The third largest FHA lender in the country Taylor, Bean and Whitaker Mortgage has been suspended from FHA lending effective immediately. In addition, the Government National Mortgage Association (Ginnie Mae) is also defaulting and terminating TBW as an issuer in its Mortgage-Backed Securities (MBS) program and is ending TBW's ability to continue to service Ginnie Mae securities.
"Today, we suspend one company but there is a very clear message that should be heard throughout the FHA lending world - operate within our standards or we won't do business with you," said HUD Secretary Shaun Donovan.
Just a few thoughts on the current uproar about the HVCC. I'm amazed as I watch all this fighting about the HVCC and the havoc it has caused.
First, I think bureaucratic solutions always cause more trouble than they ever prevent. How does putting another middleman in the process do anything other than clog things up. These "management companies" don't add any more quality to the appraisal process than we had in the past. They just siphon off money that should be going to the people who actually do the work. Lenders' own appraisal review departments had already solved most of the inflated/fraudulent appraisal problems. Problems which were already vastly overstated in my opinion, anyway.
Second, I don't think inflated appraisals were ever the real problem in the first place. Sure there was a small minority of appraisers who would hit any value no matter what they had to do to get there, just as there are crooks in any business. That's not a reason to throw the baby out with the bath water. Real estate values went down for a hundred different economic reasons that had nothing to do with the value the homes appraised for in the past.
Another thing I'm finding fairly amusing in this argument is the way that appraisers talking about it and arguing with loan officers and real estate agents in the forums refer to real estate values as if they work the same way the stock market does. They seem to think there is a definite value to a home that can scientifically be established by their appraisal. Everyone knows this is complete bull. I can order appraisals from 5 different appraisers on the same property today and a few days from now I could receive 5 appraisal values that vary as much as 5 to 30 percent from one another with most having reasonable arguments for their value determination. I know that appraisers reading this will maintain that the rules in their appraisal handbooks will prevent these variations, but I will argue that those rules often differ substantially from what real people will pay for a property.
At least they don't do so in any way which stands much chance of meaningful success in the the real world. Here is the direct quote from HUD Secretary Sean Donovan's May 29, 2009 press release: "Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate." (emphasis added)
HUD has re-published Mortgagee Letter 2009-15 entitled "Using First-Time Homebuyer Tax Credits". This Mortgagee Letter does provide the regulatory framework for monetizing the $8000 first time homebuyer tax credit now in advance. There are two very important points that need to be made about this "monetization".
First, although the HUD announcement sets out a framework for the policy, HUD does not provide the money. Therefore, we will have to wait and see how the policy becomes a part of the real world and how long we will have to wait to see any delivery of money to the closing table.
I know many people had hoped to see some form of check issued by the Treasury to the buyer, but an Act of Congress would have been required to make that possible. HUD just does not have that option available under current law.
The reality is that the possibility of non-profits or lenders coming up with the money to make these loans when the tax credit proceeds cannot be assigned to a third party is very slim. Neither of these parties has the wherewithal to put out this money and then wait for the home to sell or be refinanced before they are paid. Although the Mortgagee Letter attempts to address these issues, there are no guarantees that some other issue in the borrowers life won't pop up and prevent the tax credit from being paid to them. With seller paid down payment assistance, the borrower never put their hands on the money. With this plan, the non-profits or lenders who would provide a second lien would have to hope they got repaid when or if the tax credit money arrives.
And don't hold your breath waiting on state agencies to take up the slack. The states don't have the money.
Second, the Mortgagee Letter specifically points out that according to "12 U.S.C. 1709(b)(9), the homebuyer’s downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity)."
In other words, the borrower must still contribute 3.5% of their "own money" into the transaction. Of course, as was always the case, this can be a gift from a relative or similar close relationship.
The proceeds from this monetization can be used for additional down payment or to buy down the interest rate or to pay closing costs. The best use of the money will be dictated by the transaction. For example, many borrowers who are "on the borderline" of approval through the automated underwriting system may be able to change the decision to an approval with a little additional down payment. Other people (i.e. those who definitely plan to stay in the house for a very long time) would be better off paying down the interest rate with the "free money" from the tax credit. Borrowers who know they are going to move in a few years, and who can get the seller to pay all the closing costs may be better off waiting to receive their tax refund the normal way by waiting until they file their next tax return. The tax credit money can simply be put into the bank for a rainy day.
