FHA Loan Expert Blog

Skyrocketing growth in loans from the Federal Housing Administration and Ginnie Mae have helped support the mortgage market — but could leave taxpayers on the hook for massive new losses.

FHA-insured loans have more than tripled from 530,000 in fiscal year 2007 to 1.7 million thus far in 2009. The Government National Mortgage Association, which securitizes FHA loans, has boosted its mortgage-related issuance to $287 billion from $85 billion.

Yet during that same period, the FHA’s loan delinquency rate has climbed to 14.4% in Q2 from 12.6% two years earlier.

Adding to the concern, the FHA’s fund to cover losses has dropped to a projected 3% of insured loans. That’s a leverage ratio of 33-to-1, the level banking giant Bear Stearns was at before it failed.

The government’s own watchdogs have rung the alarm that the FHA is increasingly vulnerable to fraud.

“One of the ways to read the FHA growth is that they are coming back to a more historically ordinary presence in the market,” said Alex Pollock, a resident scholar at the American Enterprise Institute and former president of the Federal Home Loan Bank of Chicago. “But they’re having very rapid growth and they have high loan-to-value ratios and one can certainly imagine scenarios where the delinquencies and losses get serious.”

FHA-backed loans have down payments as low as 3.5% — even as many private lenders have returned to 10% or 20%. Higher loan-to-home value ratios tend to have more risk. FHA borrowers often have poor credit ratings.

But FHA’s delinquencies are still far lower than subprime loans, which have nearly doubled in the past two years to 25.4%.

Traditionally, FHA loans have been safer than subprime. Getting an FHA loan has been more cumbersome. Such loans also had various size limits — now loosened — that kept them out of many overheated housing markets that later crashed.

Also, the FHA encourages the banks it works with to help borrowers stay in their homes.

“Historically, a significant number of FHA mortgages cured themselves — borrowers start making the payments down the road,” added Guy Cecala, CEO and publisher of Inside Mortgage Finance Publications.

But Cecala also noted that those tend to reflect better economic conditions than today. Unemployment, a big factor in delinquencies, now stands at 9.4%.

The collapse of the private mortgage market has meant more business for FHA.

Congress has also pushed the FHA to get more involved by authorizing the $300 billion “Hope for Homeowners” program, intended to help struggling homeowners to refinance — even when they are up to 25% underwater on their homes. Such reworked mortgages have an extremely high failure rate. However, FHA says it has not made many “Hope” loans.

Lawmakers also expanded the FHA loan limit from $625,500 to $729,750.

All that may be leading the FHA into riskier territory. And since the agency enjoys the full faith and credit of the U.S. government, the taxpayer would end picking up yet another tab for any future losses.

Also, the torrid growth may be masking the size of FHA’s current delinquencies.

“Those numbers look lower than they would otherwise because the portfolio is growing fast,” warned Pollock. “As a loan portfolio grows fast, the delinquency numbers look better because you’re adding all these new loans that haven’t had time to go bad yet into the denominator.”

Without those new loans, FHA’s Q2 new foreclosure rate of 1.15% would be nearly 1.5%, according to the Mortgage Bankers Association.

Meanwhile, the “surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring more difficult,” said Kenneth Donohue, Inspector General for the Department of Housing and Urban Development, in testimony before Congress in June.

Donohue noted that heavy loan volume makes the FHA “vulnerable to exploitation by fraud schemes.”

The FHA recently suspended Taylor, Bean & Whitaker Mortgage for suspected fraud. The No. 12 U.S. mortgage lender in the first half of 2009, Taylor recently filed for bankruptcy.

The agency itself, in an e-mail response to IBD questions, acknowledged “some pressure on FHA’s operational environment,” but said “system enhancements and process changes” are agency priorities.

FHA also stressed that it historically has been less prone to fraud than similar private lenders, citing its insistence on full documentation from borrowers.

Donohue also worried that surging FHA volume has “collateral implications for (Ginnie Mae’s) integrity.”

That could have serious policy implications for reform of the secondary mortgage market after the collapse of Fannie Mae (FNM) and Freddie Mac (FRE), which will cost taxpayers hundreds of billions of dollars.

The MBA on Wednesday proposed breaking up Freddie and Fannie into smaller, private entities that would issue a government-backed, mortgage-backed security.

This “CG” security “would be conceptually similar to the Ginnie Mae model,” the MBA’s report said. Indeed, it suggested “Ginnie Mae could potentially take on the responsibilities of the CG.”

Cecala notes that defaults on FHA loans can create headaches for Ginnie Mae investors, even though the FHA covers any losses. A default means a Ginnie Mae MBS gets paid early, causing difficulty for those investors who expected the payments to continue for a number of years.

But Cecala added that he was “not aware of Ginnie Mae investors being concerned” so far.

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

It is important to stress that although loan servicers have delegated authority to execute individual loss mitigation actions, participation in the FHA Loss Mitigation Program is not optional.

