Currently, FHA represents the majority of purchase loans in the US. According to the HUD/FHA guidelines the eligibility for the seasoning (the “waiting time”) of a foreclosure before an individual can purchase again is 3 years. 2 years for a chapter 7 bankruptcy and 1 year for a chapter 13 bankruptcy with proof of on time payments to the trustee. Over the last few months I have received significant amounts of emails and calls asking “when can I buy gain?”.

At first the idea of a defaulted home owner buying another property seemed outlandish but when we go back and realize that the main reason that the cycle started was due to a sub prime mortgages that after a 2 year teaser rate became impossible to pay back at rates close to or, in some cases, above 10%. Fast forward 3 years and here we are in a completely different environment with rates at historical lows of 5% for a 30 year fixed. Home values have decreased across the country and some markets are down 25%. Granted that the aggressive underwriting guidelines are gone for forgettable future  and now the pendulum has moved almost to much in the other direction there will be a true opportunity for the hard working American that has not lost sight of the dream of owning a home.

Although the unemployment rate represents a HUGE issue for the overall economy it may not be the case for the housing market. If we do the math and subtract the current 11% in California versus the +/-4.5% that we had, before the economy took a nose dive, that only eliminates an additional 5% of the general population but with home ownership at historical lows of 64.5% that number truly eliminates less than 2% of the former homeowners.

We all know that price is the point at which the supply curve meets the demand. The fact is that under normal circumstances the largest portion of the population that becomes “new homeowners” are couples that have recently gotten married or had a baby. That population has not gone away. There are just as many people getting married and having kids in 2010 as there were in 2007. One last potential increase in demand is the possibility of our troops coming home and obtaining financing via the VA system. If we add all these factors together the outlook may not be as bleak some economist have already predicted further declines for the remainder of the year.

Could we have seen the worst of the housing market in our lifetimes and face greener pastures? I sure hope so.

What makes this experience even more remarkable is that I emailed Seth my experience as soon as I had access to email. Much to my surprise he replied, “great story, Michael! enjoy the ice cream.”

In December HUD (Housing and Urban Development), the agency that oversees the underwriting of FHA loans, had warned that these changes were on the way for “risk-based pricing”.  In other words, the riskier the borrower the more expensive the loan and/or the higher the interest rate.  The second announcement was leaked last Friday, January 15th, imposing a one-year moratorium on the FHA guideline that previously had prevented investors from flipping homes to FHA borrowers within the first 90 days of ownership.  Prior to this announcement investors were only able to sell these homes via Conventional, VA or private funds (cash).

1) Risk Based Pricing:  To sum up the ‘Mortgagee letter 2010-02′ published by HUD, this change represents an increase of 0.5% of the loan amount to the Up Front Private Mortgage Insurance Premiums on all FHA loans.  As an example, under the old plan, for a loan amount of $300,000 the consumer had to buy a mortgage insurance policy of $5,250 to insure the loan against default.  After April 5th 2010, the same policy will go up to $6,750. That is an increase of about 29%.  The explanation is simple.  After the demise of the Sub-prime era, FHA became the only lending source for buyers that had less than perfect credit, and also only required a 3.5% down payment.  This provides home buyers the option of having very little “skin in the game”.  In 2007 FHA loans represented less than 5% of all the loans originated in the US.  In 2008 these loans began to gain popularity and in 2009 they represented the majority (80%+) of the loans for first time home buyers.  My bet is that even with the increase in the Mortgage Insurance Premium, these loans will not lose ANY of their current popularity.

2) The second change, designed to allow quicker foreclosure resale’s, may have a very significant effect on our overall economy.  If you are a first time home buyer, I don’t need to tell you how frustrating and lengthy the process you have to go through in order to get an offer accepted, especially if your financing includes an FHA loan.  It feels at times as if the money to purchase the property is not green.  By placing a moratorium on the 90 day waiting rule to flip a property, we might be giving the first time home buyer a fair shot to get an offer to buy a home accepted.  Investors need to unload these properties as quickly as possible.  The rule specifies that as long as the profit from the resale is 20% or less no further action is required.  However, if the profit is higher than 20%, the seller must provide proof of the improvements made to the property to substantiate the higher price.  In addition, most lenders will require a second appraisal to make sure the buyer is not paying above-market pricing, and the lender is not getting into a negative-equity position.

The silver lining of these changes is this:   the increase in PMI will offset losses already incurred by HUD, and not decrease the volume of FHA borrowers.  The lifting of the 90-day rule gives FHA borrowers a better chance of being able to buy a rehabbed home.

Michael Mekler is an active loan officer. Reach Michael via email at mmekler@fhaexpert.net or call toll-free to 1-888-218-0094

1. Changes are effective for case numbers assigned on or after April 15th, 2010.
2. New upfront mortgage insurance premium (UFMIP) will be 2.25% for all purchase and refinance loans. The premium for H4H and HECM is 2.0%.
3. This change applies to all standard FHA Single Family Programs except the following: Title I, Section 247-Hawaiian Homelands, Section 248-Indian Reservations, Section 223e-Declining Neighborhoods or Section 238c-Military Impact areas in Georgia and New York
4. Annual premiums will not change at this time
5. There will be no discount on the UFMIP for first-time homebuyers with pre-purchase counseling.