At any rate, this is all speculation until we actually see someone come forward with the actual money and not just a new bureaucratic pronouncement.
Following is the complete text of the Mortgagee Letter:
May 29, 2009
MORTGAGEE LETTER 2009-15
TO: ALL APPROVED MORTGAGEES
SUBJECT: Using First-Time Homebuyer Tax Credits
The American Recovery and Reinvestment Act of 2009 (Recovery Act) provides for as much as an $8000 tax credit to qualified first-time homebuyers. FHA supports this important initiative to promote homeownership. This mortgagee letter provides:
Basic information on the first-time homebuyer credit obtained from the Internal Revenue Service (IRS) website. Complete information on how the first time homebuyer tax credit works, including the eligibility requirements for the tax credit, the amount of the tax credit that a first-time homebuyer may be eligible to receive, and how a homebuyer may claim the tax credit is available on the IRS website at http://www.irs.gov/newsroom/article/0,,id=204671,00.html?portlet7.
Guidance on how FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local government agencies or instrumentalities may assist homebuyers that are eligible for the tax credit.
I.About the First-Time Homebuyer Tax Credit
Please check the IRS website to ensure you have up-to-date information. A brief overview of the tax credit from the IRS website and a copy of IRS Form 5405 (including instructions) are attached for reference.
Pursuant to 31 U.S.C. 3727 and 26 U.S.C. 6402, a refund of the first-time homebuyer credit will be made by the IRS only to the taxpayer, not to a third party. In other words, any refund issued in response to a claim for this credit cannot be assigned by a taxpayer to a third party.
II. FHA Tax Credit Guidance
Secondary Financing
Consistent with existing FHA policy, FHA will permit entities covered by Section 528 of the National Housing Act to use the current authority to offer tax credit advances with second liens in a manner consistent with the requirements in 12 U.S.C. 1709(b)(9). Eligible government agencies and instrumentalities of government are described in handbook HUD-4155.1 5.C3 and 5.C4.
Conditions:
The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the borrower.
The second lien may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses.
Secondary financing may be "soft" (silent) or require a monthly repayment.
If payments are required, they must be included within the qualifying ratios and, when combined with the first mortgage, cannot exceed the borrower's reasonable ability to pay.
Payments must be deferred for at least 36 months to not be included in the qualifying ratios.
If the tax credit advance loan has a short term for repayment, it must also provide that if the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a "soft" second.
The secondary financing may not require a balloon payment before ten years.
Purchase of Tax Credit
FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local governmental agencies and instrumentalities thereof may purchase the tax credit anticipated by the homebuyer.
Conditions:
The proceeds of the sale of the tax credit may not exceed the anticipated tax credit due the homebuyer based on the computations of form IRS 5405;
The borrower must submit a signed certification that the tax credit is not subject to offset due to other indebtedness.
A copy of the borrower's tax refund and/or the IRS 5405 must be collected and retained in the FHA case binder.
Any costs attendant to the purchase of the tax credit are to be nominal and discounting the anticipated credit to cover the costs and expenses of the transaction must be reasonable and disclosed to the homebuyer. In FHA's view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. (Example: $6000 to be refunded, with all fees and costs discounted, borrower should receive not less than $5850.00 for sale of tax credit.)
Pursuant to 12 U.S.C. 1709(b)(9), the homebuyer's downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity). Accordingly, the proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financing benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.
Due Diligence
FHA expects that entities purchasing tax credit assets will employ appropriate due diligence measures including, but not limited to:
Require the homebuyer to draft and provide the IRS form 5405 "First-Time Homebuyer Credit."
Contact the borrower's employer and review pay stubs to confirm there are no outstanding garnishments.
Review the homebuyer's credit report to ensure there are no unpaid student loans, or other obligations that could be offset against the credit.
