How Will a Foreclosure Freeze Affect the Housing Market?

I previously wrote that the current foreclosure freeze was being blown out of proportion. But could there be more to the story? After delving deeper into the morass, I’ve revised my position.

Here’s what I think. The foreclosure freeze itself will mostly have a short-term effect on our housing market. It will initially reduce the inventory of foreclosure homes. But when the banks start rolling at full speed again, it will increase the inventory and therefore depress home values. It’s what lies beneath that has people more concerned, and it could have a broader impact on the housing market.

The foreclosure freeze is only a symptom. The rubber-stamped paperwork and convoluted transfer of mortgage notes is the disease. And the disease could have a serious impact on our housing market. Or, it could become water under the bridge in no time at all. It all depends on how it’s handled. And this is exactly why so many people are divided on how the foreclosure freeze (and underlying mess) will affect the housing market as a whole.

To give you a broader sense of what’s going on, I’ve created an ongoing list of foreclosure freeze analysis and predictions. I call it the Predict-o-Meter:

The Foreclosure Freeze Predict-o-Meter

Here’s how it works. I set up some Google Alerts to tell me whenever somebody online is talking about the foreclosure freeze and the housing market. Blog posts, news stories, press releases, random bits and pieces of online commentary — it all comes to my inbox courtesy of Google’s web-crawling technology. And then it winds up on this page.

Note: This is an organic story that is still unfolding. This page will be updated continuously.

  • freddie macFreddie Mac released its third-quarter financial report at the beginning of November. Among other things, CEO Charles Haldeman said the recent foreclosure freeze would push housing recovery further down the road. “[T]he housing market remains fragile and has recently come under renewed pressure from slowing economic growth, weaker employment and foreclosure uncertainties,” he said. “We believe that it will be a considerable time until the housing market has a sustained recovery.” November 3, 2010, Freddie Mac
  • Wall Street JournalOn the Wall Street Journal website, Ruth Simon mentioned that “Some experts predict that the only way out of the [foreclosure robo-signing] debacle is a huge settlement in which home-loan servicers modify the terms of billions of dollars of mortgages.” Of course, this kind of settlement would be a serious financial blow to the banks. And that would hamper their ability to make new loans to home buyers. October 23, 2010, Wall Street Journal
  • ReutersA Reuters article recently quoted an economist named Patrick Newport from IHS Global Insights. He pointed out that the fear caused by the foreclosure freeze has negative implications for both the housing market and the broader economy. To quote the article: “Fewer sales to investors means fewer sales altogether, which will further elevate supply. That, in turn, will keep a lid on home prices, making consumers feel poorer.” October 22, 2010, Reuters
  • Washington PostBrady Dennis of the Washington Post points to the “moral hazard” associated with the foreclosure freeze. He said there are no statistics to show how many homeowners are using the foreclosure moratorium to skip out on making their payments. But some “economists warn that this practice could become more common if a national [mandatory] freeze is put in place, as some lawmakers are trying to do.” –October 20, 2010, Washington Post
  • Wall Street Journal“A national foreclosure moratorium will exacerbate the housing-market crisis,” said Barbara Novick, “by increasing uncertainty and preventing supply and demand from reaching equilibrium.” Her Wall Street Journal article points out that a backlog of foreclosures will prevent the housing market from righting itself, dragging home prices even lower. October 18, 2010, Wall Street Journal
  • HUDShaun Donovan, secretary of the Department of Housing and Urban Development (HUD), mentioned the damage a foreclosure freeze could do to our housing market. He made the following comments in an article on the Huffington Post. “We’ve seen real progress in the housing market … With vacant and abandoned homes more than three times as destructive to the values of neighboring homes as occupied homes that are just beginning the foreclosure process, a blanket moratorium would only slow down that progress.” –October 17, Huffington Post

We will bring you more news about the foreclosure freeze and housing market as the situation unfolds.

Are We Overreacting To the Foreclosure Freeze?

Do a search on Google News for “Bank of America,” and you will see hundreds of news stories about their foreclosure freeze. Bank of America recently announced they are halting foreclosures nationwide, pending a review of their foreclosure procedures.