Treasury Secretary Henry M. Paulson Jr. said the initiative would help coordinate efforts by financial companies to help an estimated 2 million homeowners whose introductory mortgages with low rates are now resetting at much higher rates, greatly increasing the risk they will default on the loans.

“A combination of stagnant or falling house prices, low down payment mortgages and resetting adjustable-rate mortgage rates are creating real challenges for many American homeowners,” Mr. Paulson said in a statement.

He said that 11 of the largest mortgage service companies, representing 60 percent of all mortgages in the country, had agreed to join the new coalition. Other members will include mortgage counseling agencies, investors and large trade organizations.

“These leaders recognize that by working together, coordinating and scaling up their activities, they will be able to work toward the goal to help more homeowners,” Mr. Paulson said.

The initiative, which has been named Hope Now, follows an announcement by President Bush on Aug. 31 that the administration was making changes in the Federal Home Loan Administration insured-loan program so that more people could qualify for F.H.A.-insured loans.

Democrats, however, have criticized the administration, saying the actions so far have been too little and too late to significantly address a growing foreclosure crisis as homeowners struggle to deal with sharp increases in their adjustable mortgage payments.

The rising defaults, which started in the market for subprime mortgages — loans offered to people with weak credit histories — upset global financial markets in August, prompting the Federal Reserve to cut interest rates last month to make sure the country did not get pushed into a recession.

Mr. Paulson said the new coalition had put together an “aggressive plan to reach more homeowners and help them find a way to stay in their homes.”

He said that he was happy to see that the American Securitization Forum, which represents investors who buy mortgages that have been repackaged into securities, had agreed to join the alliance. He expressed hope that the group would grow to represent more than 60 percent of outstanding mortgages.

“We need greater participation if we are going to get to all those that need help as quickly as possible,” he said.

According to some estimates, mortgages converting from low teaser rates could mean an extra $250 to $300 in monthly payments on a typical $1,200 monthly mortgage payment.

In addition, FHA will implement risk-based premiums that match the borrower’s credit profile with the insurance premium they pay-i.e., riskier borrowers pay more. This common-sense, risk-based pricing structure will begin on January 1, 2008.

“Many hard-working American families who were able to make their mortgage payments under the initial teaser terms of the exotic loan are now struggling to make ends meet because their rates have doubled or tripled,” said HUD Secretary Alphonso Jackson. “FHASecure will bring stability to the housing market and give eligible families who were in good financial standing before their loans reset a chance to keep their homes.”

The combination of FHASecure and risk-based premium pricing will permit FHA to return to the role it was originally designed to play, bringing stability to the real estate market by helping break today’s cycle of foreclosures and price depreciation and creating much needed liquidity in the now-constricted mortgage market.

FHA has recently experienced a substantial increase in the number of conventional borrowers refinancing into FHA products. With FHASecure, it can help even more. The number of these refinancing transactions has tripled since the start of 2006. FHA’s transactions are projected to surpass 100,000 loans by the end of the fiscal year. To date, these figures do not include refinances for delinquent borrowers.

The FHASecure initiative will operate under the same safe guidelines as the FHA’s existing mortgage insurance program without affecting FHA’s financial health. Eligible homeowners will be required to meet strict underwriting guidelines and pay a mortgage insurance premium, which offsets the risk to FHA’s insurance fund at no cost to the taxpayer.

The risk-based insurance premium structure will further expand FHA’s reach to additional underserved borrowers, particularly minorities and first-time homebuyers who have been disproportionately lured into exotic mortgages, and enhance the FHA’s overall risk management. The move to risk-based premiums ensures that FHA remains on solid financial footing as a self-financed agency for the long-term.

FHASecure, like all FHA products, will be underwritten to ensure the borrowers have the ability to repay the loan, will require escrow for taxes and insurance, and will continue to offer unprecedented foreclosure prevention assistance. The FHA has never permitted and will not include pre-payment penalties or teaser rates that are common in exotic mortgages and have caused much of the current market troubles.

To qualify for FHASecure, eligible homeowners must meet the following five criteria:

1. A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset;
2. Interest rates must have or will reset between June 2005 and December 2008;
3. Three percent cash or equity in the home;
4. A sustained history of employment; and
5. Sufficient income to make the mortgage payment.

“FHASecure is designed for families who are good borrowers but were steered into high-cost loans with teaser rates,” said Assistant Secretary for Housing-FHA Commissioner Brian Montgomery. “These homeowners, many of whom are minorities, need a safe, affordable mortgage product that will help build wealth. All FHA borrowers pay mortgage insurance premiums to offset claims to the FHA insurance fund and ultimately prevent risk to the taxpayer.”

FHASecure will also bring much-needed liquidity to the mortgage market. FHA anticipates more lenders will offer FHA-insured loans, pool them, and securitize them with the Government National Mortgage Association (Ginnie Mae), which has the full faith and credit of the U.S. government. This guarantee makes Ginnie Mae’s mortgage-backed securities the safest on the market and helps to channel greater capital into the housing market, benefiting U.S. homeowners.

