FHA on the rebound!MortgagePress.comFederal Housing Administration Have you thought about an FHA mortgage recently? That's the problem. All too few people have. As recently as 2003, The Federal Housing Administration (FHA) insured almost 1.4 million mortgage loans nationally, of which more than 35,000 were in Pennsylvania. Those numbers fell to just over 816,000 loans nationally and about 23,000 in Pennsylvania in 2004, and fell even further in 2005 to about 523,000 nationally and only 14,000 in Pennsylvania. What happened? FHA was one of the first New Deal agencies. Founded in 1934 and folded into the U.S. Department of Housing and Urban Development (HUD) in 1965, FHA insures lenders against loss in the event of default by the borrower. FHA offered the nation's first long-term, amortizing mortgage, and with its less-restrictive credit policies and low down payments, FHA mortgages were the means by which millions of families bought their first homes. To date, FHA has insured more than 33 million mortgages. In recent years, FHA has faced stiff competition from a vast array of conventional loan products and non-prime loan products created to serve FHA's traditional market. FHA also has been slow to adapt its policies and procedures to meet the standard being set by conventional and non-prime loans for fast, flexible processing. That meant that lenders often had to be able to do business in two different ways: one for FHA and another for everyone else. The good news, though, is that FHA is responding with major changes aimed at reclaiming its share of the market. The new FHA FHA has set out on an aggressive course of action aimed at meeting the needs of today's homebuyers and addressing competing loan products. First, FHA is overhauling its operating procedures to make them compatible with conventional and non-prime loan processes. Engram Lloyd, director of HUD's Philadelphia Homeownership Center that administers FHA loans in Pennsylvania, noted, "Our goal is to make processing an FHA loan seamless with processing a conventional loan. If a lender is processing a conventional loan for a borrower and then decides that an FHA loan is what the borrower needs, they don't have to start all over with a new appraisal and other forms. They can use the same documentation they've already gathered." Secondly, FHA has developed some new products aimed at particular niches of the mortgage market. Borrowers in today's mortgage market have different needs that conventional loans are aimed at meeting. FHA can no longer afford to just sit on the sidelines and offer the same products it has traditionally offered. Why is FHA making these changes? If the conventional and non-prime markets are serving FHA's traditional customers, why should FHA try to take them back? Some might say that if borrowers are being served by other loans products, maybe FHA is no longer needed. In fact, while alternative loan products are more readily available today, they may not be the best product for the borrower. The issue is not just how flexible a loan is or how easy it is to process, but whether that is the best loan for the borrower. Many of the conventional loan products (and especially the non-prime products) carry hidden fees, prepayment penalties, higher mortgage insurance premiums and even higher interest rates. Many borrowers find that all of the flexibility that their loan offered at application vanishes after the loan has closed. FHA loans, on the other hand, have no prepayment penalties and are fully assumable. Further, they can often be less costly for the borrower than other loans, because FHA fully insures lender losses and offers low mortgage insurance premiums—even for borrowers with lower credit scores and incomes. FHA also offers better foreclosure prevention measures for borrowers in financial difficulty than many conventional and non-prime products. Foreclosure on an FHA loan is a last resort, not a preferred option. FHA believes that most lenders want to place their customers not just in any loan, but in the best loan for them. FHA is trying to prove to lenders that the best loan just may be an FHA product. The new FHA appraisal process Until January of this year, FHA had its own property condition and repair standards, its own appraisal form and other forms used only in an FHA loan transaction. This appraisal process invariably led to requiring a higher level of repairs than would be the case on a conventional loan. A higher property condition standard meant more repairs, which meant more expense for the seller and delayed closings. In some of today's hot housing markets, many sellers would list their properties with a no-FHA provision. While the higher repair standard was ostensibly aimed at protecting the buyer, FHA realized that it couldn't help borrowers who never got an FHA mortgage. It also realized that many of its repair requirements had very little to do with the basic safety and security of the property. Having its own forms and procedures also meant that changing a loan to FHA meant getting a new appraisal. In January, FHA adopted Fannie Mae's appraisal forms and protocols that are the industry standard. In addition to eliminating all FHA-specific forms and using Fannie Mae forms, FHA adopted the Fannie Mae repair standards. This means that FHA will no longer require repairs for minor items like leaky faucets or cracked windows. Minor issues of deferred maintenance, like cracked sidewalks or worn carpeting, need not be addressed. Tests that were routinely required by FHA for water quality, termites and flat roofs have all been eliminated. Closing costs and automated underwriting FHA has always had a specific list of allowable and unallowable closing costs—items that could be charged to the borrower and items that could not. For example, a borrower could be charged a loan origination fee, but not an underwriting fee. The seller could pay the transaction or administrative fee charged by a real estate agent, but the borrower could not. In addition to confusing many of the participants in the transaction, these requirements made an FHA borrower less attractive to a seller. Ultimately, someone had to pay these fees, and, too often, the seller got stuck with them. That's all changed, now. Earlier this year, FHA eliminated its list of allowable and unallowable closing costs. The only restriction, now, is essentially the same as that for other loans—closing costs must meet applicable federal and state disclosure regulations and must be customary and reasonable for the area. Automated underwriting is another area where FHA is meeting the challenge of the conventional loan process. Most conventional loans are scored through an automated underwriting system, usually Freddie Mac's Loan Prospector or Fannie Mae's Desktop Underwriter. Now, FHA loans can be scored through these same systems. The