FHA Home Mortgage Programs Face Threats
FHA home mortgage programs are currently under threat of extinction. The FHA home mortgage could die a needless death if reforms don’t pass Congress quickly and correctly.
Due to a number of reasons, the long-standing govenment FHA home mortgage programs are quickly becoming irrelevant. So much so, on the floor of the US Congress a few years back, their was a proposal to discontinue them altogether. Before we discuss the reasons, let’s refresh your memory on the basics of these mortgage programs.
What are FHA Home Mortgage Loan programs?
The FHA home mortgage loans are considered “Government” loan programs along with USDA and VA loans because they are directly insured by the Federal government. Conventional loan programs in comparison are insured by private companies such as Fannie Mae, Freddie Mac and other private mortgage insurance companies. Many folks mistakenly believe those two “F” organizations are government agencies as well. They aren’t! They are NYSE traded private companies, not backed by government in any way.
An FHA home mortgage is insured and underwritten by the Federal Housing Administration. An FHA home mortgage is commonly sold to first time home buyers who may have some credit issues and little down payment. FHA loans require 3% down and the borrower can finance the closing costs (on refinances…roll them into the loan amount). In addition to all the other closing costs, FHA loans require a 1.5% up front mortgage insurance premium. If you have a 200k loan amount, $3,000 is added to your loan amount for a final $203,000 FHA loan.
There is also a monthly mortgage insurance premium added to your payment every month. The FHA loan has loan limits that change. For example, in 2006 FHA limits loan amounts to $308,370 in Adams county Colorado. These limits are different for every state and every county in the state.
FHA home mortgage programs have seen a significant drop in use over the last few years. It’s estimated they only represent about 13% of the mortgage marketplace. In the fall of 1995, the Senate even entertained a bill to abolish both government programs along with HUD. FHA loans may soon be a thing of the past.
The first threat to FHA home mortgage loans is the encroaching conventional loan programs from Fannie Mae and Freddie Mac that address low or no down payment or bruised credit. They also have better mortgage insurance without charging anything up front and tacking it onto the loan balance.
The 100% conventional loan programs also don’t leave the new home owner in an upside down position like the FHA program. Nor do the conventional loan options maintain the monthly mortgage insurance indefinitely like the FHA home mortgage. Once a borrower obtains an 80% loan to value on a conventional loan, he can petition his lender to remove the monthly mortgage insurance payment. Not so, on the FHA home loan!
The second threat to FHA home mortgages is the low loan limits we mentioned earlier. FHA home mortgage loan limits restrict their use in high cost areas like California and New York. This must be corrected immediately if the program is to survive.
Another threat is net worth and capitalization limits for those that sell an FHA home mortgage. Banks seem to be the only ones who can afford to market them since they are the only companies rich enough to qualify. Since mortgage brokers are still responsible for about 60% of originations, if they want to survive relaxing those limits would allow brokers to market and sell their programs as well.
So the private marketplace is making these government mortgage programs obsolete…but Congress is entertaining some legislation to reform the FHA home mortgage program. The new reforms are addressing each of these threats and could breath new life into the programs.
This new legislation is getting fast-tracked not because Congress knows about the threats, but I’m afraid they see the FHA home mortgage program as the answer to the subprime mortgage meltdown.
Yikes!
A New “After Reform” Threat: Allowing the FHA home mortgage program to become the dumping ground for subprime refinancers.
One word of caution to the law makers is in order here. Don’t let Wall Street dump all their “bad paper” on the American Taxpayer in the form of subprime loans refinanced into FHA home mortgages.
The subprime Wall Street players made huge profits for the past few years, but now they realize they screwed up and want Congress to bail them out with a new and improved FHA home mortgage source of funds. The new FHASecure program is an example of this “bail out” source of funds.
If Congress allows this to occur, the FHA home mortgage will die as surely as the subprime loans died.
Good Luck!
Author: Rob K. Blake
Published December 14, 2007
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Jeff,
Thanks for drop in to add to the discussion. Let me say from the start I’m not “attacking” government loans at all and especially not for the motives you suggest anymore than you are defending them to support your marketing as the “FHA Expert”.
Can’t we leave conjecture about motive out of the debate…and simply say, “Let’s discuss this on the facts”?
I’m game if you are…
So, back on topic. Abolishing HUD and the FHA programs they administer has been a topic of interest (mainly for Republicans) going back to the early 90’s. An acutal Senate bill S.1145 was proposed and discussed.
In Sworn testimony back in 2001 John Charles Weicher,Assistant Secretary for Housing and Federal Housing Commissioner, said, “I was almost the only Republican interested in housing policy who didn’t want to abolish HUD”.
So I am not “making up” the extreme view that HUD thereby FHA be abolished. Nor am I in agreement with those views….quite the opposite in fact should you decide to read more of my site.
But I digress…the real thrust of the article (and this debate) was that the government programs were becoming (if not reformed) irrelevant, obsolete, …name your adjective.