Since its inception in 1934, FHA has helped almost 35 million people become homeowners, making it the largest insurer of mortgages in the world. The 109th Congress introduced the Expanding American Homeownership Act in June 2006 which would enable FHA to be a safe option for more underserved low- and moderate-income and minority families so they can achieve the American Dream of homeownership. Today, President Bush also urged Congress to quickly pass the Administration’s FHA modernization proposal to help more families in need.

For more information about FHASecure and other FHA products, please call 1-800-CALL-FHA or visit www.fha.gov or www.hud.gov. For a list of your local homeownership center or a HUD-approved housing counseling center, go to www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm

House lawmakers are planning to vote Tuesday on an overhaul of a federal agency that insures mortgages against default in an effort to help struggling homeowners avoid foreclosure.

The plan of leading House Democrats to expand the role of the Federal Housing Administration goes further than the Bush administration’s plan to ease some of the mortgage market troubles that have rattled the economy.

Both House lawmakers and the Bush administration want to allow the FHA, which insures mortgages for low- and middle-income borrowers, to back refinanced loans for borrowers who are delinquent on payments because their mortgages have reset to higher rates from low initial levels.

But the administration objects to a plan by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, to raise the limit on the size of mortgages FHA can insure to $500,000 in high-cost areas of the country from the current $362,000.

The White House said in a statement Monday that the program “should remain targeted to traditionally underserved homebuyers, such as low- and moderate-income families.” The administration wants the FHA loan limits to be raised to $417,000 in high-cost areas.

In the Senate, meanwhile, legislation by Senate Banking Committee Chairman Christopher Dodd, D-Conn., and the panel’s senior Republican, Sen. Richard Shelby of Alabama, would raise the limit to $417,000.

While FHA loans are insured by the government in the event of default, the mortgages themselves are made by major lenders such as Bank of America Corp. and Wells Fargo & Co., and are typically offered to investors as mortgage-backed securities by federal housing finance agency Ginnie Mae. The FHA currently insures 3.7 million loans.

U.S. Representative says GSE amendment would make loan cap $500,000

Last Update: 2:01 PM ET Sep 11, 2007

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By Damian Paletta

Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)–U.S. House Financial Services Committee Chairman Barney Frank said Tuesday an amendment he plans to offer next week would raise the limit on the size of loans that could be insured by the U.S. Federal Housing Administration, with a provision that would allow more growth based on market conditions.

The amendment, which would likely pass, would be attached to a broad reform bill that aims to give the Federal Housing Administration more flexibility to insure riskier mortgages. FHA is a division of the U.S. Department of Housing and Urban Development.

Frank, D-Mass., said the amendment would raise the size of loans that could be insured by FHA “to $500,000 – that would be the base, and in addition to that it would give the HUD secretary the ability to raise it” if market conditions require such a adjustment.

Frank’s comments came during a meeting with reporters after his speech to the National Association of Federal Credit Unions.

Frank on Tuesday also urged Senate lawmakers to pass broad reform of the supervision of Fannie Mae and Freddie Mac. The House passed a bill earlier this year, and Frank said that stronger regulatory oversight for the companies might make the White House more comfortable with allowing the companies to buy larger mortgages and increase the size of their portfolios beyond strict limits.

“Beyond that, I do think the (Bush) administration would fight hard against raising the jumbo (limit) and increasing the portfolio in the context of the current regulation,” Frank said. “The best thing that would happen would be for the Senate to take up the whole (GSE reform) bill.”

As millions of homeowners lie bleeding in the Subprime Corral, the feds ride in on an old mare to rescue a few borrowers suffering from scratches.The bailout plan, called FHASecure, is designed to prevent foreclosures among homeowners who fell behind because the rates went up on their adjustable-rate mortgages. About 60,000 “delinquent-yet-creditworthy” mortgage borrowers will be able to refinance into FHA-insured home loans in the next year or so, an official with the Federal Housing Administration says.It’s a triage operation, with the FHA aiding the delinquent borrowers who are easiest to patch up. The rescued borrowers will be dwarfed by the number of struggling homeowners who won’t qualify for FHA refinances. “Unfortunately, we think there will be some families that we won’t be able to help,” the FHA official says.People who refinance under the FHASecure program will end up with fixed-rate mortgages, which are quite popular nowadays among people who were burned by rising rates on ARMs. The FHA doesn’t lend money; it insures mortgages made by lenders.