GMAC Mortgage and JPMorgan Chase have previously implemented a freeze in the 23 states where foreclosures are controlled by the courts (so-called “judicial foreclosure” states). But Bank of America is going further by freezing foreclosure in all 50 states.

Wells Fargo recently said they are planning to move forward with all legitimate foreclosures, despite one of their former employees making similar claims about “robo-signing” documents.

All of this comes in the wake of whistleblower testimonies and governmental scrutiny regarding foreclosure procedures. Some former employees of Bank of America (and other lenders) have said that they signed off on dozens or hundreds of foreclosure documents a day, without much scrutiny or verification.

But it’s the Bank of America foreclosure freeze that really has the media in a tizzy. I even saw one headline that said Bank of America’s foreclosure freeze could cause another housing crisis.

Which begs the question … aren’t we overreacting a bit?

Here’s the logic behind the doom-and-gloom headlines. Halting foreclosures will prolong the high level of foreclosure homes we have right now. This in turn will delay recovery and stability in the housing market. It will also prevent home prices from normalizing.

But let’s look at this from a different angle. It’s in the best interest of these banks to perform their internal reviews as quickly as possible. After all, those foreclosure homes are non-performing assets. They lose more money the longer they hang onto them. So you can bet that whatever actions they take will be swift.

Bank of America CEO Brian Moynihan recently downplayed the events: “We haven’t found any foreclosure problems,” he said. “What we’re trying to do is clear the air and say we’ll go back and check our work one more time.”

Many people claim that a temporary foreclosure freeze will drive home prices down. “The moratoriums … can be incredibly destructive to the fragile recovery of the housing and housing finance markets,” said Anthony Sanders, a finance professor at George Mason University. “Consumers looking to get back into housing are even more fearful than before. This can lead to further house price declines.”

There are plenty of folks in the media who echo Mr. Sanders sentiments.

Declining home prices. What’s wrong with that? Home prices are still inflated in many parts of the country. They still need to come down to more realistic levels, if we’re ever going to see the market pick up.

But let’s get back to the drama at hand. Many in the media are blowing this whole thing out of proportion: Foreclosures have been halted. The market will come to a screeching halt. Home prices will plummet. We may see another housing crisis. This might trigger a double-dip recession. So on and so forth.

Here’s my prediction. A month or two from now, no one will even remember the Bank of America foreclosure freeze. It will be business as usual in the world of home foreclosures, auctions, and resales. And then we can go back to worrying about larger concerns. Like unemployment.

Fannie Mae Wants to Help With Your Closing Costs – If You Buy a Foreclosure

Last week, Fannie Mae announced some new incentives for home buyers. Qualified buyers who purchase one of their distressed homes (i.e., foreclosures) could receive up to 3.5 percent of the final sales price to put toward closing costs. Example: If I purchased a Fannie Mae foreclosure home for $250,000, I would be eligible for up to $8,750 worth of closing cost assistance.

On average, closing costs add up to 3% – 5% of the loan amount. So this new incentive could cover all or most of the home buyer’s closing costs. That’s nothing to sneeze at.

In order to qualify for this incentive, you must purchase a home that’s listed on HomePath.com. This is Fannie Mae’s website for distressed / foreclosed properties. You must also be an “owner occupant,” which means you are buying the home to live in it. Real estate investors need not apply.

To be eligible, purchase offers must be submitted on or after September 23, 2010, and must close by December 31, 2010. Additionally, the sale must close within 60 days of the offer acceptance.

The incentive program is Fannie Mae’s latest effort to get a growing number of foreclosure homes off its books.

Additional Incentives Through HomePath.com

In addition to the closing costs contribution, home buyers can qualify for attractive financing terms when buying a home through HomePath.com. Many of the foreclosed homes listed on the website are eligible for HomePath Mortgage Financing. The perks of this program include smaller down payments and easier qualification, when compared to a traditional mortgage loan.

Qualified borrowers can put as little as 3% down when buying a foreclosed home through HomePath.com, and they may see their mortgage insurance and appraisal fees waved, as well.

How to Buy a Fannie Mae Foreclosure Home

So how do you go about buying a foreclosed home through the Fannie Mae website? Fannie Mae works with local real estate agents to list their REO properties. So if you find a home you like on the HomePath.com website, you should make note of the agent’s name and contact info. You can then ask the agent to show you the property.