Validate that all of the eligibility requirements for the tax credit are fulfilled
Review previous tax returns and IRS tax assessment letters, if any, to determine that the borrower does not have unsettled obligations to the IRS
III. Monitoring
In order to track the tax credit monetization activities, FHA will require FHA-approved mortgagees to input into FHA Connection the following data:
Name and EIN of the party who purchased the tax credit,
The amount of the anticipated credit, and
The amount the homebuyer paid for the monetization services.
The lender must also collect and maintain in the FHA case file the documentation that validates all of the tax credit monetization data submitted via FHA Connection.
FHA will monitor the purchase of tax credit transactions closely. Charging of excessive fees or costs in the purchase of the tax credit or increasing other fees or charges in the transaction without FHA approval may result in referral to the Mortgagee Review Board, and particularly with respect to entities that are not FHA-approved mortgagees, referral to the Federal Trade Commission, or referral to the appropriate State Attorney General office, as may be applicable.
If you have any questions regarding this mortgagee letter, please call FHA's Resource Center at 1-800-CALL-FHA (1-800-225-5342). Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).
As a loan officer, I first began using seller paid down payment assistance programs with my customers almost as soon as the program was available in my area. I remember very clearly the feeling I had at the time that the programs could not last long before HUD put a stop to them. I told every customer I prequalified for the first couple of years that they better hurry up and find a home because their down payment program couldn’t possibly last very long.
When I first took the classes to get a real estate license and later a broker’s license, and then when I started training to become a loan officer, nothing was drilled into my head more firmly than the rule that any payments from the seller back to the buyer to cover down payment money were fraudulent and illegal. Now suddenly this particular money back from the seller was not a kickback as long as the money was funneled through a non-profit organization.
Yet at the same time I saw many deserving families who were ecstatic about becoming homeowners and who were ultimately very successful homeowners. They put up with a whole lot of extra scrutiny to qualify for an FHA loan instead of a subprime loan because owning a home was important to them. In fact, they went through a lot more than most of the high credit score, conventional loan borrowers who sold their previous home and made their relatively painless down payment. As a matter of fact, my personal experience with seller assisted down payment programs is that this is the group of borrowers who most appreciate the opportunity to buy a home and fight tooth and nail to keep it and foreclosures are very rare. This experience shades my view of the program.
On the other side of the coin, past loans where seller paid down payment assistance was involved do have higher default rates. They have had higher percentages of straw buyer fraud than other loans. They have had too many instances where the down payment and transaction fee were just added on top of the listed price. But are these issues with the seller paid down payment assistance programs or are they underwriting and quality control issues.
I don’t know if seller paid down payment programs are the answer or not. Maybe they are, or maybe some program similar to the VA 100% loan program would make more sense. I do believe that lack of a down payment isn’t the huge factor causing foreclosure that some of it’s critics suggest. I believe the problem is layering of risk - specifically high debt to income ratios. I know of lenders who have studied their own numbers and come to the conclusion that the difference between the default rates on FHA loans with seller paid down payment assistance and FHA loans without it would essentially disappear with some tighter underwriting standards.
I don’t believe the bill which is presently being pushed to restore seller paid down payment assistance has the right guidelines to make the program work. I’m going to discuss this in more detail over the next few posts, but in the meantime let me direct you to some viewpoints on each side of the argument:
As you can tell by the titles, a few of these articles are from some time ago before seller paid down payment assistance was discontinued, but the same arguments have been going on for ages. My own opinion of this issue has changed over time, I’d love to hear your thoughts about it.
Every single day I receive numerous emails and phone calls from loan originators and potential borrowers asking whether FHA guidelines have changed and asking me why a particular loan scenario can no longer be approved as an FHA loan. Consumers, in particular often get confused when I explain that FHA guidelines are not the issue. The problem is with the lender they or their mortgage broker have chosen.
In just the last few months I have seen ridiculous scenarios such as borrowers being asked for full documentation of their income on FHA streamline refinances! Or borrowers’ credit scores becoming an issue on streamline refinances.
Some time ago we began to see many lenders start enforcing a 580 minimum credit score in order to qualify for an FHA loan. At the end of January, Wells Fargo raised the minimum credit score for loans submitted by mortgage brokers to 620. To put that into perspective, a couple of years ago 620 was the score we looked for to qualify for a conventional Fannie Mae or Freddie Mac loan. At about the same time, everyone received a memo from Taylor, Bean and Whitaker - for a very long time one of the last bastions of wholesale lenders who followed FHA guidelines and still my personal favorite lender - indicating that TBW would no longer accept FHA loans with credit scores under 600.