Is it déjà vu all over again?
The FHA is a 73-year-old packhorse that was foaled during the Great Depression. In 1934, foreclosures were skyrocketing, house values were plummeting, and house sales and construction were at a standstill. In those days, people got balloon mortgages that lasted for five years, and then they were expected to refinance at a new rate. In that respect, those home loans were somewhat similar to today’s adjustable-rate mortgages. Like today, many homeowners back then had trouble making their payments and they couldn’t find refinancing. “The housing industry was still flat on its face with mortgage money frozen, 2 million men unemployed in the construction industry and properties falling apart for lack of money to pay for repairs,” says the FHA’s self-published history of its first 25 years. The FHA was created to insure mortgages, reducing the risk to lenders and making them more likely to lend. The agency carried a lot of cargo during the decades after the Depression. But after the 1980s, the FHA grew feeble. As recently as the mid-’90s, more than one-tenth of mortgages were FHA-insured; this year, its share is around one-fiftieth. As the FHA shed its burden, piggyback loans and uninsured subprime mortgages took it up.Some critics wondered publicly whether the FHA should be humanely destroyed. But then came this year’s subprime meltdown. Most subprime borrowers have adjustable-rate mortgages, and at the end of June, one in six subprime ARM borrowers was at least a month past due on the payments, according to the Mortgage Bankers Association. About two in 25 subprime ARMs were in foreclosure. The delinquency and foreclosure rates were rising.In light of the subprime delinquency and foreclosure epidemic, the FHA believes it is relevant again. Federal housing officials intend to saddle up FHA and make it carry a bigger load. FHASecure constitutes the first of those efforts. It’s intended to help ARM borrowers who can’t make their payments after rate reset and who have trouble finding conventional lenders that are willing to lend at affordable rates.“FHASecure is designed for families who are good borrowers but were steered into high-cost loans with teaser rates,” FHA commissioner Brian Montgomery says.It’s hard to estimate the size of that market. The Center for Responsible Lending estimates that 2.2 million subprime loans will go into foreclosure over the next several years. Christopher Cagan, director of research and analytics for First American CoreLogic, has estimated that 1.1 million foreclosures will result from rate resets through the end of 2012, affecting both prime and subprime borrowers.The FHA estimates that it can help 60,000 ARM borrowers refinance in the next fiscal year. FHA officials say the agency isn’t going to solve the foreclosure problem all by itself, and that’s not the intent.“FHASecure is designed for families who are good borrowers but were steered into high-cost loans with teaser rates.” Who qualifies for assistance?
According to FHA guidelines that were sent last week to lenders, the FHASecure refinance program is available only to borrowers who made all their payments on time during the six months before the ARM rate was adjusted upward. (In practice, “on time” means less than 30 days late, so making a few payments two weeks late won’t disqualify borrowers.)Borrowers can get FHASecure loans even if they are up to six months behind on the payments on their non-FHA ARMs. But borrowers have to prove that they fell behind because of the rate reset and not for another reason, such as a job layoff.“The FHASecure initiative … is not to be used to solicit homeowners to cease making timely mortgage payments,” the agency admonishes in its letter to lenders. So don’t let anyone talk you into making late payments on purpose.Borrowers can roll the unpaid payments into the new loan.FHA-insured loans have maximum amounts that vary depending on how expensive a housing market is. In the continental

FHA to adopt ‘risk-based pricing’
The FHA requires refinancers to have at least 3 percent equity. That’s a problem for people whose homes have lost value, so that they owe more than the house is worth. That’s the case with a lot of homeowners in formerly blistering housing markets, such as

Jim Sahnger, mortgage consultant with Palm Beach Financial Network in

The FHA suggests that some lenders might be willing to partially forgive debts so delinquent borrowers can meet the 3 percent threshold and refinance their loans. While it might sound unlikely that lenders would let borrowers off the hook like that, writing off partial debts could be cheaper than foreclosing.“Foreclosures are usually in bad shape,” says Paul Halpern, a partner with Chrysalis Capital Partners, a private equity fund. “It makes those assets tough to sell, relatively.” And lenders might choose to forgive partial debts rather than sell foreclosed houses in declining markets.The deadline for applying under the FHASecure program will be the last day of 2008. An extension is possible, but not a sure thing.In the meantime, FHA insurance premiums will rise for some new borrowers, because the agency plans to adopt “risk-based pricing” — in essence, making riskier borrowers pay more for insurance. The FHA has talked for years about adopting risk-based pricing. Last year, the Congressional Budget Office reported that “developing and maintaining the appropriate systems for managing a risk-based pricing structure would take FHA several years to implement.” But the FHA says it can do the job in four months and offer risk-based pricing at the beginning of 2008.Michael Moskowitz, president of Equity Now, a New York-based mortgage lender, says “it’s not such a big deal” to move to risk-based pricing with today’s technology. “It’s a simple thing to do, really,” he says — especially if the FHA were to buy the technology from a company such as Fannie Mae or Freddie Mac.Anthony Sanders, professor of finance and real estate at

By Jeanne Sahadi, CNNMoney.com senior writer

September 12 2007: 1:52 PM EDT

NEW YORK (CNNMoney.com) — Hundreds of thousands of homeowners who may struggle to make mortgage payments are likely to get some relief in coming months, including more options to refinance into lower-cost, fixed-rate loans and tax relief if they do face foreclosure.

About 240,000 borrowers of the estimated 2 million with adjustable-rate loans scheduled to reset in the next year already are eligible to refinance into a loan insured by the Federal Housing Administration (FHA) – roughly 80,000 of them are eligible because of the newly created FHASecure Act, which loosens FHA’s criteria for refinancing. And more changes are likely, with the possibility of helping tens of thousands more.

