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www.lasvegasmtg.com Report: Republicans target increasing FHA Down Payment Part 2

by John Le Francois

www.lasvegasmtg.com Report: Republicans target increasing FHA Down Payment was the main discussion held yesterday in the Republican led House Financial Services Committee. The Draft Legislation "FHA Rural Regulatory Improvement Act of 2011" Chairman Spencer Bachus (R) "This hearing is necessary to insure that government home loan programs do not expose taxpayers to significant losses."

In a previous article "Republican Politicians want FHA to Increase Down Payment" I wrote prior to the House Financial Service Committee hearing briefly outlined the increase from 3.5% to 5% for a FHA down Payment. It appears from testimony from the hearing there would a more restrictions being imposed with the new legislation if the proposal gets out of the Committee.

Micheal Berman Chairman of the Mortgage Banker Association and Ron Phillips President of National Realtors Association are strongly opposed to any increases in the required FHA down payment. Both Micheal Berman and Ron Phillips sited statistics that FHA default are considerably less then conventional loan defaults. What is more important then the amount of down payment is having strong underwriting requirements, which FHA does have.

The Cato Institute a Conservative Think Tank, disagrees and has provided a list of proposed changes that the House Financial Service Committee has eagerly endorsed.

• Immediately increase to 5% Cash Down Payments on the part of the borrower.
• Require FHA to only allow reasonable debt to income levels. (What that is has not been determined at time of this writing.)
• Restrict borrowers eligibility to a credit history above a 600 FICO score.
• Require pre purchase counseling for borrowers with FICO scores between 600 to 680.
• Require a 10% down for all borrowers with a credit scores lower then 680.
• Require income limits on borrowers eligibility to FHA loans to not exceed 115% of the Median Income for the Area. 

Are these proposal going to make FHA immune to defaults? No! Will requiring 10% down for borrowers with a a credit score less the 680 protect the FHA loan Program? No! Will not allowing a borrowers ability to use a FHA loan program based on Income exceeding the median income limit strengthen the FHA loan program? No! 

The good news is you would be more likely to put the fires of hell out with a squirt gun then this bill ever passing the Senate!

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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www.lasvegasmtg.com Report: Republican Politician want FHA To Increase Down Payment

by John Le Francois

www.lasvegasmtg.com Report: Republican Politicians want FHA To Increase Down Payment from the current 3.5% to 5% and are proposing this through discussion on Wednesday Housing Financial Services Committee hearing led by Judy Biggert (R-Ill.) Last year Congress tried to increase the FHA Down Payment required, but it was removed from the bill when the President Obama threatened to veto the bill if left in.

The Republican led proposed increase to the down payment is based on the argument that FHA would not be in jeopardy of Government assistance if the borrower were required to have more skin in the game with a higher down payment. FHA has had two increases in the Upfront Mortgage Premium and the annual premium in the last year to increase the required reserves that Congress has mandated to cover mortgage defaults.

Last year Congress mandated these changes to UFMIP and MIP to secure solvency of FHA without government assistance. Borrowers with FICO score less the 580 would need to put 10% down before they could get a FHA approval.

Most of the FHA defaults were the result from the Down Payment Assistance program that was approved by Congress back in 2000 and was eliminated in 2008 when it became apparent that over 60% of these types of loans were in default in the first two years. Current FHA defaults are the results of high unemployment across the nation and would be the same regardless of the percentage of down payment required.

 What is a fact is that current statistics show that Fannie Mae and Freddie Mac have an average default rate of 17% while FHA defaults are at 6.2% and VA that does not require any down payment is less then 2% in defaults.

Given VA has the lowest default rates of any mortgage loan program and does not require a down payment then logic would show that down payment is not the only determining factor for defaults.

What we do know is that the increase in down payment from 3.5% to 5% for a FHA loan would eliminate first time home buyers of at least 300,000 in the first year alone.

We know that this proposal would never come to the floor as a bill without bipartisan approval, but with banks feeling the pressure with 40% of all loans being underwritten with FHA loans, do not be surprised the banking lobby can get that bipartisan support needed to get the bill to the floor of Congress.

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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www.lasvegasmtg.com Report: FHA Annual Mortgage Insurance Increase

by John Le Francois

www.lasvegasmtg.com Report: FHA Annual Mortgage Insurance Increase will be enacted on 04/18/2011 and will increase from .90 (current rate) to 1.15%. In 2010 Congress provide FHA the ability to raise the annual monthly premium from .55% to 1.25% of the loan amount. This was to cover the required mandate that there be a 2% reserves of all existing FHA home loans to cover any losses due to Foreclosures or Short Sales. This will be the third increase in less then 12 months and it may reach the maximum allowed fee set by Congress by the end of the year.