The HomePath website also provides a state-by-state list of mortgage lenders that participate in their financing program.

When you’re ready to make an offer on a home, you will need to include the following items (at a minimum):

  1. A standard real estate contract for the state where you are buying.
  2. A Fannie Mae real estate purchase addendum.
  3. Earnest money. This will be deposited with the title or escrow company, and applied toward the down payment and closing costs at the closing.
  4. Proof of funds (if you’re paying cash for the home), or a copy of your pre-approval letter (if you’re getting a mortgage loan).

This is a simplified version of the process. If you want to learn more about buying Fannie Mae foreclosures, refer to the HomePath.com website. They have a variety of resources for home buyers. You might also want to speak to a HUD-approved housing counselor, or a real estate agent who is familiar with this process.

You Are More Likely to Default on an ARM Loan – Here’s Proof

mortgage defaultWe have often warned first-time home buyers about the risks associated with adjustable-rate mortgages. Now we have some new data to back it up. A recent report released by the Federal Housing Finance Agency (FHFA) reveals that home buyers who use ARM loans to purchase a house are more likely to default than those who use fixed-rate mortgages.

A mini-glossary is in order:

  • Adjustable-rate mortgage: Known as an ARM loan for short, this type of mortgage has an interest rate that adjusts (changes) periodically. This means the size of the monthly payment changes as well.
  • Fixed-rate mortgage: This type of mortgage loan keeps the same interest rate over the entire life of the loan. Thus, the monthly payment never changes.
  • Default: When you fail to make your mortgage payments, you are defaulting on the loan. Defaults frequently (but not always) lead to foreclosure.

According to the data released by the FHFA last week, you are more likely to default with an ARM loan as compared to a fixed-rate mortgage. The report showed data pertaining to single-family mortgage loans acquired by Fannie Mae and Freddie Mac, from 2001 to 2008.

Fannie and Freddie are government-sponsored enterprises that are currently controlled by the federal government (following the mortgage and housing collapse). These organizations purchase mortgage loans from direct lenders and sell them to investors. An “enterprise-acquired mortgage” is a loan that was purchased by one of the two government-supported enterprises.

Default Data – Fixed vs. Adjustable Mortgages

Here’s how the data stacked up for enterprise-acquired mortgages between 2001 and 2008:

  • Approximately 5% of the fixed-rate mortgages acquired by Fannie Mae and Freddie Mac were over 90 days delinquent at some point before the end of 2009.
  • Approximately 10% of the adjustable-rate mortgages acquired by Fannie and Freddie were more than 90 days delinquent in the same period.

This data supports something we have been saying for years. You are more likely to fall behind on your mortgage payments if you use an adjustable-rate mortgage. “Adjustable” is the key part of that phrase. When you choose an ARM loan, you can be certain that the interest rate (and the size of your monthly payment) will change at some point. If you stay in the home beyond the first adjustment period, you will have two choices. You can try to refinance the mortgage, or you can simply deal with the rate change.

Can’t I Just Refinance Before the Adjustment Period?

Sometimes yes, sometimes no. If your home depreciates below a certain point … or if your credit score drops considerably … or if your income declines for some reason, you might not be able to refinance the loan. That’s a lot of “if” clauses. Right now, millions of homeowners are stuck in the first scenario. Their homes have depreciated to the point they cannot refinance. These are the underwater / upside down homeowners you’ve heard so much about lately.

When an ARM Loan Makes Sense

On the other hand, an ARM loan can be a smart strategy in certain scenarios. If you know for sure you’ll only be in the home for a few years, you could use an adjustable mortgage to secure a lower rate. If you sell the home before the first adjustment period, you will avoid the uncertainty.

The key is to understand how these loans work, and how they match up to your long-term plans.

Learn more: How an adjustable mortgage works

You can use the links above to learn more about the adjustable-rate mortgage loan. You can also find a wealth of advice on the Federal Reserve’s website, if you’re interested.

Mortgage Refinance Online is Increasingly Popular With Homeowners

Napa, CA – U.S. Housing News — Consumers today are more comfortable using online mortgage applications, as evidenced by a recent survey of homeowners. In 2007, only 37% of respondents said they would apply for a mortgage refinance online. In 2010, 59% said they would apply online.

