FHA mortgage insurance premium facts

FHA mortgage insurance premium facts
FHA mortgage insurance premium (infographic from www.heritage.org)

There’s been a lot of reporting on FHA mortgages lately, creating some confusion.  Of course I’m referring to the controversy surrounding FHA’s annual mortgage insurance premium (also known as MIP).  Many were surprised to hear that one of the outgoing directives of the Obama administration was to lower the FHA MIP.  And, eleven days later, many were just as surprised to hear that the new Trump administration reversed that directive.  So what are the FHA Mortgage Insurance Premium Facts?

FHA Mortgage Insurance Premium Facts

Mortgagee Letter 2017-01, dated January 9, 2017 described revisions to the annual MIP for “certain” FHA loans.  The effective date of the revisions was to be January 27th.  Meaning, that FHA mortgages that closed and/or disbursed on or after January 27th would have had the lower MIP.  Although the general reporting was that borrowers would save an average of $500 per year (an average of about $41 per month), the actual savings would have depended on the amount borrowed, term of loan and loan-to-value (percentage of loan amount to home value).

Additionally, the lower MIP would have been on new loans that were to have been disbursed (closed) on or after January 27th.  Contrary to some reporting (and more reporting and more reporting) and social media postings, existing FHA loans would not have benefited from the lowered the MIP.  Also, the reduction was suspended before the effective date, so MIP did not increase for new mortgages.

The rational stated in Mortgagee Letter 2017-01 (Purpose and Background sections) for the lower MIP was that FHA has met the obligation to its Mutual Mortgage Insurance Fund (MMIF).  The MMIF covers lender losses on FHA mortgages.  Historically, HUD has adjusted the MIP (by increasing or decreasing MIP) as needed to meet the MMIF mandated requirements.  HUD’s last FHA MIP reduction occurred in 2015.  The November 15, 2016 Federal Housing Administration Annual Report to Congress reported that the MMIF increased from the previous year and the Fund’s capital ratio was 2.32 percent (above the 2 percent minimum capital reserve requirement).  The Report did not signal any impending reduction to the MIP this year.

Some have pointed to budget juggling and over projecting to make the MMIF appear solvent.  Consider that the MMIF pre-crisis reserve ratio was well above the minimum 2 percent but needed about $1.7 billion to replenish reserves after the crisis.  When the FHA MIP was reduced in 2015, many testified to congress about the potential risks.  Douglas Holtz-Eakin, President of the American Action Forum provided such testimony February 26, 2015 to the United States House of Representatives Committee on Financial Services Subcommittee on Housing and Insurance “The Future of Housing in America: Oversight of the Federal Housing Administration, Part II.”  Holtz-Eakin provided data stating:

Adding to concern surrounding premium reductions, FHA’s recent history has been plagued by missed projections. These missed projections enhance the perception that FHA downplays risks borne by taxpayers and cast doubt on the assumption that FHA will continually improve as projected despite cutting annual premiums. Since FY 2009, FHA’s capital ratio has been below the 2 percent minimum mandated by Congress. FHA has repeatedly projected marked improvement only to miss its targets…
In every actuarial review since 2003, the economic value of FHA’s MMIF has come in lower than what was projected the previous year …While FHA has in the past pointed to programs like home equity conversion mortgages (HECM) or the prevalence of seller-funded down payment assistance for losses greater than anticipated, erroneous economic assumptions and volume forecasts are more frequently to blame.
Following the dramatic fall in FHA’s economic value shown in Table 1, legislative attempts to reform FHA in the last Congress would have raised its mandated capital ratio even higher. Reform proposals have included a new capital ratio of either 3 percent or 4 percent, levels FHA’s MMIF is not expected to reach until 2018 and 2019 respectively before factoring in the effects of premium reductions.  FHA’s capital buffer is meant to protect taxpayers in an economic downturn while preserving FHA’s ability to fulfill its mission; its restoration is critical. Furthermore, many rightly worry that FHA’s current economic value is overstated due to the influx of money from major mortgage‐related legal settlements and the one-time appropriation of $1.7 billion from the Treasury Department ..