The main reason for the increase requirement is due to the ever increasing role the FHA loan has in the Mortgage Industry. With tightening of quidelines for Fannie Mae and Freddie Mac, larger down payments requirements, higher FICO scores and lower DTI restrictions these types of loans are becoming more costly for the owner/occupied home buyers. In 2005 FHA home Loans only represented 5% of all home loans and now in 2011 it is 30% of all transactions. 

Fannie Mae and Freddie Mac have received Billions of Dollars in government bailouts to keep them from failing, there is no life line being offered to HUD for the FHA program. Many opponents of the HUD FHA loan program are portraying FHA loans as the next sub-prime loans because of the low down payment requirements. Sub-prime loans that were offered by Fannie Mae and Freddie Mac before the Mortgage Meltdown are running at 24% default rate VS. 5% FHA default rate.  

In a recent interview by Larry Kudlow and Suze Orman pitching her new book "The Money Class" she states"anyone purchasing a new home with 3.5% down FHA Loan is making the worst economic mistake they could ever make." Suze is a proponent of saving up and putting 20% down on a new house. I know  a lot of people that put 20% down or more on a home in Las Vegas, and they are still underwater and have had their home foreclosed on or short sold their home just the same!

The reality is that the amount of down payment does not insure the risks of defaults anymore, There are 5 key elements that Desktop Underwriting will use to evaluate the risk of each borrower for a FHA Loan.

1. Credit History (Score)

2. Employment/Income History

3. Available Liquid Assets

4. Property type.

5. Debt to Income

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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www.lasvegasmtg.com Report: FHA Loans will be costing more starting April 18, 2011

by John Le Francois

www.lasvegasmtg.com Report: FHA Loans will be costing more starting April 18, 2011 in Las Vegas, Nevada. FHA Mortgagee Letter 2011-10 dated February 14, 2011 details the new Annual Premium for Mortgage Insurance. Effective with all new FHA case numbers issued after April 18, 2011 the Annual Premium will go up based on the following criteria.

The purpose of the new changes is based on the legislative mandate 202 of the National Housing Act to make FHA financially sound and to insure the FHA loan program is available to to future borrowers.  

The chart below shows the before costs and the new cost based on terms and LTV. 

Example of a FHA Loan with the before and after Annual Premium Insurance costs on a typical FHA home Loan in Las Vegas.

To put this in to perspective a FHA and DU 8.2 guidelines state the total housing expenses can not exceed 47% of income. If the Borrower was approved at the maximum 47% Housing Ratio prior to April 18, 2011 the borrowers purchasing power would now decrease by $4,500.00. Coupled with higher interest rates that are certain to be coming in the near future borrowers can not afford to be sitting on the fence anymore. The choice is yours but the clock is ticking down on what you can qualify for on purchasing a house with the increase of FHA Annual Mortgage Insurance Increase!

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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www.lasvegasmtg.com Report: Are Credit Overlays another way of "Redlining"?

www.lasvegasmtg.com Report: Are Credit Overlays another way of "Redlining"? This is the argument that has been filed by National Community Reinvestment Coalition to FHA, The National Community Reinvestment Coalition has filed complaints against 22 lenders for having credit overlays that deny home loans to the poor and minorities. There are 17 other lenders that were not included in the complaint because they have agreed to meet with National Community Reinvestment Coalition.

It should be noted that the banks not named in this complaint are Bank Of America, JP Morgan Chase & Co, and Wells Fargo Bank. These banks have a lower credit score requirements for their institutions and higher requirements for their wholesale division. Wells Fargo Bank is part of the National Community Reinvestment Coalition Banker/Community Collaborative Counsel. Wells Fargo participation with the Council and not being named in the complaint is an interesting coincidence.

Redlining is the practice of arbitrarily denying or limiting financial services to specific neighborhoods, generally because its residents are people of color or are poor. The Government passed laws to eliminate this practice specifically The Fair Housing Act, Equal Credit Opportunity Act, and Community Reinvestment Act. 

Credit Overlays are implemented by lenders to lower the risk of defaults that are shown to exist with lower credit scores. FHA minimum FICO scores is 580 and most lenders require a minimum of 620 or 640 minimum FICO scores. Even with the higher requirements by the lenders with credit overlays, there still will be hits to the rate based on FICO scores below 680 to 720 depending on the lenders overlay. 

