The FHA Program: Recent News, Changes, Financial Condition, and General Processing Notes

Echoing
what lock desks are seeing, and once again causing some lenders and
Realtors to take a fresh look at overhead, the MBA Mortgage Application
Index was down -6.3% vs. -5.5% from the week prior. Refinance
applications were down -7.7% while purchase applications were down
-3.5%. The refis have left the market, “for sale” inventories are low,
and QM restrictions with many investors loom. With this number, residential apps are back to where they were 13 years ago – but are the number of lenders and their staffing levels?

(Read More: Mortgage Application Dives Further into 12-Year Low)

I can think of no greater crusader against the FHA, than Resident Fellow at the American Enterprise Institute, Ed Pinto. In a recent NY Times article, Lisa Prevost writes, “One
of the most vocal critics (of the FHA) is Edward J. Pinto, who calls
the terms ‘predatory’ and ‘abusive’. He argues that the majority of
F.H.A. loans are at high risk for default should the economy tip back
into recession, but that borrowers have no way of knowing how safe their
loans are, because the agency prices all loans the same. Low-risk
borrowers, he said, are overcharged to subsidize those at higher risk.
“The consumer who has the very-low-risk loan doesn’t even know he might
be better off going through the private sector,” Mr. Pinto said. “They
may assume that the government is protecting their interests.” The article is entitled “The Downside to FHA Loans,”
and while there isn’t anything too earth shattering in the
investigation, Pinto wants to toast marshmallows on the FHA’s business
model v. a rebuttal by David Stevens of the MBA (and ex-FHA
Commissioner), anyone in the industry can relish in the exchange of
ideas on the topic of private finance versus public finance.

As a reminder, the FHA has issued new manual underwriting requirements. On December 11, 2013, HUD published in the Federal Register
its final notice. The manual underwriting requirements are applicable
for purchase transactions and all credit qualifying FHA refinance
transactions. HUD has made five amendments to the proposed manual
underwriting requirements: (1) they address the issue of borrowers who
exceed the 31% housing-to-income ratio, (2) address the relationship
between compensating factors and ”stretch ratios” that permit
borrowers to exceed the housing payment and total debt-to-income ratios
under certain FHA mortgage insurance programs, (3) the rule establishes
additional compensating factors that can be used to qualify borrowers
who exceed FHA’s standard housing payment and debt to income ratios, (4)
HUD has reduced the credit score (from 620 to 580) below which
compensating factors may not be cited and the standard ratio guidelines
may not be exceeded, and lastly (5) HUD has extended the applicability
of these underwriting policies to FHA-to-FHA rate and term refinance
transactions (no cash-out) and credit-qualifying FHA streamline
refinance transactions. The full release can be found in the Federal
Register.

(Read More: FHA Toughened Standards on Manually Underwritten Loans Finalized Ahead of Shortfall)

On
December 13th, HUD released its Fiscal Year 2013 Annual Report to
Congress on the Financial Status of the Mutual Mortgage Insurance Fund,
which reports the results of an independent actuarial evaluation of the
Fund. According to the independent actuary, the Fund’s value has improved by $15 billion since last year, and is currently valued at negative $1.3 billion.
According to the release, this change represents a 92% improvement in
the capital reserve ratio rising from negative 1.44% to negative 0.11%.
The independent actuary now estimates that the Fund will reach the
required 2% reserve ratio in 2015. Scott Olson, Executive Director of
the Community Home Lenders Association (CHLA), released the following
statement in response to the release of the FHA MMIF actuarial report “In
responding to the latest FHA projections, it is important to keep in
mind that the quality of new FHA loans is very strong. In fact, the
Community Home Lenders Association believes that FHA can best serve its
mission of meeting consumer mortgage needs by lowering its annual
premiums – while continuing its activities to maximize recoveries of
distressed loans through loan modifications, short sales, and loan
sales.” HUD’s Annual Report to Congress on the Financial Status of
the MMI Fund and the accompanying actuarial reviews are available on
HUD’s site
.

(Read More: FHA Shortfall Belies Significant Progress)

And
as another reminder, in a bid to perhaps stay relevant, though in the
FHA’s own words, to continue “its commitment to fully evaluate borrowers
who have experienced periods of financial difficulty due to extenuating
circumstances,” borrowers may now be eligible for an FHA loan just one
year after experiencing a short sale, foreclosure, or even a bankruptcy.
The news came via a mortgagee letter (13-26) posted on HUD’s website
back in August.
Borrowers are asked, “Did You Experience an “Economic Event?” In order
to get approved for an FHA loan just one year after experiencing such a
massive credit hit, you must prove it was due to an “Economic Event,”
otherwise known as unemployment or a “severe” reduction in income. Of
course, by severe reduction they’re only talking about a minimum 20%
reduction in household income for a period of at least six months.