An example of budgetary juggling is hinted by HUD Secretary Julián Castro in his July 13, 2016 oral testimony to the U.S. House Committee on Financial Services Hearing on “HUD Accountability.”  In his statement earlier this year, he attributed the health of FHA’s MMIF to HUD’s Distressed Asset Stabilization Program (The DASP was put into place to help troubled home owners who were at risk of default, as well as dealing with delinquent and defaulted mortgages):

“…And when you consider that DASP has contributed more than $2 billion to the MMI Fund above what would’ve otherwise been collected, it’s clear this innovative program is a significant reason why the Fund’s capital reserve ratio is now above its 2 percent requirement.”

Of course, changes to DASP would most likely reduce contributions to the MMIF.  A HUD press release outlines those changes (FHA Announces Most Significant Improvements to Date for Distressed Notes Sales Program; June 30, 2016):

In addition, FHA’s latest enhancements prohibit investors from abandoning low-value properties in high-foreclosure neighborhoods to prevent blight. FHA is also offering greater opportunity for non-profit organizations, local governments and other governmental entities to participate in DASP. Loans are not eligible to be sold through DASP unless and until all FHA loss mitigation efforts are exhausted. On average, mortgages sold through this sales program are 29 months delinquent at the time of the auction.

FHA is supposed to be self-funded through its MMIF.  Suspending the MIP reduction may be to assure the longevity of FHA to future home buyers.  In suspending the MIP reduction, Mortgagee Letter 2017-07 stated (Background section): “FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers. As such, more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions …

Copyright © Dan Krell

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Will new mortgage rules set stage for subprime resurgance

Subprime MortgageAfter much speculation, new mortgage and appraisal rules have recently been revealed and will go into effect in January.  Combined with the recent news of FHA’s reduction of loan limits (authorized increased limits sunset the end of 2013), there’s been a lot of buzz about how the housing market and home buyers could be affected.

On December 18th, the Consumer Financial Protection Bureau (CFPB) launched a campaign to educate consumers about new mortgage rules that go into effect January 10th; specific information and fact sheets can be found at consumerfinance.gov.  Among the new rules, several include: the creation of the Qualified Mortgage (QM); new mortgage servicing rules; and additional protections financially challenged borrowers.

The QM is classified by the CFPB as a loan which qualified borrowers are presumed to be able to repay; and is described as a “safer” loan compared to some of loans originated prior to the mortgage crisis.  One of the main features of a QM, as of January 10th, is that mortgage lenders will have to assess the borrower’s ability to repay.  Additionally, the borrower cannot exceed a total monthly debt-to-income ratio (all monthly obligations including mortgage payments) of 43%.  Although lenders must make an effort to determine a consumer’s ability to repay based on typical factors including: income, assets, and debts; the new rules do not eliminate all subprime mortgages.

Two additional features of a QM include safer terms and limiting points and fees.  A QM cannot have loan terms that have been attributed to “risky” loans, such as negative amortization or interest only payments.  Furthermore, if you are directly paying a mortgage broker to originate your loan, they can no longer receive additional payment by another party for the same transaction; a QM is limited to 3% of the loan amount for points and fees.

To assist borrowers, the CFPB has set new mortgage servicing rules that include: providing clear mortgage statements that show how payments are credited; addressing mistakes promptly; crediting payments when received; and providing early notice for adjustable interest rate increase.

To assist borrowers facing financial challenges, the CFPB institutes rules that include: foreclosure cannot be initiated prior to 120 days delinquent; a foreclosure cannot be initiated if a complete application for mortgage assistance has been submitted; servicer call centers must be able to answer borrower questions relating to critical documents; as well as providing accurate and timely foreclosure status to borrowers who ask.

Financially challenged borrowers seeking assistance through their mortgage servicer have additional protections.  Borrowers who make application for loss mitigation early on must have all their options evaluated with one application; an explanation must be provided to borrowers rejected for loss mitigation; and borrowers could appeal a loan modification rejection based on the servicer’s mistakes.

New appraisal rules instituted by the CFPB become effective January 18th.  Although these rules do not apply to all mortgages, typically a borrower should expect: a licensed appraiser; an interior of the property, and a copy of the appraisal prior to closing.  Additionally, a second appraisal is required for a home that is considered a “flip;” a home sale that has sold in the previous six months is classified as a flip.

Although some have speculated the new rules, along with reduced FHA loan limits, will limit the availability of mortgages for some home buyers; others see the resurgence of the subprime mortgage to fill the gap.