National Community Reinvestment Coalition argue that Credit Overlays are discriminatory against minorities and the poor. They argue that FHA loans are insured by the government so how can the lenders justify the overlays? 

Lenders argue to lower the FICO score to FHA minimum of 580 the lenders will be incurring more costs and risks in underwriting the loans. FHA can also require the lender to buyback the loan when the borrower defaults if the review of the underwriting process has determined an error in any part of the application.

Redlining practices were wrong. Are Credit Overlays Redlining? I do not think so as it does not target certain geographical areas to deny access to financial resources. Poor Credit is not based on race or income level and can be caused from bad financial habits to circumstances beyond ones control.

Does it make sense to make FHA the new subprime loan as this will clearly be the case if we lower the FICO score to 580 to get a home loan? If Credit Overlays are going to be considered Redlining, then by what standards will be equitable to determine the ability to repay the loan?  What do you think? Should we eliminate Credit Overlays? Will this increase the risk of more defaults on FHA loans? Will this create another sub prime product if enacted? I look forward to your opinions.

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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www.lasvegasmtg.com Report: HUD want to hear from you on proposed changes!

www.lasvegasmtg.com Report: HUD want to hear from you on proposed changes to help shore up FHA balance sheet. While everyone is familiar with the recent changes in Upfront Mortgage Insurance from 1.75% to 2.25% we will see the next wave of changes outlined here.

Las Vegas, Nevada home loans for purchases and refinances in the last two years are underwritten with FHA loans nearly 67% of the time for loans under $400,000.00. With the proposed changes that FHA is seeking, this could have a negative impact in Las Vegas housing industry and cause a longer time for the housing recovery.

FHA Proposed Rule Changes:

1. Restricting sellers concessionsfrom the current allowable 6% to 3 %. Las Vegas has already been limited by the banks on sellers concessions to 3% every since inventory has been held artificially low so the impact on the future contracts will be minimal.

      2. The down paymentwill increase from 3.5% of the contract price for borrower's with a minimum FICO Scores over 580 and less then 620 will now be required to have 10% down . This would not cause much of a problem as most lenders have existing overlays with a minimum of 620 FICO scores.

      3. Increase the minimum FICO Score from no minimum to 580 to offset the risk of bad loans. Most lenders in Las Vegas have already set overlay at a 620 minimum FICO Score and a maximum DTI ratio 45%. Yesterday one of the major lenders in Las Vegas just increased the minimum FICO Score to 630 and DTI is capped at 40%.

HUD will be seeking the approval from Congress to also give it the authority to raise the annual premium from .55% to the maximum of 1.25%. This will be necessary to bring the minimum reserves up to the 2% FHA is required by law to have in case of foreclosure.

FHA is under fire from Congress because the required minimum reserves of 2% set by Congress has been slowly deteriorating to less the .5% due the high number of foreclosure from the DPA (Down Payment Assistance) which ironically was created by Congress in 2005 to compete with conventional subprime loans as leveling the playing field for FHA!

 With FHA overwhelming importance to provide home buyer's low cost home loans  it makes even more sense we need to make changes to ensure it's survives this storm! 

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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www.lasvegasmtg.com Report: H. R. 5072 FHA Reform Act of 2010 Passes the House

www.lasvegasmtg.com Report: H. R. 5072 FHA Reform Act of 2010 Passes the House has been adopted by a voice vote and now will go to the Senate for debate. Some of the key components of the FHA Reform Act of 2010 (H.R. 5072) which has been noted in many blogs is the Congress setting the annual premiums loan limits currently at .55% to 1.5%. It might be noted that FHA as stated they are seeking the ability to have the 1.5% increase but would initially only increase it to .9% similar to current private Mortgage Insurance costs for a conventional loan.

In a 2009 audit of FHA UFMIP it was apparent that FHA would require a increase in the premium's due to the mandated 2% reserves required by Congress. FHA has noted that the primary reason for the shortage was a direct result of the tax rule changes allowing Down Payment Assistance programs from 2004 to 2006 when they were abolished. With 650,000 DPA loans during this time 70% of the loans are in default. Last month the UFMIP was increased from 1.75% to 2.25%, but the annual premium increase has to be approved by Congress.

Here are other provisions to the FHA Reform Act of 2010 that I think needs to be focused on as much as the increase in the annual premium.