As
any underwriter knows, it’s pretty common for individuals to see their
income fluctuate like that. And the FHA is even allowing those with
seasonal or part-time employment to qualify under these new rules.
However, there are a few more checks and balances. The lender must
analyze the borrower’s credit to determine that they were a sound
borrower before the Economic Event took place, and that their credit
only went downhill after the incident. Additionally, borrowers must
re-establish “Satisfactory Credit” for a minimum of 12 months prior to
receiving their FHA loan. In other words, your credit report should be
clear of any late housing or installment payments during the past 12
months, or any major derogatory events on revolving lines of credit.
Additionally, a year must have passed since the date of the foreclosure,
deed-in-lieu, short sale, or bankruptcy.

Occasionally I am asked about energy efficient mortgages. “The HUD EEM and the HERS Rating”
is one appropriate title. Many believe that the Energy Efficient
Mortgage (EEM) is the best way for FHA borrowers (purchase and
refinance) to make a house more energy efficient and affordable. But, it
has one requirement in the guideline that nullifies the whole program;
the requirement for a HERS rating. There is no network of nationwide
HERS trainers so the program is basically null and void. Read more about
it here
Proponents are asking that those interested click the link to send HUD
an email requesting the HERS rating be eliminated from the guidelines.

Borrowers
often ask, “Should I get an FHA or conventional loan?” LOs generally
know that the qualification process will determine the best type of
loan. Many people have many misconceptions regarding FHA financing to
purchase a home that there are several hurdles and restrictions to
surpass. FHA guidelines do have some property requirements that are more
detailed than those on conventional mortgages, but otherwise FHA has
fewer limitations than Fannie Mae and Freddie Mac and enables more
families seeking home ownership the opportunity to purchase a home. We
all know that FHA loan programs, and costs, are almost in a
teeter-totter competition with conventional conforming loans, given
changes in mortgage insurance, MI rates, gfee changes, loan level price
adjustment increases, and so on.

The
FHA appraisal includes a somewhat more detailed inspection than
conventional, and FHA appraisers will call out items that require repair
before a loan can be funded. The basic rule for FHA and property
requirements is any issue with the property that is considered a health
or safety issue must be corrected. With condominiums, many buyers are
perfect candidates for FHA financing, but many condominiums are not FHA
eligible. FHA maintains a list of approved condo homeowners associations.
Conventional loans also have requirements for condos but they are a bit
less stringent.

FHA’s can have higher loan limits in certain counties
than conventional loans, and the minimum down payment for FHA is only
3.5%. FHA also allows non-occupant co-borrowers that are family members
and use what are known as “blended ratios,” meaning that the income to
debt ratios of the primary applicant who will occupy the home do not
matter as long as the total ratios fit the guidelines. Any qualified
applicant can use FHA financing to purchase a home regardless of whether
it is their first home or fifth, but FHA financing cannot be used to
purchase investment property or second homes. Mortgage insurance is
required on all FHA mortgages regardless of loan to value. 

With
conventional mortgages there are options to finance the mortgage
insurance premium or pay a monthly premium; if paying monthly it is
possible in the future to have the premium and insurance discontinue.
With FHA there is a financed mortgage insurance premium AND a monthly
premium.  The
rates on both the upfront and monthly have increased significantly over
the past few years and effective with loans after June 1, 2013 the
monthly premium is paid for the life of the loan. Most conventional
lenders, and all mortgage insurance companies, have higher score
requirements and charge higher rates for lower credit scores. So to sum
up, FHA financing has more paperwork to sign than a conventional
mortgage but otherwise is generally an easier qualification process.

 

Well, it’s back to work for many people, especially those trying to fund loans by the end of the month. Rates have been creeping higher, given the continued news showing the U.S. economy is grinding higher, or at least recovering.
The latest was Tuesday’s New Home Sales. “The slight drop of new home
sales in November from the month prior is no cause for alarm as the
market remains near a five-year high in sales.  Homebuyers took a
momentary pause when interest rates increased earlier this year and as
rates fell thru October they are returning to take advantage of the
market.” Durable Orders, always volatile depending on things like
aircraft or washing machine orders, also exceeded expectations. Today
we’ll have the weekly Jobless Claims. So far this morning fixed
income securities are virtually unchanged from Tuesday’s closing levels
(with the 10-yr.’s yield at 2.98%).

Article source: http://www.mortgagenewsdaily.com/channels/pipelinepress/12262013-fha-loans-mortgage-insurance.aspx

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