• Within 45 days of default, every delinquent borrower must be provided comprehensive written information about workout options, including contact information for HUD-approved housing counseling agencies.
• Each borrower must be evaluated for loss mitigation by the 90th day of default.
• No servicer may initiate foreclosure until their senior management committee has reviewed the loss mitigation analysis and determined that the borrower does not qualify for any option.
• Servicers must offer loss mitigation throughout the foreclosure process any time the borrower requests such consideration or the servicer becomes aware that the borrower’s financial situation may have improved and assistance is now an option.
• And finally, these activities must be reported to FHA monthly and documented in the loan file.

To ensure compliance, FHA has developed a sophisticated tiered ranking system to both monitor and rate each servicer’s commitment to loss mitigation. Top ranked servicers – those who reported some type of loan work action for at least 80 percent of their seriously delinquent loans – are eligible to earn increased incentives. In the most recent round of tier ranking published in January 2008, 89 servicers ranked in Tier One and only five servicers ranked in Tier Four. Servicing lenders that do not take loss mitigation seriously are in jeopardy of paying to FHA a fine equal to triple the cost of their foreclosure claim and can also be held accountable with other sanctions.

Source - HUD Testimony, Laurie Maggiano Deputy Director, Office of Single Family Asset Management, Federal Housing Administration U.S. Department of Housing and Urban Development on April 16, 2008

Some mortgage and real estate industry professionals have been complaining that FHA has tightened the credit underwriting guidelines recently.  This is not a true statement, however, there is ample reason for many to feel this way.  To examine what is really going on with FHA at this moment, we’ll have to take a step back and look at the entire mortgage market as a whole.

The recent near catastrophe and near miss of financial mayhem with Bear Stearns, a Wall Street firm that survived the Great Depression, has shown us just how vulnerable the mortgage market is these days.  Fannie Mae (FNMA) and Freddie Mac (FHLMC) have recently tightened their guidelines.  In addition to the 5% Loan-To-Value reduction buyers and borrowers experience with declining market indicators, there are also pricing adjustments in play for FNMA & FHLMC.  A borrower with a credit score below 730 and an LTV above 60% will have a pricing adjustment of between .5% and 3%.  This translates into higher borrower closing costs. 

The result has been a flood of conventional mortgage loans that have been converted to FHA mortgage loans.  The recent increase in FHA lending limits has also spurred this conventional to FHA transition. 

Now, HUD direct endorsement underwriters are overwhelmed with FHA loan files and as a reaction to this over supply of FHA loans, lenders have raised the credit score and qualifying requirement for borrowers seeking FHA financing.  Again, this is not a change with FHA; this is merely a change with many lenders.

So, now that we have that out of the way, let me assure you that the lenders participating in the Seller Helps Buyer program are not subject to this FHA artificially high credit score problem.  Simply choose your lender through the Seller Helps Buyer website and relax and enjoy your new FHA mortgage loan.

Search and purchase a pre-foreclosure with an FHA Mortgage Loan

Many states across the country are affected by declining market indicators in automated underwriting findings.  Beginning January 15, 2008, applications taken after that date will be subject to a 5% LTV reduction for FNMA Conventional loans.  This will be a 5% larger down payment required by borrowers desiring to purchase in a declining market area. 

FHA and VA will not be subject to the 5% declining market LTV reduction.  You can count on FHA and VA mortgage loans in the state of Florida.

The Section 203(k) program is the Department of Housing and Urban Developments primary program for the rehabilitation and repair of single family properties and an important tool for community and neighborhood revitalization and for expanding homeownership opportunities. These are the primary goals of HUD and the Department believes the Section 203(k) is an important program and we intend to continue to strongly support the program and the lenders that participate in it.

THE SUBJECT MESSAGE IS APPLICABLE ON FORWARD MORTGAGES ONLY

POLICY ALERT – RESPA/FHA EXISTING POLICY REGARDING NON FHAAPPROVED MORTGAGE BROKER FEES IN FHA MORTGAGE TRANSACTIONS

The subject alert reconfirms existing FHA policy regarding the use of non FHA-approved mortgage brokers. FHA loan origination services must be performed by a FHA-approved lender or FHA approved mortgage broker (loan correspondent). A loan correspondent may be compensated for the actual loan origination services it performs either directly by the consumer or indirectly by the FHA approved lender without being in violation of either the RESPA statute and regulations or FHA regulations.

In transactions where the mortgage broker is not an FHA-approved broker, the loan origination services cannot be performed. Under these circumstances, RESPA would prohibit the payment to the non FHA-approved mortgage broker because those services, under FHA regulations, would have to be performed again by either an FHA-approved lender or loan correspondent. The payment to the unapproved broker for duplicated services amounts to an unearned fee in violation of section 8(b) of RESPA. Further, this payment also acts as a disguised referral fee for steering the borrower to the FHA-approved lender or loan correspondent which is in violation of section 8(a) of RESPA. While a broker who is not FHA-approved may assist a prospective FHA borrower in obtaining an FHA loan, the non-approved broker cannot perform required FHA loan origination services. In these instances, the fee charged must be paid from the mortgagor’s own available assets, must be disclosed on the HUD-1 at closing and a copy of the contract included in the loan file submitted for insurance endorsement.