only difference is that FHA loans are scored against FHA's TOTAL (Technology Open To Approved Lenders) scorecard, while conventional loans are scored against Freddie Mac's or Fannie Mae's proprietary scorecards. The process is exactly the same for the lender using them. Lender insurance In the past, FHA relied on lenders to take borrower applications, process and close loans and even enter data into FHA's automated systems. Only FHA, however, could actually insure the loan. This meant that after the loan had closed, the lender had to mail a paper file to the Philadelphia Homeownership Center, where a manual document check would be performed. If everything checked out, FHA would perform the final data entry and insure the loan. If there were missing documents, signatures or dates, however, FHA would mail the paper file back to the lender for correction. The lender would make the corrections, mail back the paper file and start the process all over. Since both the lenders and FHA relied on express mail services to send the files back and forth, this was an expensive process. Plus, like any item that is mailed, there was always the possibility for files to be lost or misdirected. It also held up the insurance of the loan and its sale on the secondary market. Beginning in January, all of this changed. FHA now allows the lender to insure the loan right in its office. Instead of FHA conducting the document check, it is now performed by the lender. Instead of sending the file back to the lender for corrections, the lender makes them. As Engram Lloyd noted, "We trust the lenders to process and close FHA loans on their own, so it only makes sense to let them insure them, as well. The old process cost lenders both time and money—the last thing we want to do in today's competitive mortgage market." Not all lenders will qualify for lender insurance. Only those lenders whose default and claim rates on FHA loans fall below certain thresholds are eligible. Those who do not meet this criterion will still have to send paper files to the Philadelphia Homeownership Center for insurance. Nevertheless, FHA estimates that more than 85 percent of all FHA lenders will qualify for this option. New FHA products It's not just a matter of changing the process. FHA is offering new products and improving old ones. FHA has overhauled its combination purchase/rehabilitation mortgage known as Section 203(k) (named after the section of the National Housing Act authorizing it) to make it more flexible and easier to use. FHA is now offering a refinance loan that allows a borrower to take cash out of the property, up to a 95 percent loan-to-value ratio (LTV). FHA has also made changes to its other refinance products to make them easier to use. FHA's reverse mortgage program, the Home Equity Conversion Mortgage (HECM), is one product where FHA is still the market leader and is making improvements to keep it there. Streamlined 203(k) FHA created its Section 203(k) program many years ago. It required an inspection of the home by a qualified inspector (a 203[k] consultant), the development of a detailed work write-up and, usually, the services of a general contractor to oversee the work. Repairs had to meet a minimum cost of $5,000. For major rehabilitation projects involving structural repairs or additions, these procedures still make sense; but, most homeowners lack the time and expertise to take on a project like this on their own. For smaller projects, these elaborate procedures represented overkill and served to discourage the use of the program. FHA has addressed this issue with the development of the Streamlined 203(k) program. Under Streamlined 203(k), there is no minimum repair requirement and a cap of $35,000. Neither a 203(k) consultant nor a detailed work write-up is required. Like the original 203(k) program, all repairs are completed after the loan closes. The program is aimed at completing repairs that may be too expensive for homeowners to take on with their own money, but which are relatively uncomplicated—a new roof, new heating or air conditioning systems, kitchen renovations, etc. The new program can also work hand-in-glove with FHA's new appraisal process. As Michael Levine, deputy director of the Philadelphia Homeownership Center, noted, "The new appraisal protocol should eliminate the need for minor repairs. When there are more serious repairs that are needed, however, Streamlined 203(k) provides the homebuyer with an option that will accomplish the repairs without costing the seller any money or delaying closing." 95 percent cash-out and other refinance loan changes For years, FHA has offered a cash-out refinance program. The maximum mortgage, however, was limited to a combined (the FHA first mortgage and any other mortgages) LTV of 85 percent. In 2005, FHA introduced a new cash-out product. This loan permits borrowers to obtain an FHA first mortgage at a 95 percent LTV. Subordinate financing may remain in place and is not included in the LTV. Standard FHA underwriting and qualification standards apply. In addition, the homeowner must have owned the property as a principal residence for at least 12 months. If there was an existing mortgage on the property, the last 12 payments must have been made within the month due. FHA has also overhauled its other refinance programs by making changes that simplify and speed up processing. Borrowers no longer have to make the payment on their old loan for the month in which they close on their new loan (the "no skipped payment" rule). On FHA non-credit qualifying streamline refinances, late charges and escrow shortages may now be included in the new mortgage amount. FHA hopes that these and other changes will make an FHA loan the choice for refinancing. HECM One bright spot for FHA has been HECM, its reverse mortgage program for senior citizens. Under HECM, senior citizens who own their homes can tap into their equity by taking out a line of credit, receiving a lump sum amount, receiving regular monthly payments or a combination of these. The senior citizen makes no monthly payments and can never be forced to leave his home. FHA's HECM is the most popular reverse mortgage product on the market, and loan volume is increasing every year. In 2001, FHA insured 8,149 HECMs nationally and 320 in Pennsylvania. In 2005, FHA insured 48,365 HECMs nationally and 1,215 in Pennsylvania. FHA seeks to maintain its dominant place in the reverse mortgage industry by making it easier for lenders to participate and by adding a HECM refinance product. Many HECM borrowers who closed on HECMs years ago have seen the value of their properties substantially increase since then. With FHA's HECM refinance program, these homeowners can refinance their current HECM into a new HECM and tap the additional equity that they have accrued. For more information, visit www.fha.gov.