o    FHA announced their new mortgage modification plans to aid distressed FHA borrowers.

o    The FHA home loan is refinanced and 30% of the FHA loan is placed into an interest-free second mortgage that must be paid back when the property is sold or refinanced.

o    Homeowners must qualify with ratios of 31/55. The 1^st ratio says that up to 31% of the individual’s monthly income can be used for housing costs and that 55% can be used for housing costs plus other monthly debts.

o    The borrowers must be able to document a hardship (ie. an income change, loss of employment etc.) and HUD must be considered as a long term hardship.   

Read the original article online > FHA Loan Modification Program.

Just last week, the Secretary of HUD announced new federal guidelines for FHA home loans which allow First-Time Homebuyers (FTH) to monetize their $8,000 Obama Tax Credit upfront, for use toward their down payment or closing costs, rather than only after close of escrow.  How will this work? No one really knows yet – federal lending guideline changes usually take a month or so to manifest into concrete checklists and phone numbers you can call to take advantage of them. But it looks like state Housing Finance Agencies and HUD-approved nonprofit organizations will be involved, and will provide the upfront funds to borrowers (for a small fee, of course), which they’ll be reimbursed at tax time next year.

However, the author of the article, noted that she has not heard anyone actually suggest that the upfront monetization of the FHA tax credit won’t be effective at stimulating home sales. On the flip-side, the National Association of Home Buyers’ projections show that about 160,000 homes will be sold as a direct result of this new incentive. But there are folks who don’t like it, and their arguments tend to focus on the worry that no-skin-in-the-game borrowers are the sort of problem homeowner who created the market madness by just walking away when their homes devalued. The pestimistic crowd says that that we might be returning to the bad old days of 100 % financing.

FHA loan overview:
This is a new era of mortgage lending than the stated income days of old (old =2005). It wasn’t no-skin-in-the-game borrowers who walked away and created the foreclosure crisis, it was no-skin-in-the-game borrowers who couldn’t afford their escalating mortgage payments who were the problem children of the real estate market. The upfront monetization of the $8,000 tax credit will only be available for FHA loans, which require full documentation of income, impose strict and low debt-to-income ratios and are characterized by low, 30-year fixed interest rates and payments. This is not a return to the subprime era, when you only needed to be human and alive to get a loan (notwithstanding those few times we saw the deceased and the canine get mortgages).

On careful reading of the few details we do have on this program, it’s clear that it does not, in fact, reduce the amount of down payment funds that need to be deposited by the buyer to get an FHA loan. The $8,000 credit cannot, under current law, be used to meet the minimum 3.5% down payment requirement (although gifts from relatives can). The upfront $8,000 is available for home-buyers to use as extra down payment money (to buy more or lower monthly payments), to pay discount points (reducing their interest rates) or to defray closing costs.  That’s it.

This FHA loan program changes the time frame in which First-Time Homebuyers who close escrow by December 1, 2009 will be able to benefit from their tax credit. Frankly, I’d imagine this will mean lots more folks will put the funds into their homes and into making their loans more affordable. 

Compare FHA mortgage rates and FHA lending costs: Borrowers have never been in a better position to qualify for lower mortgage rates.  We suggest analyzing 3 loan offers from different lenders or brokers.  Compare interest rates, loan amounts, origination fees, discount fees, processing fees, underwriting fees and the appraisal fees. Don’t forget that with FHA refinance loans all cash out transactions above 85% Loan to Value now require 2 appraisals from FHA licensed appraisers.  Don’t forget to factor in the upfront mortgage insurance premium, with FHA mortgage loans.  See the complete article at FHA Home Loan Costs.

HUD believes that many FHA mortgage lenders have not lived up to the ethic codes and high standards required with FHA underwriting guidelines. That has become a problem because FHA loans that do not meet FHA mortgage lending standards to the letter are likely to be the very loans which cause FHA losses.   In an effort to eliminate this growing concern, HUD says that it “continues to introduce proactive measures to appropriately manage its risk. Recently, FHA reactivated its Special Work Assessment Teams to conduct single-focus on-site reviews of lenders whose originations are exhibiting signs of distress.”

Many insiders, like FHA Mortgage Guide, believe that HUD will be auditing FHA mortgage lenders to make sure these finance companies are originating FHA loans effectively with HUD’s government standards. HUD also said that it “must hold mortgagees accountable for their lending practices in order to protect the public trust and the FHA Insurance Fund.

The Department expects each mortgagee to exercise the same level of care in originating, underwriting and servicing an FHA-insured mortgage as it would for a loan in which the mortgagee would be entirely dependent on the property as security to protect its investment.   When a mortgagee fails to comply with HUD’s policies and procedures, HUD will take the appropriate action. For example, lenders that materially violate FHA loan program statutes, regulations and handbook requirements may be referred to the Mortgagee Review Board for appropriate sanctions, which may include termination of mortgagee approval.”  

HUD has made it clear that compliance with their FHA loan programs is essential or they will remove you from their mortgage lending system. How would you define reasonable and allowable lending fees for FHA home loans? Previously HUD had allowed anywhere from 1-2 points per transaction. The way the mortgage crisis has played out, it has become imperative for most mortgage brokers and lending companies to be able to offer FHA mortgages for new home buying and refinance transactions.  FHA mortgage rates remains at or below 5% for thirty year fixed rate mortgages, so being FHA-approved is at the top of most marketing lists for mortgage companies because the product remains the cornerstone of lending in 2009 and beyond.

HUD’ Checklist for Originating FHA Mortgage Loans-The lenders must at a minimum meet the following criteria listed below:

ü  Reviews all FHA loans with early payment defaults to try and stave off foreclosure.

ü  Has a comprehensive quality control plan.

ü  Does not engage in fraudulent or false or misrepresentative advertising.

ü  Full documentation demonstrating the stability each borrower employment income

ü  No “excessive charges and unallowable fees to the borrower”.

CBS News’s Kelly Wallace reports that FHA rates and conforming interest rates have dropped significantly, but jumbo mortgage rates remain high, because lenders don’t want to offer low rate incentives for these high risk mortgages that many borrowers in high cost areas find themselves stuck in. 

www.youtube.com/watch?v=xqRJ4HwZt3k

See FHA Mortgage Video

The Department of Housing and Urban Development maintains a strict enforcement of fair lending practices that encourage full disclosures to borrowers considering a FHA home loan with a mortgage broker or lender providing a refinance or purchase loan transaction.  PredProtect, an 8-year old home financing compliance product, now has an automated analysis designed to aid lending companies with risk management. 

Some Banks Reduce Cash Out Limits for  FHA Mortgage Refinancing
Two smaller banks today have reduced the cash out limits on FHA home loans to 85% loan to value, despite the FHA guideline allowing 95% cash out.  Rumor has it that larger banks will also follow through on lowering the loan to value limits on FHA cash out refinancing.   Tougher guidelines quickly spread industry wide, so expect many more lenders to make it more difficult to cash out on an FHA refinance.

Since FHA loans have a very high default rate (roughly 12%), it is only logical that banks are imposing tougher guidelines for borrowers.   The banks simply cannot afford to take on additional default risk given their weak financial position.  Many potential borrowers will continue to find it difficult to obtain mortgage approval until the economy recovers and the housing markets stabilize.  Based on the way things are going, it could be a long wait.