of RESPA.  RESPA stands for Real Estate Settlement Procedures Act, and is a federal law that helps protect consumers from unfair practices during the home-buying and loan process. (We are not the only ones looking out for you.)

As part of this new regulation some significant changes have been implemented to two documents that are used within the mortgage process – specifically the Good Faith Estimate (GFE) and the Settlement Statement (HUD-1).  The GFE is a form that is issued at the start of the loan process.  It discloses to the borrower their estimated costs for fees related to obtaining the mortgage for their home that will be paid prior to or at the time of closing.  The HUD-1 is a final listing of the closing costs for the mortgage transaction.  It lists the sales price, loan amount, individual charges and total settlement costs related to the transaction for both the buyer and seller (or for just the single party in the case of a refinance).

There were two goals with this change: 

1. To standardize these two forms across all lenders to provide borrowers with an easier way of comparing loan offers.
2. To help borrowers determine that the loan they are getting at close is the same loan they were offered in the GFE. 

Every lender will now use the exact same form, with the exact same terminology and show, at close where and why any changes were made between the start of the loan process and the end.  This is a very good thing! 

A borrower can now compare a loan program from any number of lenders and intelligently compare fees, interest rates and programs in order to make an informed decision on what loan will be best for them.  At Awareness Home Funding, our goal has always been to educate our clients and to treat them fairly.  Now you have a way to prove to yourself that what we have been saying all along is true!  Check us out and compare our fees to anyone else.  We think you’ll be glad you did.

Monday, December 21, 2009

FHA

Kessler’s Take:

Today’s subprime loan. Q: What program allows borrower’s to have credit scores in the high 500’s and have less than 5% to put towards a transaction? A: A Federal Housing Administration loan. Uncle Sam did a great job of stepping up and filling a hole, but at what price?  While most banks have not allowed credit scores to be under 620 to obtain FHA financing, the fact that someone with almost nothing into the transaction who has less than stellar credit can take advantage of this program is scary.  Now this is not the wild west of a couple of years ago. There is nothing exotic about the loan nor will it allow an applicant to lie about his or her situation to qualify. Rather you have to over-document your application.

According to the National Association of Realtors most recent REALTORS® Confidence Index:

39 percent of recent buyers purchased a home with a Federal Housing Administration-insured loan. REALTORS® who took part in the November survey also reported that the number of first-time home buyers continued to climb to 51 percent.

“FHA helps provide affordable mortgage financing to home owners, particularly first-time home buyers who are so important in drawing down inventory to help stabilize the current housing market,” said NAR President Vicki Cox Golder. “These recent survey results reaffirm that, despite its current challenges, FHA is a critical part of the American housing fabric.”

Kessler’s Forecast:

It cannot stay as is. We have already seen most lender’s overlay the FHA guidelines and call for a minimum of a 620 middle fico score.  Over the coming months the minimum for the required down payment will change from 3.5% to 5%.  While this is not a major change it is something to keep an eye on.  FHA is going to take a major hit in its insurance fund over the next year.  The government requires FHA to have a 2% reserve of its portfolio and the reserve just is not there.  Guess who will be coming with a big sack of money for Christmas, it isn’t Santa rather our favorite uncle, Sam.

HVCC

Kessler’s Take:

The mere words HOME VALUATION CODE OF CONDUCT make me shutter.  What was intended to be the solution for all mortgage fraud continues to be a hindrance instead of a solution.  The brain child of NY Attorney General Ander Cuomo to rid the mortgage world of collusion and over valuing of properties has caused continued delays and costs to all borrowers applying for a conventional mortgage.  While the implementation of the system has gotten better since its start date of May 1^st 2009, it is still not the answer to the problem of mortgage fraud.  What it does enable is less then quality work by appraisers who are looking to get as much work as possible since their fees have been cut in almost half.

Kessler’s Forecast:

For a while there it looked like there might be an 18month moratorium on the HVCC because of the great lobbying efforts of the National Association of Realtors and other Real Estate industry groups.  Unfortunately that did not happen and we are stuck with what we have, but I do think as time goes on and banks and investors realize the shortfalls of the program they will issue updated guidelines to ease the problems.  For instance when the HVCC first came out an appraiser who covered one area might be assigned an appraisal 100 miles from where they called home, as time has passed the new rule is the appraiser must live within 30 miles of the property they are appraising.

Now I do not in any way condone the actions taken by Jack Geoghan, I definitely understand where he was coming from.  In times like these we need to find solutions not continue to add to the problem.  Mr. Cuomo should have stuck to doing what he knows best rather then meddling in something he knows very little about.

Death threats made against Cuomo

Rates

Kessler’s Take:

The 30 year fixed moved up to 4.94% nationally from 4.81% according to Freddie Mac’s Weekly Survey .  Last week I forecasted it would be up to 4.9%, so I missed a couple of tenths my indication was right.

