FHA Loan Expert Blog

Many FHA but not all FHA lenders, skittish as foreclosure and default rates rise, have discontinued FHA mortgages for borrowers with less-than-perfect credit or little saved for a down payment.

Credit standards for FHA loans, by contrast, are more relaxed. And while many loans now require that borrowers put 20 percent down, FHA loans mandate just 3.5 percent.

Wells Fargo Bank, which has also toughened requirements for government-insured loans that it buys from other lenders, is “continuously reviewing our real estate lending product mix and underwriting practices to ensure they prudently align with marketplace risk,” spokesman Florida mortgages wrote in an e-mail.

The bank is also requiring that brokers provide evidence that borrowers seeking “streamline” FHA refinancings haven’t missed any mortgage payments in the past 12 months, according to its notice.

The default rate for FHA mortgages has spiked to its highest-ever level as government lending continues to see its share of the mortgage market explode. Some experts think the trend will soon force the Department of Housing and Urban Development to tighten up its underwriting standards

The default rate for mortgages recently insured by the Federal Housing Administration has been climbing, an alarming trend for an agency that is playing a vastly expanded role in the mortgage market and backing roughly a quarter of all the loans made last year.

About 4.31 percent of the FHA-insured loans made in the two years ending December 31 were at least 90 days late, according to the most recent update of an FHA database designed to help the agency detect problems with its lenders and programmes. That’s the highest in any two-year period since at least 2005.

On a monthly basis, FHA defaults have been rising since summer, according to the Department of Housing and Urban Development, which includes the FHA. Not all defaults result in foreclosure.

The lacklustre performance comes at a time of increased scrutiny of the FHA by federal policy-makers, some of whom question whether the agency can handle its soaring volume of loans and properly vet the lenders who are making them.

Although the FHA is a government agency, it has been self-sustaining since its creation in 1934, meaning no public money has been used to cover its losses. The mortgage insurance paid by the home owners goes into a fund that provides backing on mortgages made by FHA-approved lenders.

Key Features of the PFS Program

• Establishing Market Value –Mortgagees are reminded to ensure that properties in the PFS program are sold at or near fair market value as established by an independent appraisal, prepared by an appraiser on the FHA Appraisal Roster. 

• Minimum List Price Requirements – Properties offered for sale under the PFS program are to be listed for sale at no less than the “as-is” appraised value as determined by a current FHA appraisal, obtained and reviewed by the mortgagee.

• Negative Equity – The ratio of 63% for the fair market value (FMV) to the outstanding mortgage balance (including unpaid principal and accrued interest) has been updated to address events in the current housing market, and replaced with tiered net sales proceeds.
 
• Tiered Net Proceeds Requirement – This ML incorporates guidelines for varying minimum net sales proceeds based on the length of time a property has been competitively marketed for sale.

• Marketing Documentation – Prior to accepting a discounted offer, evidence of competitive marketing from the selling broker is to be presented and mortgagees are to retain this documentation in the claim review file. 

• Non-owner Occupant Exceptions – Mortgagees are authorized to grant reasonable exceptions to non-occupant mortgagors when documentation indicates a property was not purchased as a rental or used as a rental for more than 18 months, immediately preceding the approval into the PFS program.

• Removal of Repair Limitations –With prior approval from HUD, properties with surchargeable damage (i.e., damage caused by fire, flood, earthquake, hurricane, boiler explosion or mortgagee neglect) may be eligible for the PFS program if funds - sufficient to cover the government’s estimated repair costs - are applied to reduce the outstanding debt when a claim is filed.

• Increase in Funds Available for Discharge of Subordinate Liens – In instances where a mortgagor has made an initial contribution/incentive of $750 or $1,000, the amount that can be used from sales proceeds for the discharge of liens or encumbrances (which represent an impediment to conveyance of marketable title) has been raised from $2,000 to $2,500. 

• Change in Allowable Closing Costs – Subject to the stated ratios, HUD allows up to 1% of the buyer’s mortgage amount for closing costs to be included in the “Seller’s Costs” on the HUD-1 for all transactions that involve a new FHA-insured mortgage.