The FHA program has been geared toward home buyers and homeowners with weak credit. Lenders may be more willing to lend to a buyer with shaky credit when the FHA is insuring the loan.

Borrowers with FHA-insured loans – which they get from private lenders as they would any other mortgage – pay a small premium to the FHA every month. The FHA, in turn, uses those premiums to cover the lender in the event of foreclosure and requires lenders to pursue viable ways to help borrowers avoid foreclosure if they become delinquent.

If you are behind on payments by at least four months but no more than 12, the FHA may even make a one-time interest-free loan to you to make your account current with your lender.

It used to be you couldn’t refinance into an FHA loan if you’d been delinquent in your payments for any reason. But with the FHASecure Act, delinquent homeowners qualify for an FHA-insured refi if they have:

• A history of on-time payments for at least six months before their loans reset to higher rates
• Interest rates scheduled to reset between June 2005 and December 2009
• 3 percent equity in their home, or the cash equivalent
• A sustained history of employment
• Sufficient income to make their FHA-insured mortgage payment and all other obligations

The FHA will still insist that lenders verify borrowers’ income and ensure that their total debt payments don’t exceed 43 percent of their income or that their mortgage payment won’t exceed 31 percent of income. If those ratios are exceeded, the lender must explain how the homeowner can compensate for that.

For borrowers who qualify, an FHA refi can save them money. Even with the premiums FHA charges, an FHA-insured loan could save a borrower $100 or more a month for every $100,000 borrowed compared to the payments they’d owe under an adjustable-rate mortgage that readjusts upward by 3 percentage points.

And if the homeowner has an FHA-insured loan for five years and has built up 22 percent equity in the home, the borrower no longer needs to pay the premium.

FHA requirements may get even more liberal

Lawmakers also are considering legislation to modernize FHA guidelines, which could make FHA refis available to another 60,000 troubled mortgage borrowers, and open the door to another 140,000 new home buyers who today wouldn’t qualify for an FHA-insured loan, according to FHA estimates.

Jaret Seiberg, a financial services analyst at policy research firm Stanford Group, expects lawmakers will pass the FHA legislation, noting that it has broad support in both parties. “FHA reform is the lowest hanging fruit. It’s the easiest thing to do.”

That legislation would further liberalize FHA loan requirements. Among its key provisions, it would:

Raise loan limits. Today the FHA won’t insure loans above $362,790 for single-family homes, and even less in lower-cost areas. Under the bill before the House, which is expected to vote next week, that ceiling would increase to 100 percent of the conforming loan limit for mortgages backed by Fannie Mae and Freddie Mac, currently $417,000.

But Barney Frank, chairman of the House Financial Services Committee, plans to propose an amendment that would boost that new limit to $500,000, and give the FHA commissioner discretion to raise that limit further during mortgage crises.

Reduce down payment requirements. Homeowners would no longer be required to have 3 percent equity or the cash equivalent. They could get an FHA-insured loan with 0 percent down.

Reduce complexity. Reform also would “clear away a bunch of burdensome rules that make FHA difficult to use,” Seiberg said.

Foreclosed borrowers may get tax break

For homeowners whose situations can’t be remedied with a refi, they may get tax relief if they end up facing foreclosure.

Currently, if you foreclose on your home and the bank forgives a portion of your mortgage debt which isn’t recovered by the sale of your home, that forgiven debt is treated as taxable income to you. President Bush has asked lawmakers to provide a temporary exemption from that rule.

Both Seiberg and Clint Stretch, managing principal of tax policy at Deloitte Tax LLP, think it’s likely lawmakers will pass that exemption this fall and make it retroactive so that homeowners who foreclosed in 2007 would be covered.

That’s right, in the month of October alone, many homeowners will be forced to pay higher monthly mortgage payments than they can reasonably afford. And while this number is staggering, it’s not exactly new information — it’s been known for two years that the crisis was coming.

The Associated Press reports that, in all, 2 million homeowners have adjustable rate mortgages scheduled to reset by the end of 2008. Of those, the Federal Housing Administration (FHA) estimates that 500,000 could experience foreclosure.

Is Bush’s Proposal Enough?

In my opinion, the president’s proposal is an excellent start — but will it offer enough help to those half-million families at risk of losing their homes?

Bush isn’t proposing a direct bailout for homeowners who knowingly overextended themselves. Nor will the government be rescuing irresponsible lenders and speculative investors who bought homes to flip for a profit. As the president acknowledged, that would only encourage the problem to occur again.

Instead, Bush’s proposal strikes a balance by offering:

• Temporary tax relief to ensure that cancelled mortgage debt on a refinanced mortgage isn’t counted as income

• A foreclosure-avoidance initiative through homeowner education and outreach

• Ways to help responsible homeowners refinance through FHA loans offering a lower interest rate and lower monthly payments

Help for Those in Trouble

Among the president’s new initiatives is the immediate introduction of a refinancing product called FHASecure. This product will now be offered through the FHA and offers help to homeowners who are already in default of their primary residence mortgage loans. Previously, the FHA would not insure refinanced loans from borrowers delinquent or in default, so this is a significant change.