I know that, to people with good credit, and to mortgage originators who specialize in loans for clients with excellent credit, griping about having to adhere to credit scores that low seems ridiculous. But to those loan originators who have made a specialty of helping good people who’ve been thrown a few unexpected curveballs in life yet still recovered, this goes against everything the FHA program represents.
I want to make one thing clear. I’m not talking about those people the subprime industry pushed into home loans without caring about anything except whether their credit profile fit into a box in a qualifying matrix. The people who had a history of borrowing too much every time they got access to credit again and then letting everything go when the payments added up. I’m talking about people who may have been laid off, or the primary wage earner in their family had health problems but who fought tooth and nail trying to keep their head above water and only used their credit cards to keep food on the table until they had to choose between their power bill or their credit card payment. But who did everything they could to re-establish a good payment history once their emergency was over. The kind of people who have downright terrible credit scores but are really a good bet when it comes to whether or not they will make their house payment.
Over 24 years in the real estate/mortgage industry has shown me that there are a lot of people in both of those groups. Over the last few years there has even been another group. Those with 690 to 750 credit scores who would gladly take a $10,000 payment from a house flipper to stand in as a straw buyer to help consummate a fraudulent real estate transaction.
Now, in the midst of this huge crisis the mortgage industry is in, those good folks are being thrown under the bus because the mortgage industry has become too reliant on automated underwriting and credit scores instead of traditional guidelines and common sense. The system has become disconnected from the people and it gets worse every day.
I can’t count the number of times I’ve looked a 750 credit score borrower in the eyes and spoken with them and just known that I couldn’t rely on them to pay back $20 in gas money much less a home loan. Yet they have credit that causes the automated systems to allow them to be approved with 58% debt to income ratios. The kind of people who have good credit scores, but you can easily see would run those credit cards up to their high limits with no qualms whatsoever. Who you know in your gut from your conversation would walk away from their home loan if the mortgage balance was even slightly under water. And I’ve known of many of this group who did just that.
And I’ve seen an equal number of 550 credit score borrowers (or worse) who fought their way out of bankruptcy after a horrendous unexpected catastrophe. Who don’t even have any high credit limits to run up to if they wanted. But who would fight tooth and nail to keep their home paid for even if it was worth 80% of what they paid for it. Just because it is their “home” and not just a house. The kind of people who have always been helped by the traditional FHA loan, but who have already been fighting an uphill battle against automated underwriting for years.
Underwriters today (and in the underwriters’ defense, lenders as well) want to see those automated approvals that cause them not to have to look at the patterns of the borrowers’ credit and find out why those people had problems and what they’ve done to stop them from happening again.
Why is all this happening? It’s almost as if common sense has been divorced from the mortgage industry for so long that no one can imagine how we did it back when underwriters really tried to analyze people and not just “files”. Before complicated software started (supposedly) analyzing things underwriters couldn’t possibly even understand. Like what the chances of default were just because you had a department store card compared to not having one. Or how many and what type of lines of credit the group of people likely to make their payments possessed. The funny thing is that defaults have gone up by unbelievable order of magnitude since the mortgage industry started using these more advanced and supposedly accurate methods of underwriting.
I know lenders have all sorts of reasons they feel we need these higher credit scores. They’ve analyzed all the pools and tranches and macro trends and determined that groups of loans with these characteristics will be more likely to perform as investments. But the sad thing is that no one is comparing today’s loans to the days when real people took their time and followed the debt ratio guidelines and asked people why they were late on their payments. When it took a month or more and stacks and stacks of paper to check and double check and make sure a good decision was being made. Before the whole goal became to close as many loans as you can as fast as you can so you can collect your fees and turn the loan over to the next company to collect the payments.
Maybe, just maybe, this is one process that hasn’t improved with time. Maybe it’s time to give very serious thought about whether automated underwriting has been a positive influence in the mortgage industry as a whole and in FHA lending in particular. I’d love to hear your thoughts.