New mortgage rules, lowered FHA loan limits, and other new changes are increasing investor backing of non-conforming mortgages.

by Dan Krell © 2013
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Disclaimer.  This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice.  Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction.  This article was originally published the week of December 23, 2013 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

Renovate your home with FHA 203k

FHA 203k
Renovate your home with a FHA 203k

If you’re like many home buyers, you’re probably looking for a home that is “turnkey” or an updated home that is ready to move right in.  However, since inventory is tight, competition can get intense.  But rather than passing on the “diamond in the rough,” consider the FHA 203k.

The FHA 203k is HUD’s rehabilitation loan.  The “203k” actually refers to the section within the National Housing Act that provides HUD with the ability “…to promote and facilitate the restoration and preservation of the Nation’s existing housing stock;” in other words provide mortgages to renovate and rehabilitate existing homes.  Although the program is not allowed to provide for “luxury” upgrades (such as hot tubs), the program may be used “…to finance such items as painting, room additions, decks and other items…”

If you’re purchasing a home that is not a total rehab project, there is a streamlined version of the program that can assist you to purchase the home and provide additional funds (up to $35,000) for improvements and upgrades.  The FHA 203k-streamline is a “limited loan program” designed to provide quicker access to funds so your home move-in ready relatively quickly.

The “203k” process is relatively straight forward.  After identifying a home, you should consult your 203k lender and consultant about the feasibility of a FHA 203k.  A project proposal is prepared detailing a cost estimate for each repair/improvement.  During loan underwriting, the appraisal is completed to determine the value of the home after the proposed repairs/improvements are completed.  If the mortgage is approved, the home is purchased with the loan and the remaining funds are placed in escrow to pay for the project.

Much like a typical mortgage, you must qualify for the program by meeting underwriting standards for borrowers.  However, unlike the typical mortgage, additional underwriting requirements include review of architectural plans and repair estimates (materials and labor) from licensed contractors.  HUD approved consultants/inspectors examine and evaluate the project’s progress to ensure work is completed and compliant with HUD standards.  Funds for the repairs/renovations are released in draws to ensure the work is completed as intended as well as meeting all zoning, health and building codes.

Of course, the home must also meet eligibility guidelines.  The home: must be one to four units; must be at least one year old; and must meet neighborhood zoning requirements. The program allows for major rehabilitation on homes that have been razed provided that the foundation still exists.

But what if you’ve decided to renovate your home rather than move?  The FHA 203k allows for home owners to make renovations, updates, and sometimes additions.  The possibilities seem endless (as long as your vision stays within the loan limits).   Besides painting and updating kitchen and bathrooms, you could possibly even expand your existing house with an addition.  The FHA 203k even allows for many “green” upgrades to make your home more efficient.

FHA guidelines have been revised in recent years, and may undergo further revisions.  It is important for home buyers and others who are interested in the FHA 203k to consult with an approved FHA lender for borrower and home qualifying guidelines, loan limits and 203k acceptable improvements.  Additional information (including a list of lenders) can be found on the HUD website (HUD.gov).

Original published at https://dankrell.com/blog/2008/09/19/fha-203k-renovation-loans-are-still-available/

By Dan Krell

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © Dan Krell.

Sequestration will affect real estate and housing markets

by Dan Krell

Housing and Sequestraion(Dan Krell © 2013) Remember the “Fiscal Cliff?” Well, after a two month hiatus, sequestration concerns are again entering (if not intrusively) the minds of those who may be affected. And, if you remain indifferent on the matter, you might consider the local economic effect from looming government budget cuts that may begin on March 1st.

On February 14th, HUD Secretary Shaun Donovan provided written testimony to the “Hearing before the Senate Committee on Appropriations on The Impacts of Sequestration” (HUD.gov). Secretary Donovan outlined what he described as the “harmful effects of Sequestration” to not only at-risk populations, but families, communities, and the economy at large, as he concluded, “…Sequestration is just such a self-inflicted wound that would have devastating effects on our economy and on people across the nation.”

As a result, HUD counseling would be limited. According to Secretary Donovan, about 75,000 families would not be able to receive the critical counseling services that include pre-purchase counseling, and foreclosure prevention counseling. According to the Secretary: “…This counseling is crucial for middle class and other families who have been harmed by the housing crisis from which we are still recovering, and are trying to prevent foreclosure, refinance their mortgages, avoid housing scams, and find quality, affordable housing. Studies show that housing counseling plays a crucial role in those 3 efforts. Distressed households who receive counseling are more likely to avoid foreclosure, while families who receive counseling before they purchase a home are less likely to become delinquent on their mortgages.”

