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
Google+

If you like this post, do not copy; instead please:
link to the article,
like it at facebook
or re-tweet.

Protected by Copyscape Web Plagiarism Detector
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.

Sequestration will affect real estate and housing markets

by Dan Krell
DanKrell.com
Google+

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.

More news and articles on “the Blog”
Protected by Copyscape Web Plagiarism Detector
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.

Don’t buy into a false economy

by Dan Krell
DanKrell.com
© 2012
Google+

Auction Stories about housing and real estate often reported in local media are entertaining and sometimes informative. However, some stories can create an erroneous impression about what’s happening in the marketplace. If you are not careful, you may be lead to buy into a false economy; using a Realtor® in today’s market is vital to get real time neighborhood information to make the best decisions.

A recent story highlighted a DC foreclosure that reportedly received over one hundred offers, and the accepted offer was more than double the list price. The story appeared to use this home sale as an example of a hot DC market. And make no mistake – that neighborhood is a hot market for various reasons (including the limited number of active homes for sale); but there’s missing information that could distort your perspective.

First, understand that the story referred to the sale of a HUD owned property, which was most likely a FHA foreclosure. The fact that there were reportedly 168 offers on the property is not unusual for a HUD owned property located in a neighborhood with very active buyers; although some HUD properties don’t get much attention, it is not unusual for many such homes to attract a lot of attention, as well as many offers.

Most offers on HUD homes are usually at list price or below, not only because savvy buyers are seeking a foreclosure bargain; but because of financing limitations. HUD appraises these properties so as to know the market value, and usually lists the home at that price. HUD foreclosures that are eligible for FHA financing use that appraisal, and are therefore limited to that price.

The MLS listing for this home indicated that it was listed “Insured with Escrow,” which means that the home was eligible for FHA financing. And looking at recent neighborhood comps, it looks as if the home was priced competitively. Additionally, the repair escrow indicates that the home requires repairs to meet FHA guidelines.

AuctionAlthough there are some buyers who pay over list price for an “Insured” HUD foreclosure, they know they need to pay cash or find alternate financing; so unless the buyer of this home has cash, the buyer could encounter issues obtaining alternate financing. Furthermore, although the story reported that the home sold, the MLS listing indicates that the home is under contract with contingencies (home inspection). So, the home is far from settled, and it remains to be seen if this contract falls through (or remains owner-occupied as required for this sale).

Although the story about this home sale was interesting, it is not typical for the housing market. The story does not indicate that the reported 14% DC median home sale price increase compares November 2012 sales to November 2011. There is also no mention that “luxury” home sales could have impacted November’s home sale price figures; GCAAR (gcaar.com) reported that DC single family home sales priced at $1.5M and above increased about 111%! Also, according Realestate Business Intelligence (rbintel.com), the November 2012 average DC sale price is about 97% of list; the average sale price is not over list.

Don’t get me wrong, this was a good story. But the story may be about buying into a false economy and buyer’s remorse; the real story may ultimately be how you should consult with your Realtor® before making a purchase or sale.

More news and articles on “the Blog”
Protected by Copyscape Web Plagiarism Detector
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 December 24, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

House Flipping makes a comeback

by Dan Krell © 2009

Short sales? Foreclosures? Fugetaboutit! House flipping is the new real estate buzz!

Flipping homes is an investor technique used to quickly sell a home, sometimes rehabilitating the home to current code and standards. Flipping is more prevalent in re-emerging markets (sometimes associated with recessions) because of the real estate investors’ ability to buy homes at wholesale and sell at retail prices. Flipping was also pervasive during the housing boom earlier this decade, when real estate speculators took advantage of the rapidly appreciating market by quickly re-selling homes they purchased almost as soon as they bought them.

Home flipping has been a viable technique included in many real estate investors’ business models. Flipping is not only a means for investors to make money, it has often been a part of neighborhood revitalization. Run down homes, that are often overlooked by home buyers, are made more appealing by modernizing and renovating to code.

Unfortunately, flipping has become synonymous with fraud and scam because of the vilification home flipping received in the mid to late 1990’s (as the result of widespread fraud scams that involved flipped homes). Several cities were known as “ground zero” for flipping scams, Baltimore being one, because of the investors’ ability to purchase homes for very little money.