1. Sponsor Waters (CA) Increase Loan Limits in micro-politan counties experiencing significant growth.

2. Cardonza (CA) Prioritizing foreclosure counseling in hardest hit areas in foreclosures.

3. Cao (CA) to require information to borrowers on credit risks and financial counseling services.

4. Bean (IL) HUD to provide a annaul report on financial stability and to provide recommendation on the minimum required Down Payments. It would give the authority to HUD to make changes to the minimum investment requirements.

5. Garrett (NJ) Would require the Down Payment to be 5% up from the current 3.5% minimum. Closing costs would be prohibited from being included in the loan.

6. Price (GA) Would cap HUD at 10% of all originated loans until 2012. HUD has 90 days to provide Congress a plan of action.

7. Turner (OH) to remove HUDs emergency authority to increase loan limits from $720,000 in high cost areas and cap the maximum loan limit to $500,000.

8. Clarke (NY) Require HUD to provide to the GAO analysis of HUD's loss mitigation program particularly low income borrowers.

9. Edwards (TX) Would require borrowers to state they have not been convicted of sexual offense with a child to get a FHA loan.

I think item # 4, 5, 6, 7, would have a greater affect on getting a FHA loan then the increase in the annual premium. I would also feel that item #9 is going to be extremely difficult and most people would find it offensive to have to certify they are not a child molester in order to get a home loan. 

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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www.lasvegasmtg.com Report: FHA the Truth or Fiction Game is based on Mortgagee Letters everyone has heard about, but until you try to implement them you do not know if they are true or fiction in the real world of lending. So lets begin with an easy one alright?

1) FHA now has implemented a minimum FICO Score set at 580. If you do not have a minimum FICO score of 580 you will need 10% down? Is this Fact or Fiction? This is Fact based on FHA guidelines, but Fiction in the real world of lending! Lenders have what is called Matrix's or Overlays set by the investors that buy the loans on the secondary market. Few lenders will do 580 while most are set at 620 minimum FICO score and no hits to the rate with FICO scores over 640. Mortgagee Letter 10-016.

2) FHA has waived the 90 day flipping rule. Is this Fact or Fiction? Fact FHA has waived the 90 day flipping rule starting January 15th, 2010. Fiction in the real world of lending. All lenders will not accept this waiver and will still require 91 days from the last record of sale date. As of today I have only two lenders now with a lot of restrictions. The sales price cannot be more then 20% above the previous sale and requires two appraisals. The second appraisal cannot be paid by the seller. Again the investors are fearful of fraud on these and it is not worth the risk to try to sell on the secondary market. Mortgagee Letter 10-011

3) FHA allows a borrower to use a FHA loan when they just completed a short sale on their primary home that was less then 3 years? Fact or Fiction? Fact the FHA did make this change with the Mortgagee Letter 09-52 dated December 16th, 2009 allowing the borrower use a FHA loan when just completing a short sale. Fiction in the real lending world only one lender will accept this Mortgagee Letter 09-52 based on the following criteria:

a) The short sale was due to other circumstances other then declining markets.

b) The borrowers were current on the mortgage and other installment debt on the previous owned property.

c) The proceeds of the short sale served as payment in full.

Based on the following Criteria this would be Fiction for most borrowers and they would not be able to qualify.

We are now halve way through March and HUD has released Mortgagee letter 10-051 on March 16th, 2010. With program changes, new guidelines changes, then lenders interpretation of the changes, and the placements of their overlays due to the FHA changes, it is enough to make your head spin!

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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www.lasvegasmtg.com Report: What every Realtor should know about the FHA Changes in effect and the legislative changes being requested. Due to losses that occurred from legislative changes in 2003 when both houses of Congress proposed and passed the Down Payment Assistance Program the necessary funding required by law to cover defaults is now below the mandated 2% requirement.

This January 2010, FHA announced the changes that will take effect in staged time frames for the public and industry to digest and hopefully not impact the recovery of the housing markets. 

1. FHA is now requiring the "Funding Source" or Lender to show net worth of $1,000,000.00 in assets up from the $250,000.00 previous requirement.

2. Will require the Financial Audits annually of lenders instead of every two years.

3. Lenders performance will be rated and can be followed through Neighborhood Watch.

4. Minimum FICO Score 580 required now with 3.5% down. FICO Scores below will be required to have 10% down.

5. FHA 90 day Flipping Rule is waived for 1 year effective 02/01/2010 till 01/31/2011. Price of home cannot exceed 20% of  original purchase price unless it meets strict guidelines. Must be true Arms length transaction with no identity interests between buyer and seller.