The Home Buying Institute recently conducted a survey among homeowners who were planning to refinance their homes. We asked them about mortgage refinance online. Specifically, we wanted to know how many people were planning to apply for a loan online, as opposed to doing it in person. More than half of the respondents (59%) said they would to use the Internet to apply for a mortgage refinance loan.

This is a significant increase over a similar survey we ran three years ago. In the summer of 2007, we conducted a survey that asked the very same question: Would you apply for a mortgage refinance loan online? Back then, only 37% of respondents said they were comfortable with online applications — compared to the 59% from this year’s survey. Three years ago, the majority of respondents were reluctant to start the process online. But times have changed.

There are several reasons for the rising popularity of online mortgage applications:

  1. People are more comfortable using the Internet to apply for loans.
  2. There are more websites that allow homeowners to apply for refinancing online.
  3. Most likely, it is a combination of these two factors.

Regardless of the reasons, online mortgage refinance is clearly becoming more popular among homeowners. But how does the process really work? How much of it can be handled online? Is it a real application, or just a lead-generation tool. Here’s what you should know about online mortgage applications.

Online Mortgage Refinance Tips

Applying for a mortgage refinance online is fairly simple. You visit the website of your choice, and then you fill in the appropriate information. After that, somebody from the bank or lender’s office will contact you for more information. But there are several things you need to know before you start applying for loans online. Follow these tips for success:

  • Check your credit score. If you want to secure a low rate on the new loan, you’ll need to have good credit. The higher your FICO score, the lower the rate you can get. We recommend checking your credit at least three months before you pursue a mortgage refinance online, if at all possible. It takes time to boost a FICO score, so find out where you stand today.
  • Use reputable websites. When you apply for refinancing online, you need to be careful which sites you use. We have seen websites that asked for sensitive information like Social Security Numbers, but didn’t even have a basic security system in place. You can reduce the chance of identity theft by using reputable websites owned by banks or lenders you know.
  • Gather your documents. When you apply for a mortgage refinance online, you’re really just starting the application process. You won’t be approved based on the online application alone. You’ll have to follow up with some additional documents. If you start rounding up these items up now, you’ll have a smoother application process. Here’s a partial list of documents to get you started. Ask the lender what else they might need.
  • Consider your equity. Property values have dropped in most parts of the country, resulting from the housing bust that began in 2008. As a result, millions of homeowners are upside down in their mortgage loans. Many more have seen their equity shrink considerably. If you don’t have enough equity, you won’t be able to refinance. You don’t necessarily have to get the house appraised — the lender is going to do that anyway. Just file this away in the back of your mind.

Applying for a mortgage refinance online is a great way to get the ball rolling. It’s also a good way to shop for interest rates, closing costs and loan terms. But you need to be prepared for the process. You can learn more about this subject from the refinancing section of our website.

Going Local: 68% of Home Buyers Prefer Local Banks Over the Majors

Napa, CA – U.S. Housing News — A recent survey showed that future home buyers prefer to work with smaller, local banks, as compared to the big national banks like Wells Fargo and Bank of America. Among other things, people felt they would get more personal attention and lower rates.

At a time when large banks are increasingly viewed as unscrupulous robber barons, the following survey may come as no surprise. In a recent survey conducted by the Home Buying Institute, 68% of future home buyers leaned toward local banks or credit unions over the big national lenders.

Pie chart, buyer preference
Image permission: You may use this image on your own website. We would appreciate a link back to this story.

Details and Logistics: This web-based survey was conducted between June 14 and August 14, 2010. It was presented to more than 15,000 readers, through the Home Buying Institute website. Participants were asked the “either-or” question shown in the image above, and were then given the chance to provide additional comments about their preference. Of those who responded, 68% said they preferred to work with a local bank or credit union, as compared to the big names like Wells Fargo and Bank of America.

Of those who leaned toward local banks and credit unions, common reasons included:

  • Higher level of trust.
  • The potential for better interest rates.
  • More personal attention.
  • Quicker response time to inquiries, problems, etc.

