FHA Loan Expert Blog

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

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203 [Docket No. FR-5087-F-02] RIN 2502-AI52
TITLE: Standards for Mortgagor’s Investment in Mortgaged Property
AGENCY: Office of the Assistant Secretary for Housing–Federal Housing Commissioner, HUD.
ACTION: Final rule.

DATES: Effective Date: October 31, 2007.

SUMMARY: This final rule amends the Department’s regulations governing the specific standards for a mortgagor’s investment in property for which the mortgage is insured by the Federal Housing Administration (FHA). Specifically, this final rule codifies HUD’s longstanding practice, authorized by statute, of allowing a mortgagor’s investment to be derived from gifts by family members and certain organizations. The standards established by this final rule address a situation in which the mortgagor’s investment is derived from a gift, loan, or other payment that is provided by any donor, including an individual or an organization, and also specify prohibited sources for a mortgagor’s investment. The final rule establishes that a prohibited source of downpayment assistance is a payment that consists, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale: The seller, or any other person or entity that financially benefits from the transaction; or any third party or entity that is reimbursed directly or indirectly by the seller, or any other person or entity that financially benefits from the transaction.
 
This final rule follows publication of a May 11, 2007, proposed rule and takes into consideration the public comments received on the proposed rule. After considering all comments received, HUD is adopting the May 11, 2007, proposed rule with certain minor clarification changes.

According to Nehemiah’s webiste getdownpayment.com, Nehemiah Corporation of America is “a not-for-profit community development corporation specializing in homeownership, affordable housing and community development….The nation’s largest privately funded downpayment assistance program. Since 1997, we have assisted over 230,000 families working with Realtors, builders and lenders nationwide to provide more than $900 million in downpayment gift funds.”  Here’s what Nehemiah’s president had to say about the recent HUD rule. 

October 1, 2007

Dear Colleague,

Today HUD published its rule known as “Standards for Mortgagor’s Investment in Mortgaged Property.” This rule threatens the existence of privately funded downpayment assistance. Below is an excerpt of a press release issued today that describes my assessment of the situation.

“HUD’s action to move forward with banning privately funded downpayment assistance programs is outrageous and we have responded by filing a lawsuit in Federal Court yesterday to challenge the merits of HUD’s damaging rule and to seek an injunction blocking implementation of this rule. It is inconceivable that HUD has taken this action in complete disregard for the House’s passage of legislation that would block it, driven by strong bipartisan support from House Financial Services Sub-Committee on Housing Opportunity Chair Congresswoman Maxine Waters (D-California) and fellow committee member Congressman Gary Miller (R-California). To date, privately-funded downpayment assistance programs have helped over 600,000 families become homeowners, and have been credited not only for helping people buy homes, but also stabilizing neighborhoods and cities and creating stronger families. As evidenced by the over 15,000 letters sent in opposition to HUD by families across the country, programs like The Nehemiah Program continue to be a lifeline for families working to reach the dream of homeownership. Further, broad opposition to this proposal by groups including the National Association of Home Builders, the Mortgage Bankers Association, the US Council of Mayors, and National Association of Counties speak to the validity and importance of seller-funded downpayment assistance programs. We remain hopeful that the legislative process reaches a successful conclusion.”

The HUD Rule has 3 major components:

1. Under the new rule downpayments cannot be derived from sellers directly or indirectly or any other party that benefits financially.

2. The rule takes effect on October 31, 2007 for all DPA providers except The Nehemiah Program.

3. Due to a 1998 legal settlement between Nehemiah and HUD, the effective date for The Nehemiah Program is March 31, 2008. The excerpt from the final rule states:

“…pursuant to an April 1998 settlement agreement resolving litigation between the Nehemiah Progressive Housing Development Corporation (Nehemiah) and HUD, the effective date shall be March 31, 2008 for the Nehemiah downpayment assistance program described in the settlement agreement between Nehemiah and HUD.”

Since May, Nehemiah has led the fight against this controversial rule, and will continue to take every possible step to preserve the option of privately funded downpayment assistance for low- and moderate-income homebuyers. We expect Congress to continue their opposition to the HUD rule. So far, the House of Representatives has opposed the HUD rule by including language in the FHA Reform Bill and the HUD 2008 Appropriations Bill that protects DPA. The Senate is presently working on its version of the FHA Reform bill and Nehemiah is diligently working with its leadership to make sure our concerns are heard.