Although, there is nothing wrong with flipping a home per se; flipping has been rebuked because mortgage fraud was often entwined with the flip in several ways: loan officers falsified income and/or credit information for unqualified home buyers; fraudulent appraisals were used to justify artificially inflated sales prices; and/or “straw buyers” were recruited by the scammers to facilitate the scam. Additionally, flipping scammers often defrauded unknowing home buyers by portraying homes as having renovations, when in fact the renovations were not preformed or of poor quality and not meeting code.

To protect consumers and stem the mounting losses due to illegal flipping, HUD took action. HUD defines “flipping” as, “… a practice whereby a recently acquired property is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser…” (HUD MORTGAGEE LETTER 2003-07). To dissuade the financing of flips, FHA instituted a title seasoning (the time an owner is on title) requirement of at least 90 days; if the sale is between 91 and 180 days, the sales price cannot exceed 100% of the prior sales price.

In the wake of the illegal flipping scams that rocked many Baltimore neighborhoods, then Maryland Attorney General J. Joseph Curran, Jr. launched an initiative to combat deceptive real estate practices that included flipping and predatory lending. The initiative not only sought to prosecute scammers, but to educate home buyers through town hall meetings and a brochure.

The brochure (www.oag.state.md.us/consumer/flipbrochure.pdf) gives five signs that the sales price of the home may not be the value and that sale is a [illegal] flip, including: the seller does not answer questions about price or condition; and, the person “selling” the home is not on title or the home was recently sold.

Since flipping is on the rise, protect yourself by getting all the information. Find out if the seller is being deceptive, as well as how the flip may affect your ability to obtain a mortgage.

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 December 14, 2009. Copyright © 2009 Dan Krell

Be your best advocate; get to know RESPA


by Dan Krell © 2009

One of the most important pieces of legislation that home buyers need to be aware of is The Real Estate Settlement Procedures Act (a.k.a. RESPA). Although RESPA has been around since 1974, it’s a wonder that the professionals whom consumers depend on have had trouble understanding the law. And in some cases it’s more of a problem of following the law.

To protect the consumer, RESPA clearly spells out some of the many do’s and don’ts for those in the real industry. According to HUD (HUD.gov), RESPA is a “ …consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD…”

Of all the sections of RESPA, Section 9 appears to be the area that gets the least attention. Section 9 prohibits home sellers from requiring home buyers to use a specific title insurance company as a condition of sale. Seems simple enough, right? In an owner occupied resale transaction, a buyer may not encounter such pressure from the seller. However the number of Section 9 complaints from buyers may have increased in the last two years corresponding to the explosion of foreclosures and short sale transactions. Many MLS entries of such sales have remarks such as: “must use ABC title” or “settle with XYZ title,” which are direct or indirect statements that fly in the face of Section 9.

The first thought of a seller who directs the buyer to use a particular title agent may be one of kickbacks and affiliated businesses (which is regulated by RESPA Section 8). However, even if the seller may have a reasonable case to require the use of their title agent as a condition of the sale, the fact is that it is prohibited by Section 9 (caveat notwithstanding).

The reasons for a buyer to choose their own title agent include price and service. If a buyer has the ability to select their own title agent, they can compare prices for title insurance and affiliated services. Additionally, the buyer may also be able to compare title agents on their professional and service reputations. Having the title agent be responsive, file the correct documents, and distribute escrow funds in a timely manner should be taken seriously; title problems may plague you in the future if releases and mortgages are not filed correctly with the County.
Become your best advocate and get acquainted with RESPA. You can visit HUD’s consumer website to get further explanation on Section 9 and other sections of RESPA as well as the complaint process.

If you feel that the seller violated Section 9 and you were forced to use a seller’s title agent as a condition of the sale, consult with an attorney- you may be able to seek damages up to three times the amount you paid for the title insurance.

To enforce RESPA, HUD wants to know about your RESPA complaints by sending an outline of the violation and the violators name, address and phone number (along with your contact information) to the Director, Office of RESPA and Interstate Land Sales, US Department of Housing and Urban Development, Room 9154, 451 7th Street, SW, Washington, DC 20410.

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 December 7, 2009. Copyright © 2009 Dan Krell