Kessler’s Forecast:

1 week (12/24/2009) – 4.95%

 1 month (1/21/2010) – 5.20%;

 3 months (3/18/2010) – 5.65%;

 6 months (6/24/2010) – 6.25%;

12 months (12/23/2010) – 6.50%

Reports

Previous Week:

November Housing Starts

U.S. Census Bureau

Upcoming Week:

Tuesday, December 22

November Existing Home Sales

National Association of Realtors

Wednesday, December 23

November New Home Sales

U.S. Census Bureau

In mid-May 2009, the U.S. Department of Housing and Urban Development (HUD) launched a program that would allow federally approved lenders to offer bridge loans to cover closing costs for borrowers who take the 2009 First-Time Homebuyer Tax Credit and who use financing backed by the Federal Housing Administration (FHA). These loans allow buyers who are eligible for the credit to apply those funds towards their downpayments and closing costs, using the credit as collateral. Once buyers receive the credit after filing their 2009 tax returns, the money will then be used to repay the bridge loan.

Due to considerable challenges in making these loans widely available, few lenders are currently offering these bridge loans. However, there are still many other funding sources to explore, including:

1.State Housing Finance Agencies
2.Local Governments and Nonprofit Agencies
State Housing Finance Agencies

Determining whether your state has a program

As of mid-2009, more than a dozen state housing finance agencies (HFAs) were offering bridge loans to prospective buyers, and many more were planning to do so. Currently, the following states have programs in place: Colorado, Delaware, Idaho, Illinois, Kentucky, Missouri, Nebraska, New Jersey, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, and Virginia.

To determine whether or not your state has begun offering these loans, you can:

•• Find your state’s HFA phone number on the National Council of State Housing Agencies’ (NCSHA) member list.
•• Consult the NCSHA’s list of HFA’s offering bridge loans.
If your state offers these loans, information should be available on the state’s HFA web site, which should be listed on one of the pages above.

Things you should expect from a state HFA advance loan

Although state HFA bridge loans differ from state to state, here are some typical characteristics

•• Buyers will need to make a minimum down payment from their own funds—probably approximately $1,000.
•• A local lender approved by the HFA will need to originate the loan, since HFAs themselves do not originate loans.
•• Buyers will use HFA-backed financing for their mortgages.

Other things to note about HFA bridge loans

•• Some are interest-free, others are not. So be sure to check with your lender.
•• HFAs have limited funds to devote to these bridge loans, so they are often made on a first-come, first-served basis.
Applying for an HFA loan

Since this financing often includes a below-market interest rate, it requires borrowers to meet eligibility criteria—often these include being a first-time buyer, and meeting income requirements. For the bridge loans, there’s a good chance the criteria will be similar to what’s required for the tax credit.

Local Government/Non-Profit Associations

If your state HFA does not offer loans, the staff may be able to direct you to local nonprofit organizations that do have programs—if any exist.

Another good place to start a search is NeighborWorks, a national nonprofit which maintains a list of more than 200 local affiliates that provide housing assistance. Each affiliates’ loan program will be different, so buyers should be sure that the organization offers bridge loans repayable with the tax credit, and that they understand the underwriting standards and loan terms.

FHA-Approved Lenders

If you are unable to identify other sources of funding, you may be able to obtain loans from FHA-approved lenders. Although as of mid-2009 many lenders had not yet begun offering these loans, it is possible that more will launch bridge loan programs before the credit expires.

Unlike loans from state and local agencies or nonprofits, the bridge loans provided by private, for-profit FHA-approved lenders must be structured in the form of a personal loan or line of credit. These loans are collateralized by the tax credit and cannot be structured as a second mortgage.

Also, although FHA allows you to use the bridge loan to cover closing costs or to buy down your interest rates, you can put it towards the down payment only after you’ve covered the 3.5 percent minimum that is required on any FHA loan. Therefore buyers will need to contribute the 3.5 percent minimum down payment themselves or find another funding source to cover it. However, buyers should be aware that seller-funded down-payment programs are not permitted to be used.

HUD provides complete details in Mortgagee Letter on “Using First-Time Homebuyer Tax Credits”. However, since individual FHA-approved lenders will be making the loan, actual loan terms will vary. At a minimum, though, the bridge loan must meet certain restrictions, which are intended to eliminate fraud or ensure that borrowers do not get in over their heads. Restrictions include:

a. Loans can not result in cash back to the borrower

b. The amount can’t exceed the amount required for the down payment, closing costs, and prepaid expenses

c. Monthly repayments must be included within the qualifying ratios and, when combined with the first mortgage, cannot exceed the borrower’s reasonable ability to pay.

d. Payments must be deferred for at least 36 months to not be included in the qualifying ratios.

e. There can be no balloon payment required before ten years.

-Information provided by: The National Association of Realtors

To Search for Homes, Visit my Website at: www.TheFastestGrowingCityinTexas.com