There are specific criteria that must be met in order to qualify:

1. First and foremost, you must have a history of on-time mortgage payments before your teaser rate expired — which means you must have a decent credit history.

2. Your interest rate must have reset after June 2005 but before December 2009.

3. You must have at least 3 percent cash or equity in your home.

4. You must have a sustained history of employment.

5. You must have sufficient income to make your mortgage payments.

Beefing Up the FHA

Since 1934, the FHA has helped more than 34 million people become homeowners — not by lending them money directly, but by guaranteeing their loans. This reassures lenders who might otherwise be reluctant to make loans to buyers who don’t have a lot of money. Borrowers have always paid a set price for this insurance.

The president’s proposal seeks to introduce risk-based pricing, which will give borrowers with weaker credit more access to FHA loans. Rather than being denied an FHA loan, underserved borrowers will instead pay a slightly higher fee. This will allow them to refinance at a lower interest rate with more affordable monthly payments.

President Bush is also asking Congress to pass new legislation that would modernize the FHA. These proposed changes — including lower down payment requirements and higher maximum loan limits — would also help borrowers with weaker credit and lower incomes. Hopefully, Congress will act quickly.

Can the Fed Help?

Echoing the sentiments of President Bush, Federal Reserve Chairman Ben Bernanke also weighed in on the situation on Aug. 31. He stated that it’s not the responsibility of the Fed to protect lenders and investors from the consequences of their actions.

However, he also acknowledged that developments in certain financial markets, including those currently emerging with mortgages, could have broad economic effects. As a result, the Federal Reserve will take those effects into account when determining policy.

Many believe the odds are growing that the Fed will cut the federal funds rate, now at 5.25 percent, by at least one-quarter percentage point on or before Sept. 18, its next regularly scheduled meeting. The Fed hasn’t lowered this rate in four years.

That could be good news if you currently have an adjustable rate mortgage. Even a mild rate cut of .25 percent might mean a slightly lower payment for you now. A cut of .75 percent would create significant breathing room for those on a tight budget, and could potentially send the stock market on a tear. My prediction is that the rate will get cut between 25 and 50 basis points.

Other encouraging news came on the Tuesday after Labor Day, when the Fed put added pressure on loan-servicing companies to modify loan terms or defer payments for borrowers having trouble making their mortgage payments and facing default.

TO:                 ALL APPROVED MORTGAGEES                        ALL FHA ROSTER APPRAISERS  SUBJECT:    The FHASecure Initiative and Guidance on Appraisal Practices in Declining Markets

 The Federal Housing Administration is pleased to announce an initiative that will enable homeowners to refinance various types of adjustable rate mortgages (ARMs) that have recently “reset.”  This mortgagee letter describes how lenders and homeowners may refinance mortgages that, due to the increased mortgage payment following the reset, have become delinquent.  The mortgagee letter also reiterates guidance to lenders about making objective decisions regarding the underlying collateral in declining markets. The FHASecure initiative, which is a temporary program designed to provide refinancing opportunities to homeowners and to increase liquidity in the mortgage market, requires that the loan application be signed no later than December 31, 2008.

Refinancing Non-FHA Adjustable Rate Mortgages Following Resets   

FHA is currently doing a significant business in refinancing non-FHA mortgages for borrowers who are current under their existing mortgage.  This mortgagee letter extends eligibility to borrowers who became delinquent under their current mortgage following the reset of the interest rate.   FHA recognizes that many lenders are engaged in a variety of loss mitigation activities to keep borrowers in their homes, and applauds these efforts.  This mortgagee letter explains credit policies for refinance transactions involving non-FHA adjustable rate mortgages where the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due.  These instructions are designed to permit homeowners, who previous to their reset, demonstrated an ability to meet their mortgage obligations, an opportunity to refinance into a prime-rate FHA-insured mortgage.  In many cases homeowners may be permitted to include mortgage payment arrearages into the new loan amount, subject to existing geographical mortgage limits and the loan-to-value limit shown below.   

Eligibility Highlights of the FHASecure Initiative 

The mortgage being refinanced must be a non-FHA ARM that has reset.

The mortgagor’s payment history on the non-FHA ARM must show that, prior to the reset of the mortgage, the mortgagor was current in making the monthly mortgage payments, i.e., the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due.

If there is sufficient equity in the home, under additional eligibility instructions provided below, FHA will insure mortgages that include missed mortgage payments.  

Under certain conditions explained below, FHA will insure first mortgages where (1) the existing note holder writes off the amount of indebtedness that cannot be refinanced into the FHA insured mortgage; or (2) either the FHA-approved lender making the new mortgage or the existing note holder may take back a second lien that includes closing costs, arrearages or previous secondary financing if the indebtedness exceeds FHA prescribed LTV and maximum mortgage amount limits. 

Mortgagees must determine, as part of the underwriting process, that the reset of the non-FHA ARM monthly payments caused the mortgagor’s inability to make the monthly payments and that the mortgagor has sufficient income and resources to make the monthly payments under the new FHA-insured refinancing mortgage.

