FHA Book
Expert Source on FHA Loans
Subscribe to RSS FeedWelcome to FHABook.com, an Informative Source of News and Updates regarding the FHA Home Loan Program.
DPA Opposition Getting Mainstream Attention
When it comes to finding FHA news articles, the Wall Street Journal seems to be becoming my new Seattle P-I or CNNMoney.com. The WSJ had another FHA article today, this time focusing specifically on the risks of putting zero down on a home. The article, which has an accompanying blog post, focuses on the reasons why eliminating DPA could be critical to the survival of FHA, and the response from the DPAs and other supporters, particularly those who are closely tied to minority and poverty issues. Others feel that the programs need to be changed, but not eliminated:
Seller-funded groups and supporters in Congress say that such programs should be regulated but not shut down, a proposal that HUD hasn’t shown much interest in in recent years. “If there’s a problem, let’s fix it,” says Rep. Gary Miller (R., Calif.), a vocal defender of the program and a former home builder and developer.
Whether or not DPAs will go away, the article concludes with a sure bet:
Rep. Frank said in an interview that he believed a compromise could be reached with the Senate that would preserve the program but with tougher lending requirements. “No one is talking about leaving it untouched,” he says.
WSJ Addresses FHA Problems
The Wall Street Journal posted an article the other day that is very critical of two FHA issues that I also happen to be very critical of:
The dangers of zero down are assessed:
The biggest reason the FHA lost so much money was a scam called the “downpayment assistance program.” Under this program, builders or mortgage originators make a loan to low-income homebuyers, and then arrange for a third party to pay the downpayment, so the loan qualifies for FHA insurance. This means borrowers have no skin in the game, and in many cases have negative equity because the value of the homes are often inflated.
Borrowers could bet on the upside of the market at no cost to them. And thanks to the 100% FHA insurance against default, lenders were guaranteed full repayment whether or not the loan is ever repaid. Until recently, lenders even got a tax write-off for their “charitable contribution.” Everyone won – except the taxpayer. Now even the FHA finally agrees that this program invites widespread fraud and wants to end it. But Barney Frank, who heads the House Financial Services Committee, is insisting that it continue.
One lesson from the debacle is what happens with low or zero downpayment FHA loans: They go bust. The Government Accountability Office finds that default rates are about three times higher than on conventional loans. So why in the world is Congress promoting a new FHA bill to lower downpayments to 3% and in some cases even to zero?
Although I find the article to be a bit overly critical when it comes to the FHA program as a whole, I wholly agree with DPA and sub-prime issues.
Anti-Flipping Rule Suspended
On June 2, 2003 the FHA began enforcing a rule that it would not insure mortgages for houses that had been sold more than once in ninety days, effectively preventing flippers from using FHA Loans to finance their enterprises. The justification for this rule was to prevent people from using FHA Loans to finance houses that were “fixed up” in a short period of time and then selling the property for a grossly inflated price, as well as stopping genuine scam artists who would repeatedly sell the house to fake buyers. A May 7, 2003 article from the Realty Times does an excellent job describing the details.
CNNMoney.com reports today that the rule has been suspended for one year. The decision is based on the enormous number of foreclosed properties that are sitting empty and destroying market values. Hopefully honest flippers will take advantage of this suspension of the guideline and help revitalize many distressed neighborhoods.
HOPE NOW Update
An article on Inman News details new guidelines for HOPE NOW, the program for helping homeowners facing foreclosure. Two such guidelines set deadlines for how long servicers have to inform borrowers of their options:
The new HOPE NOW guidelines state that loan servicers should inform homeowners within 45 days whether their application for a workout — such as a repayment plan, loan modification or short sale — has been accepted or denied.
Servicers also agreed to re-subordinate second-lien loans if their position will not be worsened by a refinance or workout — potentially removing a major obstacle to preventing foreclosures in cases where borrowers have “piggyback” second loans. HOPE NOW servicers will also attempt to contact homeowners with subprime adjustable-rate mortgages (ARM) and other homeowners with ARMs that have a probable risk of default 120 days in advance of reset.
These new guidelines have been put in place to make HOPE NOW a more effective tool for distressed borrowers.