Under no circumstances, may a borrower pay a fee that is not commensurate with the amount normally charged for the similar services, goods or facilities. If the payment or a portion thereof bears no reasonable relationship to the market value of the goods, facilities or services provided, the excess over the market rate may be used as evidence of a compensated referral or unearned fee in violation of section 8(a) or (b) of RESPA and 24 CFR 3500.14(g).

RESPA provided further guidance to industry regarding payments by lenders to mortgage brokers in Policy Statement 1999-1. While the policy statement specifically speaks of lender payments to mortgage brokers, those payments are indirectly paid by the consumer and the policy statement would apply equally to payments made directly by the consumer.

There are a number of mortgage loan programs that are available in Florida.  One of the most popular these days is the Florida FHA loan.  The advantages of an FHA loan in Florida are apparent.

FHA provide a 3% down payment option that can be gifted

Many Florida properties are within FHA loan limits

Florida FHA loans may be obtained with some bad credit

FHA loans in Florida have low fixed rates

OK, I’ve typed enough about the Florida FHA loan for today.  Please consider your FHA options in FLorida for a Florida fixed rate FHA loan carefully.

Let’s take a look at what the 4155.1 states regarding delinquent federal debt and obtainig an FHA mortgage loan. 

“If the borrower, as revealed by public records, credit information, or HUD’s Credit Alert Interactive Voice Response System (CAIVRS), is presently delinquent on any Federal debt (e.g., VA-guaranteed mortgage, Title I loan, Federal student loan, Small Business Administration loan, delinquent Federal taxes) or has a lien, including taxes, placed against his or her property for a debt owed to the U.S., the borrower is not eligible until the delinquent account is brought current, paid, otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing.  Tax liens may remain unpaid provided the lien holder subordinates the tax lien to the FHA-insured mortgage. If any regular payments are to be made, they must be included in the qualifying ratios.
 
Since the IRS routinely takes a second lien position without the necessity of independent documentation, eligibility for FHA mortgage insurance will not be jeopardized by outstanding IRS tax liens remaining on the property unless the lender has information that the IRS has demanded a first-lien position.

Although eligibility for an FHA-insured mortgage may be established by performing the actions described above, the overall analysis of the creditworthiness must include consideration of a borrower’s previous failure to make payments to the Federal agency in the agreed-to manner and must document its analysis of how the previous failure does not represent a risk of mortgage default.”

Effective October 15, 2007, borrower social security information will no longer be validated in real time when a new case number assignment is requested in FHA Connection (FHAC).  Edits in FHAC will continue to validate the prefix combination of the SSN as well as check against the Social Security Administration’s (SSA) Death Master File.  The FHAC will also continue to validate SSNs using the borrower’s name, SSN and birth date. 

However, this validation process will no longer provide an acceptable confidence rating at the time of case number assignment.  Instead, the case number will be issued to the lender while an overnight verification attempt with SSA takes place.  Lenders are expected to view the Holds Tracking screen in FHAC the next business day (or the following business day after that for case numbers requested after 5:00PM Eastern Time) to verify the borrower’s name and SSN passed validation with SSA.  Due to their business cycle, especially towards the end of the month, SSA has cautioned that it may not be able to provide an overnight validation when required but should do so within a few business days.

If the overnight matching with SSA fails, a Case Warning for SSN Validation will be placed on the case number.  Lenders will have the opportunity to make the necessary corrections and a second attempt to validate with SSA will occur.  If the revised data passed validation, the Case Warning for SSN Validation will be removed.  If a case continues to fail SSA validation and the lender submits a request for insurance endorsement because it believes the SSA database is in error, the lender must provide conclusive documentation in the case binder supporting the validity of the SSN to the applicable Homeownership Center (HOC).  For the Lender Insurance program, the Case Warning for SSN Validation will require the lender to submit the case binder for endorsement along with conclusive documentation supporting the validity of the SSN.  If upon review, the HOC staff believes the documentation to be valid and the loan meets all other FHA requirements, it will endorse the mortgage for insurance.  Any changes made to the borrower’s name, birth date and SSN at any time prior to insurance endorsement will trigger a validation request with SSA.  It is anticipated that an increase in the number of loans that fail this validation process will occur.

SSA has limited tolerance for minor mistakes in names, birthdates and social security numbers, so lenders are reminded of the importance for accuracy in these three data elements when requesting a case number. 

FHA provides SSN checks to help protect the insurance funds it manages, and that lenders are still responsible – not FHA – to verify each borrower’s SSN, as well as the borrower’s identity.  This verification service, provided by FHA at no cost to its approved lenders, may only be used for processing loans for FHA insurance.  Lenders are not to use this service to verify SSNs for other than FHA-insured mortgages.

A mortgagee letter on this subject will be issued shortly.  In the meantime, should you have any questions concerning this change, call 1-800-CALLFHA