Dennis' Mortgage Blog

Question of the week:  What changes are in for FHA this year?

Answer:   There are quite a few changes in store for FHA this year, some have already come into effect from last January (meaning enacted in 2009) and FHA has announced more on the table for 2010. 

Lender Liability  Some of the policy changes last year affected lenders and who can approve and fund FHA loans, as well as who has the liability for those funded loans.  FHA has stopped approving individual brokers for origination and instead approve lenders and let them determine who their business partners will be and then be liable for their performance.  This transfer of liability, and therefore penalty, helps clean up some of the fraud that has been rampant in FHA financing over the years. This week FHA announced it was increasing enforcement of FHA lenders with several different actions. 

Affecting consumers the most will be expanding the liability of lenders who underwrite and originate to be liable for all loans originated and underwritten with no indemnity.  This will result in lenders creating their own overlays on FHA underwriting guidelines and stricter approval processes. 

Mortgage Insurance On the consumer front 2009 saw an increase in the FHA upfront Mortgage Insurance Premium (MIP) from 1.5% of the loan amount to 1.75%; in plain math that means $1750 is added to every $100,000 of loan amount so borrower is financing $101,750 when borrowing $100,000.  This week FHA announced that the MIP is being edged up to 2.25%, so starting later in the year $2250 will be added to every $100,000 borrowed. 

The purpose of the MIP increase is to build FHA’s insurance reserves and meet the capitalization requirements mandated by Congress.  This will increase the amount financed, monthly payment and total interest paid by borrowers over the life of the loan.

Note the upfront MIP is in addition to the monthly mortgage insurance (MMI) of 0.5% or 0.55% collected every month (lower monthly mortgage insurance on mortgages with loan to values of 95% or less). 

Down Payment While the base down payment will remain at 3.5% for now, FHA is increasing the required down payment for borrowers with FICO scores below 580 to 10% down.  With Fannie Mae and Freddie Mac pushing up their FICO requirements the past year it seems that FHA will follow suit and this increased down payment for lower FICO scores is the first step.  I feel the position is moot given the increased liability on lenders for FHA mortgages that go into default; most will not be approving FHA mortgages for borrowers with FICO scores that low.

With the change in down payment requirements however, FHA is opening the door to future changes in minimum down payment.  There have been rumors in the industry for the past several months that FHA is looking to increase the minimum down for all mortgages to 5%, could this be the first step to that move?  I would not be surprised if FHA begins a more tiered MIP process with lower MIP required for higher down payments.

Seller Contributions  FHA will be lowering the amount sellers can contribute to buyers’ closing costs from 6% of the sales price to 3% of the price.  This brings the FHA regulation in line with Fannie Mae and Freddie Mac.  While this may impact the methodology of some agents and FHA originators, I cannot see it impacting our local market tremendously—at least the markets where I work—as I have rarely seen in over twenty years any purchase agreement with the seller paying 6% for buyers costs on top of the other costs associated with selling their home. 

Appraisals  Effective February 1, 2010 FHA will follow the Fannie/Freddie guideline and require all appraisals be ordered through the HVCC process.  I will not go further into this guideline as I wrote about it in my Weekly Rate and Market Update on December 4, 2009 and you can read more there if you wish.

Condos   The guideline changes here will have a very big impact on real estate markets, particularly in condo heavy Southern California.  For decades FHA has had an approval process for condominium Homeowner’s Associations (HOAs).  Once an HOA received FHA approval any FHA sales or mortgages in the complex did not need to go through a full approval process with review of budgets, reserves, etc.  For HOAs that did not have an approval, individual units could get approved for financing through the “spot approval” process.  This process would be a somewhat limited review of the HOA compared to the full approval process and facilitated many FHA mortgage applicants in the purchase or refinance of their condo units.

While the deadline has been shifting for several months, it appears we finally have a firm deadline of mid-February for new guidelines to take effect that will impact FHA financing for condos.  First, no more spot approvals of individual units.

Second, and very important for all condo owners and HOAs, all FHA approvals that are older than two years old will need to be recertified by FHA and go through the approval process.  Further, approvals are only for two years so HOAs will need to resubmit bi-annually.