Note: We are not suggesting that local banks perform better in all of these areas. That was not the purpose of the survey. But the items listed above do seem to indicate widely held consumer perceptions.

This survey comes at a time when popular blogs like the Huffington Post are urging consumers to move their money toward local banks. Are we witnessing a long-term consumer shift, or a short-term response to corporate malfeasance? Time and stock prices will tell.

Thousands of Countrywide Customers Will Get Refunds for Overcharges

Countrywide Home Loans overcharged thousands of customers before it was acquired by Bank of America (BOA). And now, following one of the largest FTC settlements ever, Bank of America is being required to pay refunds to former Countrywide customers. Technically, Bank of America will pay the money to the FTC, which will then disburse refund payments to more than 200,000 former customers of Countrywide.

Most of the overcharged customers were struggling with their payments at the time, and facing foreclosure as a result. Some were filing for Chapter 13 bankruptcy, as well. According to the FTC, Countrywide charged these people a variety of fees that were excessive in nature. The settlement and refunds only apply to customers whose mortgage loans were handled by Countrywide before it was acquired by BOA (in July 2008).

“Life is hard enough for homeowners who are having trouble paying their mortgage,” said FTC Chairman Jon Leibowitz. “To have … Countrywide piling on illegal and excessive fees is indefensible. We’re very pleased that homeowners will be reimbursed as a result of our settlement.”

Here’s what is truly despicable about all of this. Countrywide was one of the biggest subprime lenders during the housing boom. This means they gave mortgages to people who normally wouldn’t qualify for a loan — people with bad credit, high debt ratios, and shaky income. They did this by using a variety of “creative financing” strategies, such as the option ARM loan and the infamous stated-income loan (soon to be illegal).

In other words, Countrywide gave loans to people who had no business taking on mortgage debt. After all, the lender could simply sell the loans into the secondary mortgage market to limit their own risk. When such borrowers (predictably) fell behind on their mortgage payments, Countrywide cranked up the profit machine again, by levying huge fees.

From the FTC announcement: “Countrywide’s loan-servicing operation deceived homeowners who were behind on their mortgage payments into paying inflated fees — fees that could add up to hundreds or even thousands of dollars.”

Learn More About Countrywide Refunds

If your mortgage loan was serviced by Countrywide Home Loans before July 2008 (and you went through default, foreclosure or bankruptcy at the time), then you may be eligible for a refund through this settlement. According to the FTC’s settlement fact sheet, you don’t need to do anything. They will send notices in the mail to all customers who are eligible for the refund. See the video below for details.

Countrywide, Bank of America, and Reasons to “Shop Locally”

Still not shocked by this corporate malfeasance? Try this one on for size. Countrywide also created a subsidiary to hire out lawn-mowing services, for properties that were in default. They marked up these services by upwards of 100%, and then passed the marked-up fee to the defaulting homeowners.So let’s recap. Countrywide gave loans to many people who were ideal candidates for foreclosure. Then they charged these people excessive fees for missing payments. Lastly, they charged them seriously marked-up fees for lawn mowing, property inspections and other services. Let me remind you that Countrywide is now part of Bank of America.It’s something to consider, the next time you’re in the market for a mortgage loan.

87% of Home Buyers Plan to Use an FHA Home Loan

The Home Buying Institute is conducting a survey to measure the popularity and usage of FHA home loans. The first phase of the survey revealed that most home buyers plan to use an FHA home loan to finance their purchase.

The survey was presented to more than 12,000 readers, through the Home Buying Institute website. Of those who responded, 87% said they were planning to use an FHA loan to finance their home purchase.

FHA usage indicator
Chart: Most home buyers surveyed are planning to use an FHA loan. Image permission

Definition: An FHA home loan is a mortgage loan that is insured by the Federal Housing Administration, which is part of HUD. This insurance protects lenders from losses resulting from borrower default (when the borrower stops paying). With this kind of protection, the lenders bear less risk. Loans must meet certain requirements established by FHA to qualify for insurance.

Survey Details: Phase one of this survey was presented to more than 12,000 visitors to the Home Buying Institute website, over a one-month period. The first question in the survey was: “Do you plan to use an FHA loan when buying a home?” Eighty-seven percent of respondents said yes, they were planning to use an FHA home loan.