Additional Information About the FHASecure Initiative  

• Maximum FHA loan-to-value ratios 

The maximum loan-to-value limits are shown below and are applied to the appraiser’s estimate of value, exclusive of any upfront mortgage insurance premium.   

Maximum Loan-to-Value Ratios  States with Average Closings Costs At or Below 2.1 Percent of Sales Price ·       98.75 percent:  For properties with appraised values equal to or less than $50,000.

·       97.65 percent:  For properties with appraised values in excess of $50,000 up to $125,000

·       97.15 percent:  For properties with appraised values in excess of $125,000. 

States with Average Closings Costs Above 2.1 Percent of Sales Price 

·       98.75 percent:  For properties with appraised values equal to or less than $50,000

·       97.75 percent:  For properties with appraised values in excess of $50,000 

• Calculating the Maximum FHA Mortgage Amount

The amount of the FHASecure mortgage may not exceed either the geographical maximum mortgage limits or the loan-to-value ratios shown above.  FHA will permit the inclusion of the existing first lien, any purchase money second mortgage, closing costs, prepaid expenses, discount points, prepayment penalties, and late charges.  FHA will also permit arrearages (principal, interest, taxes and insurance) to be added into the new loan amount provided the arrearages arose after the reset.

• Subordinate  Financing Under the FHASecure Initiative

If the new maximum FHA loan is not enough to pay off the existing first lien, closing costs and arrearages, the lender may execute a second lien at closing to pay the difference. The combined amount of the FHASecure first mortgage and any subordinate non-FHA insured lien may exceed the applicable FHA loan-to-value ratio and geographical maximum mortgage amount. If payments on the second are required, they must be included in qualifying the borrower. If payments are deferred, they must be so for no less than 36 months to not be considered in the qualifying ratios. Borrowers need not yet have missed any mortgage payments to be eligible for this type of subordinate financing.

• Underwriting the Mortgage/Qualifying the Borrower

FHA encourages all approved lenders to use FHA’s TOTAL Mortgage Scorecard to obtain risk classifications on each mortgage originated under the FHASecure initiative.  If TOTAL renders an “accept/approve,” the mortgagee’s underwriter need not perform a personal review of the borrower’s credit history and capacity to repay.  However, in the more likely event that the risk class is a “refer,” the underwriter must:

1.     Determine that the homeowner has the capacity to make future mortgage payments as well as pay all other obligations.  The payment-to-income ratio and debt-to-income ratios remain 31 percent and 43 percent, respectively.  Compensating factors are to be provided by the underwriter when the ratios are exceeded.

2.     Analyze the homeowner’s overall credit history, especially payments on the existing mortgage.  The underwriter must determine that the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due and that other recurring obligations were paid on time.  If the borrower was offered partial forbearance after interest rate reset, the underwriter must determine that he/she has made payments under the forbearance agreement in a timely manner. 

3.     Provide comments in the “remarks” section of the mortgage credit analysis worksheet that he or she has determined that the cause of the borrower’s inability to make payments was directly related to the increased payment attributable to the reset and not due to a disregard for obligations.

• Tax consequences for a borrower when the note holder writes off a portion of the amount to pay off the first mortgage 

FHA recognizes that there may be tax consequences resulting from debt relief.  However, since FHA does not provide tax guidance, it recommends borrowers—and mortgage lenders—in such situations seek competent tax advice. 

• Other considerations of which the mortgagee must be aware when refinancing these mortgages.

The FHASecure initiative for refinancing borrowers harmed by non-FHA ARMs that have recently reset is not to be used to solicit homeowners to cease making timely mortgage payments;  FHA reserves the right to reject for insurance those mortgage applications where it appears that a loan officer or other mortgagee employee suggested that the homeowners could stop making their payments, refinance into a FHA insured mortgage, and keep, as cash, the amount of payments not made on time.   

Appraisal Practices in Declining Markets 

Historically, FHA has provided a counter-cyclical force in helping to stabilize declining housing markets and will continue to do so.  In fact, much of FHA’s business activity this year has been in those states (e.g., Ohio, Michigan,

Appraiser Responsibilities 

The purpose of the appraisal is to provide the lender/client with an accurate, and adequately supported, opinion of market value.   It is the appraiser’s responsibility to determine whether a property being appraised is located in a declining market.

The neighborhood section of each property specific appraisal form contains a housing trends section where the appraiser marks a box indicating property values are increasing, stable or declining.  Whichever box is selected, the appraiser is certifying that he/she has performed an objective analysis of quantifiable data supporting the observations made.

If a property is located in a declining market, the appraiser must provide an explanation in the “Market Conditions” section of the appraisal report that includes relevant information in support of the conclusions relating to trends in property values, demand/supply and marketing time.  The appraiser must also provide a description of the prevalence and impact of sales and financing concessions and/or down payment assistance in the subject’s market area.  Other areas of discussion may include days on market, list-to-sale price ratios, and/or financing availability.

Lender Responsibilities 

The mortgagee’s responsibility is to properly review the appraisal and determine that the appraised value used to support the mortgage is accurate and adequately supported. 
 