Problems with FHA Legislation
The more I learn about the Frank-Dodd plan, the less I like it. It focuses far too much on fixing past bad sub-prime loans and not enough on creating a plan to make FHA work for the future. Basically, they are forgiving those who made bad decisions and neglecting those who are trying to use the FHA program and practice in responsible lending and borrowing. An article by former House majority leader Dick Armey in today’s Wall Street Journal delves into these problems. There is strong opposition within FHA and some shocking facts that back up the sentiment:
On June 9, FHA Commissioner Brian Montgomery told reporters that he opposes the Dodd-Frank approach, saying that the FHA “is not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans.” Last week the Congressional Budget Office (CBO) projected that banks will use the program to offload their “highest-risk loans” to the taxpayer, and that a stunning 35% of all of the loans refinanced through Dodd-Frank will eventually default on the FHA.
35%!! Wow, that could literally destroy the FHA. There has to be a better solution that does not reward irresponsible corporations and punish not only lenders, but potentially the FHA itself.
The Many Benefits of FHA
Although I primarily write about the standard FHA Home Loan, the FHA has a number of programs for helping out homeowners. One that I haven’t mentioned in awhile is the Reverse Mortgage. An article in yesterday’s Seattle P-I talked about the benefits of reverse mortgages and who they benefit most. Plus, the article details new changes that may allow more seniors to take out reverse mortgages:
Pending legislation may spur more senior homeowners to consider reverse mortgages. Those who have enough equity in their homes can qualify for loans of as much as $362,790 backed by the Federal Housing Administration. A housing bill in Congress includes a proposal to raise the payout to as much as $550,000 and eliminate the current limit of 275,000 reverse mortgages that the Department of Housing and Urban Development can insure.
As with any loan product, reverse mortgages aren’t for everyone; but if the circumstances are right, an FHA Reverse Mortgage could be a great choice for many Americans.
FHA Loans on the Upshot in DC
The Washington Post had an article the other day about the rise of FHA Loans in the DC area and across the country. It’s a great piece that covers the many benefits of FHA Loans that include:
It’s a great article with the personal stories of borrowers have been helped. One particularly interesting (and encouraging) tidbit is that FHA Loans were up 126% for the first quarter from last year.
DPA Organization Continues to Fight Ban
AmeriDream, Inc. issued a statement today that had one sentence in particular that bothered me. From a press release defending Down Payment Assistance:
“In addition to jeopardizing homeownership opportunities for qualified low to moderate income homebuyers, the Administration’s position does not comport with the facts…”
The above remark was made by the organization’s president, Ann Ashburn. The word I take issue was is “qualified.” To qualify for an FHA Loan, a potential borrower must be able to put down at least 3% on their new home. If a borrower does not have enough cash-at-hand to make the down payment, he or she is not a qualified borrower. So, technically, AmeriDream assists non-qualified borrowers. If FHA reform passes there could be a down payment as low as 0%. In that case, people who could not put money down would qualify and AmeriDream would have no customers.
Calculating Your FHA Loan
We all know the importance of being informed before taking out any loan, and as more and more people take out FHA Loans it’s critical to understand your obligations before starting the process. A simple way to do this is by using a mortgage calculator. One of these such tools can be found at the Mortgage Loan Place website. You plug in your information and the calculator provides an estimate of the loan amount you could be approved for and your monthly payments. The information to be plugged in includes:
The Calculator already has the Loan Term (30) and Interest Rate (6) plugged in, but these can be changed to fit your plans. Tools like this one are a great way of understanding what you can expect before starting the FHA lending process.
Mortgage Mess Goes Beyond Subprime
An interesting article appeared on the online magazine Slate last Thursday that pointed out a factor in the mortgage meltdown that most media are ignoring: stated-income loans. These loans, more commonly referred to as Liars’ Loans, allowed individuals to state their income without verification. The author, Mark Gimein, uses this great analogy to explain the situation:
Imagine a city center where running red lights isn’t something that the occasional drunken driver or road-rage victim does, but where everybody does it all the time. That’s a lot like the mortgage market in big swaths of the country one or two years ago.
He continues the analogy to describe the unbelievably high number of people (with relatively good credit) whose homes were going into foreclosure:
Think about that city center again. All those cars speeding through those red lights. And crashing.
I’ve written a lot about why I think FHA loans are, and always have been, a better alternative to sub-prime loans. The gross failure of stated-income loans shows that even when FHA was being ignored across the board, the system used to obtain an FHA Loan would have prevented this widespread practice. With FHA Loans, borrowers must prove to the lender that they have enough income to pay their loans and show that they have an employment history that is steady and they will, therefore, be more likely to continue to have such an income.
Though the FHA system clearly needs some updates (and fast), examples such as these show that the FHA process is, and always has been, much more sound than many of the popular mortgage practices used by so many over the past decade.