Reasons for Using an FHA Loan

Those who answered “yes” to the first question were then asked about their primary reasons for using an FHA loan. Here are the results of that follow-up question:

  • 53.8% said they wanted to use an FHA home loan for the smaller down payment. *
  • 19.2% said they thought the overall qualification process would be easier.
  • 13.5% said they previously had trouble qualifying for a conventional loan.
  • 7.7% said they had low credit scores.
  • 5.8% felt their income was too low to qualify for a regular loan.

* Borrowers who use FHA loans can put as little as 3.5% down. Conventional loans typically require a larger down payment. According to our survey, this is the biggest motivator for home buyers.

Reasons for using FHA loans
Chart: For the 87% of respondents who said they planned to use an FHA loan, these were the primary reasons given. Image permission

This survey suggests further growth in the FHA’s market share, which has already grown considerably in recent years. In the first quarter of 2010, almost half of all home buyers used an FHA loan to purchase a home. Brandon Cornett, publisher of the Home Buying Institute, expects that number to rise:

“Each month, we receive more than 200 email questions from home buyers. The frequency of FHA questions has increased steadily since the end of 2009. That’s what prompted the survey. The down-payment priority is not very surprising, when you think about it. A lot of people lost their savings during the recession, so they’re not in a position to plop down ten to twenty percent on a down payment. FHA loans have also been in the news a lot lately, due to various program changes. All of these things point to a continued rise in FHA usage.”

FHA Fact Sheet: In response to this survey, we have created an easy-to-read fact sheet about FHA home loans. It explains the pros and cons, the eligibility requirements, and the basic steps needed to apply. You can download the fact sheet for free, in Acrobat PDF format, on this page.

Reasons for Not Using the Program

Of those who said they did not plan to use an FHA loan, the following reasons were given:

  • 57.1% said they did not know enough about the FHA program.
  • 28.6% said they had excellent credit and enough saved for a down payment.
  • 14.3% said they tried to use an FHA loan before, but got turned down (reasons not given).

Related coverage from this website:

Summary of changes to the FHA program (2010)

Minimum down payment could rise to 5%

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H.R. 4173 to Eliminate Stated-Income Mortgage Loans

Austin, TX – U.S. Housing News — The current version of the financial reform bill (H.R. 4173) would eliminate certain types of high-risk lending practices. For one thing, it would outlaw stated-income mortgage loans and make income-verification mandatory.

income verificationEver since the mortgage crisis began in 2008, fewer banks have been offering stated-income mortgage loans. That number could soon shrink to zero, if House Resolution 4173 becomes law.

This bill, currently called the Restoring American Financial Stability Act of 2010, will result in sweeping reforms of the financial-services industry. It includes an enormous list of reform measures, affecting everything from debit cards to mortgage loans. The current version of the bill is well over 1,000 pages, a testament to its far-reaching scope.

The differences between the House and Senate versions still have to be resolved, but final passage of the bill appears likely. According to the Washington Post: “Crucial differences … must be resolved in a House-Senate conference committee, which is expected to begin meeting soon after the Memorial Day recess.”

Most of the media outlets have been focusing on the new restrictions for derivatives trading. That kind of thing is off the radar of the average home buyer (most of whom don’t even know what a derivative is). But there are also some major changes being proposed that would affect the primary mortgage market. In short, there will be fewer mortgage products available.

Stated-income mortgage loans are first on the chopping block. These are also referred to as no-doc loans. This is where the lender allows the borrower to simply “state” his or her income, instead of verifying it through documentation.

At the height of the housing boom, from the mid 90s to early 2000s, there were many lenders offering stated-income mortgage loans. These were the days of easy credit that produced a wide variety of “exotic” mortgage products. But most lenders stopped offering such loans after the bubble bust in 2008. If the bill passes, such loans would be outlawed entirely.

H.R. 4173 Would Eliminate the Stated-Income Mortgage (Sensibly)

Section 1074 (b) of the Restoring American Financial Stability Act states the following:

“No creditor may make a loan secured by real property [i.e., a mortgage loan] unless the creditor, based on verified and documented information, determines that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan … and all applicable taxes, insurance, and assessments.”