That focus I got directly from HUD spokesman, Brian Montegomery, when he testified before the House Financial Services Committee…April 2006…on “Transforming the Federal Housing Administration of the 21st Century”
He says, “Unfortunately, over the last few years, the housing agency that helped bring the nation out of the Depression, the agency that helped our grandparents and our parents buy their first homes, the agency that stood by the oil patch and rust belt states in the 1980s when the entire real estate market sank in parts of California, Texas, Louisiana, Michigan, Ohio, New York and Pennsylvania - that agency became an almost invisible presence.”
“almost invisible presence”…now does that not sounds like “irrelevant” to you?
He goes on, “Over the last ten years, the industry changed dramatically. Reliance on automated underwriting systems and risk-based pricing is standard operating procedure today. A multitude of innovative new products were created. The secondary mortgage market was transformed into an investors’ paradise, where the array of investment options seemed endless. While this transformation happened, FHA stayed the course; the world changed and FHA remained the same. Simply put, the dynamic mortgage market passed FHA by.” (emphasis added by me)
When HUD’s own people admit, the FHA programs got passed by, they make my post more on point with every word.
FHA is attempting to “upgrade” if Congress approves, with the FHA Modernization Act which Mr. Montgomery says includes, no payment loans doing away with the complicated loan amount and cash to close calculations currently the hallmark of an FHA loan. Also they want to raise the loan limits, which has probably done more harm to the program than anything. This Act would also treat condos more like single family homes allowing for more approvals. Also they are thinking about “risk scaling” the mortgage insurance….which I think is a great idea.
But again, this is If, Congress agrees.. These reforms were proposed in 2006 and rejected. You mentioned these reforms are coming back this year, and we’ll have to wait for the outcome. But from what I’ve read Congress will actually have less motivation to do it this year than last. I’m not sure Congress wants to put all those subprime escapees into the publicly insured FHA coffers.
Can you blame them?
Kenneth Harney wrote a Washington Post article outline why these reform are no “slam dunk”
I won’t address the DPA programs as we agree these programs are all but gone, and good riddance.
I’ll quote Mr. Montgomery once more, “Simply put, the dynamic mortgage market passed FHA by. For example, in CongressmanTiberi’s district, FHA’s volume has dropped from 3,096 loans in 2000 to 1,735 loans in 2005. For Congresswoman Harris, during that same time period, FHA’s volume dropped from 2,354 to 621 loans. For Ranking Member Waters, FHA’s volume has all but shriveled up from 2,207 loans in 2000 to just 34 loans in 2005″
Those dropping FHA loan volumes I’m sure were due in large part to subprime encroachment, but we can’t discount that FNMA Flex with expanded levels played a part in that too. As well as the My Community programs, and now the new HomeStay program.
But my basic point that FHA programs in there current form, have limited utility and are only a “good” option when comparing against subprime or when conventional is not possible. You’ve said nothing yet to convince me otherwise.
Should the loan limits be raised to reflect the market, the down-payment requirement eliminated, the mortgage insurance be tiered and have the ability to be removed at 80% LTV ( and be tax deductible like pmi) all without being more expensive rate-wise, than the conventional programs, I’ll convert…but not until.
PS: I stand corrected on FHA financeable costs…yes, only on refi’s.
July 10th, 2007 at 4:57 pmRob…. sorry, but you are so wrong in most of what you are talking about. I see that you sell videos and books that you have done. In my life experiences, people need to attack one part of their business, to drive business to another part. Sounds like that is what you are doing here.
Let’s touch on your topic of Congress trying to get rid of these gov’t loans. I didn’t read anywhere that mentioned that congress wants to stop these types of loans and why. This sounded more like your opinion. What is in the news is that many would like to see the DAP programs disappear. The Down payment assistance programs, better known as Nehemiah and AmeriDream. Yes, these programs, but NOT FHA.
You said that FHA has dropped off considerably in the last few years. Gee, the last 5 to 6 if you want to get technical. Yes, FNMA has come out with more programs. 100% and everything else that can deal with the less than perfect credit. But did you go on that there are penalties for the 100% program, that rates are higher than FHA rates? But you talk negative about the up front MIP insurance? If I added that onto my loan, but with FHA’s rates compared to the 100% program… even if they put 2.25% down, my payment will still be lower. Hands down.
On another note, you talk about FHA and that the congress doesn’t like these loans because … you wrote “FHA loans require 3% down and the borrower can finance the closing costs (roll them into the loan amount).” You can’t roll closing costs into a FHA loan on a purchase…. where did you get this information from?
Overall, I could be here all day. But your blog is not misleading, but very misleading to the general public. If I am dealing with less than perfect credit, no matter what the credit score is, apples to apples on the 2.25% down payment (3% total monies out of pocket).. I will beat out any other rate and or program that you can offer on the FNMA side. Hands down.
In any case, sorry if this sounds harsh, but information like this is very one-sided and misleading to the public. And if you knew everything, CONGRESS might be about 2 to 3 months away from approving higher loan limits. And this is inside information that is accurate, not specualtion.
July 10th, 2007 at 10:51 amLeave a Comment