Update: In a comical turn of events as we face FHA loans with minimum credit scores of 620 in some instances, here is a quote from a Fannie Mae guideline update published just after I wrote the above post:
"Starting April 4, 2009…
In order to provide lenders with increased efficiencies for the origination and underwriting of limited cash-out refinance transactions, and allow more borrowers to take advantage of today’s historically low interest rates…
Expanded Eligibility Criteria
The following expanded eligibility guidelines will be applied to limited cash-out refinance loan casefiles meeting the DU Refi Plus eligibility criteria noted above (including the successful identification of the existing Fannie Mae mortgage loan):
Loan casefiles with an LTV less than or equal to 80 percent will not be subject to the minimum “representative” credit score requirement of 580.
High-balance mortgage ARM loan casefiles with an LTV less than or equal to 80 percent will not be subject to the minimum “representative” credit score requirement of 680.
Reduced Employment Documentation Requirements
DU will offer the following reduced employment documentation requirements on all DU Refi Plus eligible loan casefiles:
Salary/Bonus/Overtime: one current paystub and a verbal verification of employment
Commission/Self-Employment: one year’s federal income tax return"
Just a quick heads up about a change to the guidelines for the FHA 95% loan to value cash out refinance program effective for all case numbers issued after January 1, 2009. This change does not apply to the standard 85% loan to value program.
The guidelines already included additional requirements that many loan officers have overlooked when taking applications for 95% loan to value cash out refinances:
The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.
If said property is encumbered by a mortgage, the borrower must have made all of his/her mortgage payments within the month due for the previous 12 months, i.e., no payment may have been more than 30 days late and is current for the month due.
The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling.
Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making scheduled payments on all liens.
Any co-borrower or co-signer being added to the note must be an occupant of the property. Non-occupant owners may not be added in order to meet FHA’s credit underwriting guidelines for the mortgage.
In Mortgagee Letter 2008-9, FHA already made it a requirement that two appraisals were required when the loan amount exceeds $417000. Those loans are also limited to 85% LTV (loan to value).
Now HUD has extended this requirement to any loans with an LTV above 85% beginning with any case number issued on or after January 1, 2009.
From Mortgagee Letter 2008-40:
In addition, FHA will now require a second appraisal for all cash-out refinances where the LTV, exclusive of the UFMIP, will exceed 85 percent of the appraiser’s estimate of value. This second appraisal requirement applies regardless of the loan amount or the location of the property, i.e., whether the property is in a “declining area” or is not. This second appraisal requirement for cash-out refinances is effective for all case number assignments on or after January 1, 2009 and is to adhere to the instructions set forth in ML 2008-09. Please also note that cash-out refinances with LTVs exceeding 85 percent will be over-selected for post-endorsement technical reviews (PETR) to assure the quality of the underwriting.
Mortgagee Letter 2008-09 sets out the requirements for the 2nd appraisal. It must be done by an FHA approved appraiser engaged by the lender and the costs may be passed on to the borrower. If the second appraisal has an estimated value more than 5% below the first appraisal, the maximum mortgage must be determined based on the lower appraised value.
If you are a mortgage broker, please take note of that last sentence. This means that wholesale lenders are going to be picking these loans apart even more closely than they have been. And they haven’t exactly been easy with the underwriting lately to begin with. Also, remember that the borrower should be prepared to have as much as $900 of their cash out eaten up by appraisal fees!
If you would like to find an easy way to keep up with all these guidelines in an organized, easy to read handbook (HUD doesn’t understand what those terms mean), then check out http://fhatraininingsource.com.
This blog is normally focused primarily on providing information for originators of FHA loans, but this post should prove useful to both loan originators/processors and consumers. With mortgage interest rates plummeting to record levels, and home sales plummeting as well, many people have a renewed interest in refinancing for lower interest rates and sometimes shorter mortgage terms.
The FHA streamline refinance is a great option for quite a few of them. Here are the rules which will be in effect beginning January 1, 2009 for calculating FHA streamline refinances.
In order to qualify for an FHA streamline refinance you must be a homeowner who currently has an FHA-insured mortgage. Streamline refinances for conventional mortgages are in the planning stages, but have not been implemented yet.