Third, FHA is changing the approval process as well.  If a lender approves a complex for FHA financing it is liable for all future FHA mortgages funded under that approval if there is an issue with the complex or HOA.  So if Wells Fargo approves the Sunnyside HOA in Long Beach and Bank of America funds a loan later that goes into default and it is discovered there was an issue with the HOA then Wells is on the hook for that defaulted loan.

Because of this liability extended to all loans in the future we are hearing from our wholesale lending partners they will not be approving HOAs for FHA financing.  This means all approvals will need to go through FHA regional offices.  We suspect the delay in implementing this new guideline has been to give HUD time to set up their regional offices so they can handle the incoming flood of condo approvals for FHA financing.

The effect of this guideline on consumers is to limit the number of condominium units available for FHA financing.  With mortgage insurance companies pulling out of California, and those who remain reducing the coverages they will give condominiums, this guideline will serve to further soften the condo markets by limiting the number of qualified buyers due to higher down payment requirements for non-FHA mortgages.

If I owned a condominium I would investigate how long it has been since my HOA received FHA approval and if longer than two years would work to get my HOA board and management to cooperate to apply for FHA approval.  With loan amounts up to $729,000, FHA is no longer financing for just the lower end of the market.  The more buyers who are able to purchase your property, the more potential demand for your property, the more demand the more stable your prices and values.

Have a question for me?  Ask me!

This week had a some important economic news.   The Producer Price Index (PPI) came in lower than last month and relatively flat. This is a gauge of future inflation and was a positive impact on rates.  Housing starts came in lower than expectations, not unexpected given the weather in the Midwest and East, but housing permits—an indication of future housing starts—came in very high.  The biggest news was yesterday with the initial jobless claims coming in at 482,000 Americans; essentially the same as if every resident in the City of Long Beach filed unemployment last week.

Jobs are now the focus.  With healthcare reform taken off the stove, Congress and the White House will move job development, creation and retention to the front burner.  How they will do this is what is the big question.  In February Congress spent less than a week to pass a $782 billion stimulus package that has produced very few jobs thus far, with most of the funds going to states and local governments and not into the job creating private sector.  There is talk of another $200 billion or so in “stimulus” coming from Washington.  Will this make a difference?  In the meantime, with each negative employment number our rates stay low.

The Fed may continue buying mortgage backed securities (MBS).  With about $100 billion left of the $1.1 Trillion commitment to by MBS by the deadline of March 31^st, some Fed governors are making noise that the program needs to continue to keep mortgage rates low.  In addition to the $1+ Trillion from the Fed, the Treasury has lifted the debt caps for Fannie Mae and Freddie Mac, ostensibly to help with more loan modifications, but in reality allowing them to repurchase securities to also stave off higher mortgage rates.

With all this said, this week MBS did fight a resistance level to lower rates, as I mentioned last week.  Finally breaking through yesterday, rates today have met another ceiling of resistance and are unable to push through.  It looks like rates are at or near bottom for the current cycle/range.  Depending on next week’s $100+ billion Treasury auctions (U.S. debt) and other economic and political news we could see rates start a new cycle higher. 

This week in rates kept trying to break into lower territory without much success week over week.  As mentioned above, technical factors of resistance and moving averages make it challenging for rates to break lower and begin a new cycle of lower rates.  Moving forward anyone floating rates should do so very cautiously.  Reminder, for day-to-day, throughout the day updates on the mortgage markets follow me on Twitter .

Rates for Friday January 22, 2010:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.875%                            No Change

30 year conforming-jumbo 5.125%                   No Change

30 year FHA    4.75%                                      No Change

30 year FHA jumbo 5.125%                            No Change

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

What a great weekend to look at homes!  For those in Southern California thinking, “What are you nuts? It’s horrible weather!”  Exactly!  In Southern California the best time to view and inspect possible new homes is in the middle of winter storms because that is one of the few opportunities to see what water does to the home and property.  Are there small or big leaks? Adequate drainage around the outside of the home? Does the street flood?  Is there a river from your potential neighbor’s yard into yours?  We can go seven or eight months without any rain and no answers to these questions.  If you are thinking about buying a home in the near future do two things:

1)      Call me!

2)      Go look at homes when it wet and rainy

Have a great weekend, let me know how I can be of service to you,

Dennis