We intend to prevail and ask for your support in preserving downpayment assistance by contacting your Congressperson and Senators to voice your concern about the elimination of downpayment assistance programs. Locate your elected officials by visiting takeaction.ahaanow.org/ahaa/home.

You can count on Nehemiah to keep you informed on the latest information surrounding the downpayment assistance industry. Stay up-to-date by visiting getdownpayment.com or call us at 877-634-3642 from 9:00 a.m. - 8:00 p.m. EST for answers to your questions.

On behalf of the Nehemiah family, I thank you for your support. Stay tuned!

Sincerely, 

Scott Syphax
President & CEO
Nehemiah Corporation of America
424 North 7th Street, Suite 250
Sacramento, CA 95811

Was today’s HUD rule the seller-funded-down-payment-knockout-punch?  Maybe it was.  Maybe it was not.

Stay tuned!

WashingtonPost.com reported on FHA Seller Funded Down Payment Assistance Programs (DPAs) yesterday.  I wonder if this HUD Rule will be challned in some way?  Time will tell.  For now, at least, it looks like here will be no more seller funded DPAs helping homebuyers to purchase.

From the WashingtonPost article we read:

The Federal Housing Administration will prohibit borrowers from using seller-financed down payment assistance programs that have helped hundreds of thousands of people buy homes but have come under the scrutiny of federal authorities.

Such programs allow home sellers to give money to charities, which in turn assist buyers with their down payments. The sellers pay the charities a service fee, but often recoup the money by charging a higher price for the homes, usually 2 or 3 percent more, or an amount equal to the down payment, according to a 2005 study by the Government Accountability Office.

In a conference call with reporters, Federal Housing Commissioner Brian Montgomery said the FHA will publish its new rule in the Federal Register on Monday. The rule, which is little changed from a preliminary version put out for comment in May, will go into effect 30 days after publication.

“These contributions often function as an incentive to purchase the home,” Montgomery said. “But these gifts are ultimately paid for by the borrower through a higher mortgage amount. The home buyers are often unaware that the ‘gift’ is something they end up paying for and is not a ‘gift’ at all.”

Almost 200 charities nationwide — one of the largest is AmeriDream in Gaithersburg — have participated in such arrangements. But the Internal Revenue Service and other government entities have raised concerns, particularly after the GAO study found that borrowers receiving assistance from the charities were more than twice as likely to default or become delinquent than other FHA borrowers were.

In a ruling last year, the IRS went so far as to call the seller-financed programs “scams,” accusing the charities of inflating home prices.

“Down payment assistance programs administered by charities have unfortunately been an area where my investigations and the IRS have found a great deal of abuse,” said Sen. Charles E. Grassley (R-Iowa), who has pushed for changes.

Ann Ashburn, president of AmeriDream, criticized the FHA rule and said there is no evidence that down payment programs raise prices.

The housing market has deteriorated so much that home prices cannot be inflated, she said. “At the end of the day, the buyer has the ultimate say.”

Borrowers with FHA-insured loans will still be able to get down payment assistance from family, employers, governmental entities or charitable organizations. But Ashburn said seller-financed down payment assistance has accounted for 30 to 50 percent of FHA purchase loans in recent years. The new rule, she said, would keep low-income borrowers from buying homes and further weaken the housing market.

“The rule does discriminate between the haves and the have-nots,” she said. “People who have money from mom and dad or have money on their own are still okay . . . but people who have no access to any sources — those are the have-nots — that group is now going to be discriminated against.”

The Mortgage Bankers Association also blasted the ruling. The programs provide “important assistance to cash-strapped borrowers,” said Steve O’Connor, the association’s senior vice president of public policy.

“While there is a need for stronger quality control measures, we shouldn’t throw the baby out with the bathwater and end the program,” he said.

Others called the ruling prudent.

“Given the poor performance of these loans, we can understand why . . . [the FHA] took the steps they did to shut it down,” said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.