An FHA streamline refinance does not require any proof of income or any verification of funds to close. No repairs are required unless the house has lead paint. FHA does not require a credit report, but some lenders may require one for loan pricing purposes. FHA guidelines require only a verification of the mortgage payment history for the last 12 months (or the length of time the mortgage has been held). HUD’s Credit Alert Interactive Voice Response System (CAIVRS) need not be checked, but a check of HUD’s Limited Denial of Participation (LDP) and General Services Administration (GSA) exclusion lists is still required for all borrowers.
Yesterday Obama named Shaun Donovan, New York’s Housing commissioner who also worked in HUD during the Clinton administration, as his nominee for Secretary of Housing and Urban Development. I don’t know much about him other than what I read in this profile in the New York Times in which there is a quote that turns my stomach a little due to my admittedly slightly hypocritical for an FHA specialist belief that government regulation and meddling is never a good solution:
I would never believe that the private sector, left to its own devices, is the best possible solution. I’m in government because of the role of government in setting rules and working in partnership with the private sector. On the other hand, there’s no way you could ever get to a scale that can really affect the housing problems in this country without working with the market. - Shaun Donovan from a 2006 New York Times profile.
But I’m always willing to wait and see what happens, even though 80% of the reason he is the nominee is probably because he took a leave of absense from his previous job to work on Obama’s campaign. According to Politico, Donovan “was one of the earliest public officials to foresee the magnitude and destructive capacity of the subprime crisis.” and “…unlike many Clinton-era housing officials, the 42-year-old financing expert never subscribed to the prevailing (and deeply misguided) belief that low-income homeownership was the panacea for all the nation’s housing ills.” So at least he may not be as short sighted and driven by untoward influences as some of his predecessors have been.
Here’s a link to Obama’s address in which he announces the nomination and gives his reasons: Obama Makes HUD Pick
A lot has been going on in the world of FHA since my last post, so there is quite a bit of catching up to do!
First, let me remind you about the changes that are happening with FHA loan limits and the down payment requirements in January. Don't let these catch you flat footed with your clients losing their loans. More on that in a separate post.
Second, one of the changes that will affect loan officers takes effect on January 16, 2009 when the 1% limit on loan origination fees on FHA loans that has been in effect forever will be removed. This is part of the same rule introducing the new "simplified" (in the George Orwell sense) Good Faith Estimate which does not have to be used until 2010.
Some consumer activists have complained that removing this limitation is an instance of HUD giving up on consumer protection. This is far from the case. First, people not directly involved in the origination and processing of an FHA loan for a customer with credit problems or other issues that cause their loan not to fit easily into the box have no idea of the work involved in getting that customer a loan.
I have worked on both the real estate broker side of the transaction as well as the loan officer side. Some may disagree, but I believe I know what I am talking about when I say that the loan officer in such a transaction really deserves at least the same pay as the real estate agent and neither deserves less than the agent is getting now. I know that, unlike with the average conventional loan, they end up doing more work. Yet many people seem to think a loan officer should be happy to split less than half the real estate agents' pay with the mortgage company, the lender, the government, the appraiser and the attorney.
No one in the transaction has to wrangle as many different people and as many different seemingly uncontrollable factors as the loan officer. Some consumer activists who think that human nature can be overridden may believe otherwise, but a person doing any difficult job does it more effectively when they are well rewarded for the effort. I think having to pay a little bit extra is a small sacrifice for a borrower who has problems it takes an expert to solve. They aren't being "ripped off" by having to pay more.
Traditionally, this has meant that FHA borrowers with difficult loans (estimates are that this group includes at least 60% of mortgage applicants today) almost always ended up paying higher interest rates which paid yield spread premiums so that a busy expert FHA loan originator would feel motivated to spend the extra time and absorb the extra stress involved in getting such a transaction closed. Now this will be pushed out into the open where it belongs. Unfortunately, this benefit will be dulled because the fee will still be limited by state regulations in most cases. Consumers need to realize that experts in a field will leave that field if their work is not well rewarded, leaving only the order takers who aren't experienced and prepared enough to solve the problems borrowers have.
