With Mortgage Backed Securities (MBS) markets in turmoil for about a year now, the new emphasis for loans with a higher Loan to Value than 90%. Why is this? The answer lies with Ginnie Mae (GNMA) - Fannie Mae and Freddie Mac's cousin specializing on Government loans - and the way their loans are insured.
Fannie and Freddie don't guarantee payments on home loans, but the FHA does. Does the FHA guarantee the servicer payments and also the payments on underlying collateral? FHA guarantees for a fee (known as MIP) to the GNMA MBS security issuer that the borrower will make their payments, but if the borrower fails, then the security issuer has to service the loan through foreclosure, and submit the costs to FHA for reimbursement. During that time, the Security issuer (servicer) also must advance principal and interest payments on non performing loans to the investors in the GNMA pool, which is never a money-making venture and why many have drawn the line at a 580 FICO score. FHA does not guaranty that the servicer will make it's payments to the investor, but that is where GNMA comes in. GNMA guarantees, for a fee, to the end investor that the servicer will make the payments to them. If the servicer fails or becomes insolvent, then GNMA can seize the pool (made up of strictly FHA and VA loans) and assign the servicing to a different institution to fulfill its guaranty to the investor.
As a lender with the ability to write both conventional and government loans I can tell you that the premium that was onced placed on a Govy in terms of rate and pricing is now gone - FHA and Conventional are pretty much the same rate today. Are they more work to originate? Yes, a little but we aren't talking about launching the Space Shuttle. Many are having problems closing FHA deals because lenders hired people during the boom years when there was hardly any FHA production. These green processors are now learning FHA when they were used to Stated and "Fast and Easy" loans.
FHA and VA are the foundation of today's mortgage market. Let's embrace it and make the very most of these great conditions in Middle Tennessee.
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