| FHA was created in 1934 to give homebuyers a shot | | | | landscaping, furniture, and decorating upgrades then the |
| at owning an affordable home. Per The Department | | | | payment increases come along and borrowers |
| of Housing and Urban Development more than 34 | | | | become shadowed by the eight ball. |
| million families have been helped by the FHA programs | | | | Alphonso Jackson, HUD Secretary, proposed in June |
| over the years. With it's stated goal to allow families | | | | of 2006 certain changes that would once again |
| access to affordable housing. However, recent run-ups | | | | position FHA as the first choice of first time |
| in home prices many families have been locked out of | | | | homebuyers, which could bring them reasonable |
| the process as FHA loan limits are far below median | | | | certainty of a monthly housing expense. With the |
| home prices in far too many areas. This means FHA | | | | mid-term elections things were put aside for other |
| cannot help those borrowers to get into a median | | | | issues such as the war, minimum wage other items |
| priced home. Over the years, FHA has been able to | | | | closer to the front burner. As things settle in industry |
| implement programs that have stood the test of time. | | | | proponents are hoping Congress will once again take a |
| The areas of borrower counseling, budgeting, credit | | | | look at Secretary Jackson's proposal. Originally, there |
| direction have all been a firm foundation for providing | | | | was a bipartisan support. It is thought that still is the |
| mortgage loans. The insurance aspect of the | | | | case. In brief, loan limits in high cost areas would be |
| mortgage can help offset defaults and/or foreclosures. | | | | closer to the Fannie Mae and Freddie Mac upper loan |
| It is a program that has worked in the past and is | | | | limits. Right now, the upper limit is $417,000.00. As |
| sorely needed now. With FHA insuring mortgage loans | | | | reported FHA Release 06-069 this might be 87% to |
| there is little risk to lenders losing money in case of | | | | 100% of that limit. Presently, FHA in some cases are |
| default. Thus more money to lend. | | | | $200,000.00 away from that limit and as a result, |
| Now with subprime under extreme pressure and | | | | homebuyers are closed out of those communities |
| many lenders in this product area have shut their | | | | from even considering an FHA loan with all that brings |
| doors and simply gone out of business. With heavy | | | | with it. In lower cost areas, the FHA limit might be in the |
| foreclosures the secondary market buyers have | | | | 48% to 65% of the GSE ('Government Sponsored |
| turned a cold shoulder to any new loans with high-risk | | | | Entity'-Fannie Mae-Freddie Mac) upper loan limits. This |
| parameters. Fannie Mae and Freddie Mac have been | | | | would be a big boost to making the program attractive |
| reeled in to further limit high-risk loans in their portfolios. | | | | to homebuyers. This proposal has been called "The |
| Any volatility in their respective combined 1.3 trillion | | | | Expanding American Homeownership Act" and has |
| portfolios would cause tremendous financial fallout in | | | | been laid out in H.R. 5121, representing the House of |
| the other financial markets. Federal Reserve Chairman | | | | Representatives version. It was introduced April 6, |
| Bernanke is urging more conservative lending and to | | | | 2006 and received bipartisan support with at the time |
| maintain a little steadier course steering out of the big | | | | 67 cosponsors and was approved by the House |
| risk waves which could bring harm to all US markets | | | | Financial Services Committee. |
| and beyond. | | | | Additional provisions of the bill would be the elimination |
| What tends to quickly glaze the eyes of lenders and | | | | of the currently required minimum 3% investment. |
| mortgage brokers combined with frequent head slaps | | | | Alternative mortgage products are offering more |
| to the forehead are the incredible required levels of | | | | attractive down payment requirements. The new |
| company qualification and compliance just for the | | | | proposed rules would allow for a variety of down |
| privilege of doing any FHA business. This is very | | | | payment options making FHA a little more user friendly. |
| expensive to stake out this privilege. If FHA would | | | | Another element of the H.R. 5121 proposed bill would |
| chose to streamline broker participation and high | | | | be matching risk with various mortgage insurance |
| compliance costs, more loans would be originated. | | | | premiums. Currently, the mortgage amount has 1.50% |
| Thus, when subprime mortgages became very | | | | added on top for the Up Front Mortgage Insurance |
| attractive to lenders and brokers who were trying to | | | | Premium or UFMIP. On a loan of $200,000 that would |
| assist borrowers to get into their homes of choice, | | | | add $200,000.00 x 1.5% = $3,000.00. Then the new |
| that's just what they did. These programs were | | | | loan would be $203,000.00. A monthly MIP or Monthly |
| provided instead of FHA. As it turns out, many of | | | | Insurance Premium of .5% is added into the payment. |
| these loans had low rates going in, but would | | | | The UFMIP and MIP all would go into a risk insurance |
| accelerate in say two years with many payments | | | | pool to pay for defaults. The monthly MIP would be |
| wrecking havoc with family budgets. Some of these | | | | $203,000 x .5% = $1,015.00/12 = $84.58/month to the |
| were 2/28 ARMs which gave borrower a two-year | | | | payment. If the home is sold or other non-FHA |
| fixed rate then moving to an adjustable. As rate | | | | financing is put in its place within the first 84 months a |
| increases were pegged to things like the 6 month | | | | portion of the UFMIP would be refunded to the |
| LIBOR (London Interbank Offered Rate) plus a margin | | | | borrower based on a published sliding scale. The |
| that may be in the 6% to 7%+ range it guaranteed the | | | | $3,000 added UFMIP would add approximately $17.99 |
| loan payments would accelerate dramatically after | | | | month on a 6.00% mortgage. In spite of these add-ons |
| two years. | | | | this FHA program can be far superior to any |
| As an example: The start rate could be in the 7.50% | | | | adjustable rate subprime loan. |
| range for the first two years. With a LIBOR index, as | | | | In summary, if Congress could get back on track to |
| an example at 4.75% and the margin at 7.00% = | | | | finalize the proposed HUD changes, which had |
| 11.75%. It might take two years to get there after the | | | | bipartisan support before the mid-term elections, many |
| adjustment period but going up 1% every six months | | | | positive benefits could accrue to borrowers. These |
| could dramatically effect the monthly payment. If the | | | | would be lower and predictable interest rates, higher |
| mortgage were $200,000 with a start rate of 7.50% | | | | lower limits, lower down payments with the FHA |
| on a thirty-year term the start payments would then | | | | program layered over the whole mortgage product to |
| be $1,398.43/month. At the fully index rate of 11.75% | | | | ensure better borrower performance. Loan counseling, |
| the payment would move to $2,018.82/month. This is a | | | | family budgeting, and close interaction can all help |
| payment increase of $620.39/month. For some | | | | home buyers achieve their housing dreams and avoid |
| borrowers, that is way more than they would be able | | | | problems down the road. If this bill was enacted it could |
| to handle. Complicating this further, to avoid Private | | | | go a long way to alleviate the down and negative |
| Mortgage Insurance (PMI) for any loan above 80% | | | | pressures on subprime loans and riskier loans in the |
| Loan To Value (LTV), simultaneously closed second | | | | Fannie Mae and Freddie Mac portfolios. Homebuyers |
| mortgages were placed with many of those rates | | | | could use the steady hand of FHA to make their |
| running from 10% to 13% which would allow for a | | | | homeownership a reality. FHA has been priced out of |
| Combined Loan To Value (CLTV) of 100%. Any first | | | | many markets. Now FHA is needed more than ever. |
| time homebuyer purchase can trigger expenditures for | | | | Homebuyers would welcome action on FHA. |