FHA has been the workhorse to stabilize the housing market as well as providing the means for affordable home purchases. Those directly affected by sequestration would be home buyers and home owners who are applying for FHA mortgages; as well as those seeking assistance through HAMP and HAFA. In written testimony, Secretary Donovan stated that “…furloughs or other personnel actions may well be required to comply with cuts mandated by sequestration.” As a result, “…The public will suffer as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties.”

Another concern is the possibility of a sharp increase in interest rates. Up until now, home buyers (and those refinancing) have had the benefit of historically low mortgage interest rates. Low mortgage interest rates are one of the reasons why home affordability is also at historic levels. A sharp rise in interest rates combined with FHA mortgage delays could shock the housing and real estate market. The result could be housing activity similar to what we experienced immediately after the financial crisis. Granted, the shock would probably not be as prolonged as what occurred in 2008-2009, but nonetheless significant.

In a region that has been relatively unaffected by unemployment and economic issues due to a strong government workforce, sequestration could essentially put a damper on the local housing recovery. Home buyer activity has already been affected, as those who are concerned about sequestration have either put their home purchase plans on hold, or have changed their housing plans altogether. And of course, over time, the changes to consumer behavior would trickle down to various sectors of the economy.

But don’t worry, although sequestration is set to begin March 1st, budget cuts won’t occur all at once. Unless Congress acts on the matter, you might not immediately feel its effects.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 18, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Necessary reforms to save FHA

by Dan Krell
© 2013

home for saleAfter the financial and foreclosure crises, FHA became the workhorse that not only kept the housing industry afloat, but assisted many financially distressed home owners keep their homes. After taking the brunt of the crises and almost facing insolvency, it’s time for FHA to get back to helping home buyers who might not otherwise have the means of purchasing a home.

The Federal Housing Authority (also known as FHA) was established in 1934, to help jump start a housing industry that was decimated by the Great Depression. Much like the housing downturn of the recent “Great Recession” which followed a housing boom; the 1930’s housing bust followed a 1920’s housing boom. At a time when a majority of Americans rented, the FHA provided the means for would be home buyers to become home owners.

Unless you’re familiar with the FHA’s history, you might have questioned the use of FHA as a means to refinance home owners with underwater mortgages as well as assisting those in foreclosure. However, FHA has a history of assisting home owners facing financial uncertainty, as well as making mortgages available to home buyers during times when conventional lenders were not lending. And although many criticized such assistance programs as being unnecessary and wasteful; in retrospect, these measures were significant and necessary during an uncertain time for the housing industry – regardless of the outcomes.

Last year, the outcomes of mortgage and home owner assistance programs were highly criticized as being responsible for almost bankrupting FHA. Although many describe FHA’s woes stemming from being saddled with non-performing loans and a historic number of borrowers; Tami Luhby, in her January 24th 2012 article in CNNMoney (Has Obama’s housing policy failed?; cnnmoney.com), provides some insight to the crises related assistance programs’ lender related bureaucratic issues and low success rates. She reported that at the time of her article, the HAMP program only helped about 910,000 home owners refinance to lower interest rate mortgages instead of the planned 4 million; and the HARP program “… which was intended to reach 5 million borrowers, has yielded about the same results. Through October [2011], when it was revamped and expanded, the program had assisted 962,000…”

It comes as no surprise that after eroding capital reserves, congressional hearings were held late last year to address FHA’s losses. As a result, FHA plans to shore up its financial short falls by increasing mortgage insurance premiums, increased down payment requirements for loans in excess of $625,500, as well as tightening underwriting standards.

FHA’s survival may come down to its perceived role in housing industry. And of course, there is criticism from both sides: some argue that FHA’s losses have become an unsustainable burden; while others argue the tightening measures will hurt the housing market and limit home ownership.

So, when I read Jacob Gaffney’s January 15th lamentation about refinancing out of an FHA mortgage (Refinancing Away From the Government; With an FHA Blessing: housingwire.com), the planned FHA changes not only make sense, but is necessary to preserve the access to homeownership that FHA provides. FHA Commissioner Carol Galante’s response to Gaffney not only impressed him, but may sum up the FHA mission: “…The role of FHA is to enable homeowners. FHA helped you get your home, made it happen” …”If you find you can move on, then I’m pleased you have that opportunity.”

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 4, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.