FHA's guideline update: It's no jokeJeff MifsudFannie Mae, Freddie Mac, loan-to-value, downpayment requirements As the market has continued in its decline lately, I have watched Fannie Mae and Freddie Mac respond, and I was waiting for the Federal Housing Administration (FHA) to do the same. I must say that FHA is really stepping up to the plate and showing the nation how important housing is in this country. If you are at all familiar with international homeownership rates and have access to financing to acquire real estate, then you know how fortunate we are to have a government that supports homeownership! If you aren't familiar with this topic, then I'll share just a couple of statistics with you. According to a 2005 study published by the Royal Institute of Technology in Stockholm, Sweden, mortgage terms—specifically loan-to-value (LTV) ratios—available to homebuyers revealed the following: The United States had 95 to 98 percent LTVs, though this obviously doesn't include our sub-prime data; Germany had 70 to 75 percent LTVs; and France had 70 to 75 percent LTVs. The fact is that a lot of us wouldn't be homeowners today if we didn't have access to high LTV loans, which are here because of FHA. That's it for today's lesson in international real estate. Now, the FHA guideline update issued through Mortgagee Letter 2008-09 starts out by stating: Recognizing FHA's counter-cyclical role in the mortgage market, and its ability to help stabilize declining housing markets, FHA is not at this time establishing higher downpayment requirements or borrower credit bureau score thresholds for properties located in declining areas. However, to mitigate risk to the FHA insurance fund as well as FHA borrowers, FHA will require a second appraisal for higher balance loans secured by properties in declining markets as indicated on the appraisal report or determined by the lender using other sources. The update focuses on two things: Second appraisal requirements and limited cash out requirements for loan amounts that exceed $417,000. Here are the pertinent details: •A second appraisal is required only when all three of these factors exist: ∇The loan amount exceeds $417,000; ◊The LTV, excluding upfront mortgage insurance premiums, equals or exceeds 95 percent; and ◊The property is determined as being in a declining market. •A declining market is defined by: ◊The appraiser. The appraiser is required to indicate if the property is located in a declining area, both in the neighborhood section and in the housing trend section of the appraisal, and/or must determine if there is an over-supply of properties. ◊The lender. The lender may determine that the property is located in a declining market area. This may be done through services such as the S&P/Case-Shiller Index, Office of Federal Housing Enterprise Oversight Index, National Association of Realtors statistics, or an automated underwriting system such as Fannie Mae's Desktop Underwriter or Freddie Mac's Loan Prospector. You may be asking: So, who really calls it, the appraiser or the lender? The answer is both. FHA has been very consistent over the past several years and has clearly communicated that the lender is equally responsible for the appraisal. The bottom line is: Don't pressure your appraiser to bring in the value. •The second appraisal guidelines are: ◊An FHA appraiser selected by the lender underwriting the loan must complete the second appraisal; ◊A second case number is not ordered; ◊The fee for the appraisal may be passed onto the borrower as any other closing cost; and ◊A second appraisal is only for loan amounts that exceed $417,000. •If the second appraisal is five percent lower than the original appraisal, the maximum loan amount is based upon the lower of the two appraised values. •The lender must include the second appraisal in the insurance binder when sent to FHA. •In line with other agency moves to tighten appraisals up across the country, FHA states: ◊A lender may not choose an appraiser that has any interest, direct or indirect, in the property being appraised; ◊A lender may not choose an appraiser that is employed by an appraisal company that owns, is owned by, is affiliated with, or has any financial interest in the builder or seller of the property; and ◊Instances of undue pressure or influence on an appraiser reported to FHA will result in appropriate disciplinary actions against the lender involved. •If the loan amount without the upfront mortgage insurance premium will exceed $417,000, a cash-out refinance is limited to an 85 percent LTV. That's the summary for the guideline updates. Now, let me share some personal thoughts. Although FHA and the agencies have increased the loan amounts temporarily, it is quite clear that the lenders are not giving originators incentive to write them because of the huge price hits. My message to wholesalers is to give the loans a chance to perform for you. Price these loans well, and let's get some volume to see how these loans do on the secondary market. I think the price hits are too steep and overly cautious. These FHA loan amounts above $417,000 are full doc loans, not the stated incomes that brought the sub-prime market down. I feel confident these higher loan amounts will do well on the secondary market. Wholesalers: You took the time bomb loans, funded by Wall Street, and sold them with a vengeance. Wall Street funded these sub-prime loans for you with the hope of making their real money after homeowners' interest rates jumped up to 14 or 15 percent. Obviously, that house of cards folded in on itself. FHA is bending over backwards to help the housing situation by offering amazing products, and you have priced them right out of the market. FHA has been around since 1934, and it offers the opportunity to make real money with real loans for real people. With FHA, people make decisions on the loans, not computers. Wholesalers, I urge you to take another look at the pricing of these loans. In my opinion, the wholesaler that takes another look will understand and will not only win a lot of business, but come out ahead of the others. There are two primary factors that will determine whether the legislators will vote to make permanent the temporary loan amounts—the default rates and the performance of these loans on the secondary market. If we can keep the default rates low and get good performance on the secondary market, I feel they will vote to keep the elevated loan amounts in place, given the need for stabilization in our housing market. What you're seeing now is a shift back to a closer working relationship between FHA, Fannie Mae and Freddie Mac, which is how it used to be. The mortgage industry is going through a "mid-life crisis," but the way the agencies are working together gives me a lot of confidence that the secondary market will remain strong and rebound. The tightening of appraisals is necessary to help gain back the confidence of the investors who put their money into mortgage backed securities. This is crucial for our success as originators; because if we don't have a place to sell loans, we're out of business! As in any crisis situation, there is always opportunity, and the opportunity for you is to become an expert at FHA loans! Jeff Mifsud founded Mortgage Seminars LLC in 2004, has been an FHA originator for 12 years, is a contributor to LoanToolbox.com and is a former FHA underwriter. Jeff may be reached at (877) 342-9100 or e-mail [email protected].