6. February 12, 2010 all FHA Case numbers ordered after this date will have to order the appraisals through a HVCC system.

7. April 5th, 2010 the UFMIP will increase from 1.75% to 2.25%. This can still be added into the loan, same as before.

8. Summer of 2010 Sellers Concessions will be reduced from 6% to 3% in a effort to keep properties from being inflated at time of the appraisals to allow the higher concessions.

9. FHA is seeking Legislative policy changes for the following: Higher Annual Premiums for MIP. Tighter enforcements of FHA Lenders.

Summary of the new and proposed changes:

1-3. Will cause greater Underwriting scrutiny on all files and more conditions, longer reviews, more declines if not properly reviewed by the loan officer at time of the application process.

4. Will have very little effect as Lenders investor overlays are far more conservative at 620 then FHA proposed minimum FICO scores set at 580.

5. Will allow more homes to be available for purchase using FHA as a loan option.

6. Will cause some delays initially until the bugs are worked out.

7. Will cause higher costs but will be financed over 30 years, eliminating the initial impact to consumers. Raising costs per month by a few dollars on the average FHA loan of $125,000.00.

8. Will have a greater impact to the consumer as the 3% of sellers concessions will not be enough to cover all of the prepaid and closing costs. Will require more funds from the buyers at closing or higher interest rates so lender can credit closing costs.

9. Will cause a higher payment amount monthly and will reduce the amount of purchasing power for the buyer.

Las Vegas Nevada FHA home loans rates are still very low, but the Fed has announced that it will stop buying mortgage backed securities at the end of March which could cause mortgage rates to rise by .5% to 1% more.

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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www.lasvegasmtg.com Report: Rebuttal to FHA changes designed to reduce buyer pool written by Lenn Harley today featured article in Activerain. I agree that this will leave some out of the market but not because of the raised FICO score. Most of the lenders already had their own matrix's with a minimum FICO score higher then the new FHA minimum FICO Score. Lenders that advertised doing loans at 580 which was the lowest FICO any lender would do was next to impossible to close with them with only 1 in 7 actually closing. Most of the secondary market had already imposed the minimum FICO score as a requirement before they would accept the purchase of the paper.

The short fall for the MIP was created with the policy of DPA where a seller gifted the down payment to a third party and the buyer came in with less then 1% down to buy the home. In the government review of these types of loans that were insured by FHA, 68% of these loans were in default within in the first two years. With little investment involved from the buyer it assumed that they had nothing to lose walking away.

While the government or should I say Congress enacted the policy for the DPA against the protests of HUD for fear of the buyers would have "no skin in the game" and would walk away, the law was enacted anyway. The policy of DPA was enacted during the subprime market and was sold as a way for FHA to even out the playing field against the 80/20 conventional loans being offered with little or no down payments required. Everyone knows how well the 80/20 loans did and it would stand to reason that the DPA would not fair any better. It was a bad plan enacted by politicians that do not understand the market or the consequences of the policies they put in place.

Raising the UPMIP from 1.75% to 2.25% will only increase the mortgage payment on a $100,000.00 loan by $3.22 a month hardly any significant amount. If Congress approves raising the annual premium from .55% to .95% as proposed this will raise that annual premium by $34.31 on the same loan. This would only lower the purchasing power for a typical buyer by only $500.00 to $1,000.00 but does not shrink the buyers pool by that much.

Sellers concessions does play a larger part in the equations as costs are fixed like processing and underwriting fees and as a percentage the lower the loan amount the higher the percentage overall cost will be. Does this impact the buyer from getting a home? I believe not as FHA has not imposed a ban on lender credits that can be applied towards the loan costs to lower what the buyer has to have for down payment and closing costs. This can be accomplished by charging a .25% to .375% higher rate and crediting the rebate towards the closing costs, a win win for everyone! If this is explained to the buyers as a way for them to still acquire their dream home, 95% of the people I have talk to have no objections with doing this. This is why it is important to work with a loan officer that will work with the buyer and Realtor to offer alternatives then just saying "NO".

                                                                                                          

John Le Francois Senior Loan Officer All Western Mortgage Inc. 8345 W. Sunset Rd. Suite 200 Las Vegas, NV, 89113 US	Work: 702-947-0648 Mobile: 702-271-2659 Fax: 702-541-9901 jlefrancois@awmlv.com http://www.lasvegasmtg.com
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