Now on to the main subject. All this praise of the expert professional FHA loan officer needs to be tempered by the fact that every day more loan officers who don't have a clue what they are doing and don't care to take the time to learn, or even worse do have a clue but have turned to the dark fraudulent side of the business are entering the FHA loan origination business.
According to the Mortgage Bankers Association, in October the percentage of total loans originated that were government insured had risen from 9.4% in January 2008 to 32.9% in October! November was the second straight month that GNMA issued more mortgage backed securities than Fannie Mae or Freddie Mac. GNMA, or Ginnie Mae, backs government insured loans in much the same way that FNMA and FHLMC (Fannie Mae and Fredie Mac) back conventional loans, with the exception of explicit backing by the FHA and VA insurance funds. Government bond issues have not been higher than conventional issues since just after the savings and loan crisis in the 1980s. The point is that FHA and VA loans are taking over the market.
In theory, according to the guidelines, FHA has a system to control abuses of the program by unscrupulous mortgage lenders, brokers and loan officers. HUD has an audit process that participants agree to when they sign up to take part in the program. HUD has a system for eliminating lenders whose default rates exceed the national average by too much. HUD insists on a written quality control plan that each FHA lender must have and follow to prevent fraud and insure quality loans. FHA insists on verifying and analyzing a borrowers ability to repay the loan. FHA has a thorough and effective loss mitigation program to help keep borrowers in their homes when they have financial difficulties.
The trouble is that enforcing and implementing these guidelines, rules and procedures requires more staff than FHA has available at a time when FHA loan numbers are increasing at a record pace. A few weeks ago, Business Week published an article entitled "FHA Backed Loans: The New Subprime". My initial response to this article was to get my nose out of joint and sit down to write a thorough rebuttal, but I was interrupted and therefore given time to really think about the situation and calm down.
My first instinct was to point out that the real numbers show that FHA foreclosure starts and delinquency rates have held steady while conventional numbers went up. In spite of FHA grabbing a larger section of the market. However, we must also take into account that, according to a recent audit FHAs insurance fund has dropped 39% from last year. The fund has dropped from $21.2 billion a year ago to $12.9 billion. Even so, the worst case scenarios still indicate that the fund will continue to remain above the legal limit or 2% of outstanding FHA mortgages. FHA just simply has an awesome loss mitigation system.
However, the Business Week article has several examples of high volume lenders who should never be allowed to originate FHA mortgages, but have wriggled through the cracks and are still going strong in spite of the rules which say they shouldn't be in business. These are the same type lenders who helped throw gasoline on the bonfire as the subprime business went up in flames. According to the article, "Thirty-six thousand lenders now have FHA licenses, up from 16,000 in mid-2007." To top that off, the government is strongly encouraging as many lenders as possible to join the FHA program and constantly introducing more flexible programs to bail people out of foreclosure and to allow larger loans.
While this has been going on, according to the article, "FHA staffing has remained roughly level over the past five years, at just under 1,000 employees, ... The FHA unit that approves new lenders, recertifies existing ones, and oversees quality assurance has only five slots; two of those were vacant this fall, according to HUD's Web site. Former housing officials say lender evaluations sometimes amount to little more than a brief phone call, which helps explain why questionable ex-subprime operations can reinvent themselves and gain approval." (emphasis added)
Surely, a little bit of the bailout money could be directed towards making sure FHA has the resources to prevent FHA itself from needing to be bailed out.
In the meantime, remember that the vast majority of lenders and brokers are still coloring within the lines and present little potential problem. I highly encourage every loan officer to help out by holding themselves to a higher standard. Don't just be an order taker whose goal is simply to get every borrower who wants one into a house. Learn the rules thoroughtly, get all the FHA training you can, and make sure the borrowers you help will really benefit from the loans you are helping them get.
Don't hesitate to make an offer if any of them interests you. You can do it right on the site: http://DomainSellersMarket.com. Please notice, a few of them are purposeful mispellings so look carefully. Any questions, you can email me through my profile.
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Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
As a loan officer, I first began using seller paid down payment assistance programs with my customers almost as soon as the program was available in my area. I remember very clearly the feeling I had at the time that the programs could not last long before HUD put a stop to them. I told every customer I prequalified for the first couple of years that they better hurry up and find a home because their down payment program couldn’t possibly last very long.
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