The bill also outlines the steps mortgage lenders must take to verify a person’s ability to repay. They must review the borrower’s credit history, current income, current financial obligations, and debt-to-income ratio. To verify the borrower’s income, the lender must review IRS W-2 statements, tax returns, bank records, and payroll receipts / pay stubs.

Of course, all of this can be filed under ‘R’ for Responsible lending. This is the kind of verification process that should take place, across the board. But during the heyday of housing mania, many lenders created “side doors” for people with bad credit and/or shaky income. The stated-income mortgage loan is a prime example of this look-the-other-way mentality.

If this bill becomes law, we can finally say good riddance to such reckless lending practices. At least until the next round of exotic mortgages come onto the scene.

Changes to FHA Loan Program – And a New Fact Sheet

Austin, TX – U.S. Housing News — If you’re having trouble keeping up with all of the changes to the FHA loan program, you’re not alone. We receive at least one email per week from confused home buyers, regarding the FHA changes they’ve heard about. So we decided it was time to compile all of the recent FHA program changes into one place. We have also created a fact sheet about these loans, and you can download it here.

FHA Home Loans, Defined

The Federal Housing Administration (FHA) is an agency of the federal government. It falls under the Department of Housing and Urban Development. The FHA’s primary mission is to insure mortgage loans made by approved lenders within the United States and its territories. The FHA does not lend money directly to home buyers. Rather, it insures loans by lenders in the private sector. This kind of government backing encourages lending to a wider segment of the populace (including people who wouldn’t otherwise qualify for a home loan).

Changes to the FHA Program

So why have there been so many FHA changes in recent months? These changes are primarily designed to strengthen the FHA’s capital / cash reserves. These reserves dipped to an all-time low recently, following the housing and mortgage crisis of 2008 – 2010. This severe loss in capital was the result of high numbers of mortgage defaults and foreclosures (i.e., bad loans). The FHA insures many of the mortgage loans made by lenders within the private sector. When those loans started defaulting in record numbers over the last couple of years, the FHA’s capital reserves became severely depleted.

Toward the end of 2009, FHA commissioner David Stevens said: “I don’t want to leave the impression that the reserves are adequate … There are real risks to the FHA and we are aggressively addressing those real risks with real reforms.” He explained that the FHA is going to change the way it does business, mainly by reducing the risks it has endured in the past.

So how does all of this translate into action? Here are some changes to the FHA loan program that have already been implemented:

  • Borrowers who use FHA home loans are required to pay an upfront mortgage insurance premium. In 2010, this premium was raised from 1.75% of the purchase price to 2.25%, an increase of 50 basis points. This increases the amount due at closing.
  • The FHA has also requested permission from Congress to raise the annual mortgage insurance premium. This would offset some of the upfront insurance costs, described above. Overall, it would increase the cost of the loan.
  • In the past, the FHA has not had any hard and fast rules about credit scores. It was mostly left up to the lenders. But this will change in 2010. Going forward, borrowers must have a FICO credit score of at least 580 to qualify for the 3.5% down payment. Borrowers with scores below 580 will have to make a down payment of at least 10%, which is a significant difference in upfront costs.
  • Another big change to the FHA loan program has to do with seller concessions. HUD has reduced the amount of seller concessions from 6% to 3%. This means sellers will not be allowed to contribute as much money toward the buyer’s closing costs (when an FHA mortgage is being used).

Possible Changes in the Future

The down payment situation may change again in the near future. There is currently a proposal in Congress to raise the down-payment requirement to 5% across the board. As of May 2010, this bill (H.R. 3706, the FHA Taxpayer Protection Act) was still in a committee status. No voting has taken place yet. We are watching this closely, and we will report back if and when the proposal becomes law.

Download Our FHA Reference Sheet

We recently published a reference sheet on the FHA home loan program. It includes some of the changes mentioned above, as well as other helpful information for home buyers. If you are thinking about buying a home with one of these loans, you will find our fact sheet helpful. Learn more here

Disclaimer: This news story contains time-sensitive information about changes to the FHA home loan program. Future changes and modifications could make portions of this article obsolete. Please make note of the publication date for this story. If you want the most current information available, you can visit the news release section of the HUD website.