Sincerely,

        Brian D. Montgomery

Assistant Secretary for Housing

Federal Housing Commissioner

August 22, 2007; Page A4

WASHINGTON — As the subprime-mortgage crisis ripples through the broader housing market, the Bush administration is eyeing an often overlooked federal mortgage insurer to help low- and middle-income homeowners avoid foreclosure.

President Bush has balked at allowing mortgage giants Fannie Mae and Freddie Mac to buy more mortgages for their portfolios to ease the credit crunch triggered by rising defaults on home loans to borrowers with poor credit. But he said earlier this month that he supports giving the Federal Housing Administration more flexibility to help those facing foreclosure refinance their homes.

•  What’s Happening: The Bush administration is eyeing the Federal Housing Administration, an often-overlooked federal mortgage insurer, to help low- and middle-income homeowners avoid foreclosure.

•  How It Would Work: The FHA could offer refinancing options to homeowners, including those who aren’t yet in default, but who risk falling behind on payments that jump when rates are reset.

•  What Needs to Happen First: The effort is likely to jump-start legislation in Congress to give the housing authority more tools to assist homeowners. Senate Banking Chairman Christopher Dodd said recently that FHA reform will be among his top priorities, and a bill passed by committee is set to head to the full House this fall.

Treasury Secretary Henry Paulson, meanwhile, has instructed staff to work with the Housing and Urban Development department, which oversees FHA, to find ways to help individuals caught in the fallout of the credit crunch.

The administration is looking to FHA to offer refinancing options to homeowners, including those who aren’t yet in default or foreclosure, but who are at risk of falling behind in their payments on mortgages that were structured to offer payments that were very low at first but then escalated.

The effort is likely to jump-start legislation in Congress to give the housing authority more tools to assist homeowners. Senate Banking Chairman Christopher Dodd (D., Conn.), said recently that FHA reform will be among his top priorities when Congress returns from its August recess. The House Financial Services Committee passed a bill in June that is expected to head to the full House this fall.

For decades, the New Deal-era agency was used by low- and middle-income home buyers who had little or poor credit and would have trouble getting a loan in the primary market. The FHA didn’t originate loans, but insured them against default by somewhat risky buyers, giving lenders an incentive to issue a mortgage.

In recent years, the agency lost market share as the market for subprime loans exploded and home buyers of all income levels were offered a range of exotic loan products, such as no-money-down mortgages and interest-only payments. While FHA-insured loans once accounted for roughly 15% of the mortgage market, that number has fallen below 5%.

But many buyers who got subprime loans are beginning to have trouble making their mortgage payments as the attractive initial “teaser” interest rates are reset at much higher levels. While many of those buyers believed they could refinance their loans, that has become much harder as mortgage lenders tighten their standards in the face of defaults and foreclosures. The Center for Responsible Lending estimates as many as 2.2 million loans will reset over the next two years.

FHA says it is constrained from doing more now because of limits on the size of the loans it can back and some requirements that borrowers must meet. While its refinancing business has picked up and the agency expects to refinance about 120,000 loans this year, FHA officials say they could easily double that amount if given greater flexibility.

Among the options being discussed in Congress is eliminating or reducing the required 3% down payment, raising the size of the loans FHA can insure to as much as $417,000 from $362,790, and being able to charge insurance premiums based on a borrower’s risk instead of a one-size-fits-all rate.

Federal Housing Commissioner Brian Montgomery said the current rules effectively prevent FHA from helping borrowers in high-cost states, such as California and New York. Most of the loans it insures are in places such as Texas and the Midwest.

For the Bush administration, backing FHA reform offers a way to straddle the growing calls for government assistance to those caught in the subprime mess without advocating a financial bailout.

Fannie and Freddie, backed by a host of Democratic lawmakers, have argued they could provide liquidity to the rattled housing market if allowed to grow their portfolios beyond strict limits. Their portfolios are capped in part because of accounting scandals at the government-sponsored entities and Mr. Bush has said Congress should pass long-awaited reforms that would tighten oversight of Fannie and Freddie before allowing them to grow.

Still, an administration official said the government is sensitive to the need to help minimize “collateral damage” from the subprime woes, such as massive foreclosures that could hit certain neighborhoods hard and affect property values broadly. To that end, Treasury and HUD are looking to find ways to assist borrowers who are creditworthy, but who got caught in a pinch and are facing higher mortgage payments than they can afford.

One challenge for the administration is trying to identify borrowers who are likely to get hit with a change in their loan payment — known as a reset — that could force them to default on their mortgage, and then figuring out ways to help them refinance. Among the possible options are for government agencies such as FHA or Fannie Mae and Freddie Mac to refinance some of those loans at a lower interest rate.

But not everyone is convinced, and FHA reform may run into trouble in the Senate. Alabama Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, has expressed concern about expanding FHA, saying it could ultimately hurt taxpayers.

“One lesson learned from the current pattern of defaults and delinquencies in the subprime market is that those borrowers with little or no equity in their home will be the most likely to fail,” he said at a hearing last month. “We must approach any attempt to expand the program or lower the program’s standards with great caution.”