FHA-supported home sales are about to get more expensive. Image: Flickr / nickbastian / CC-BY-ND

Last year, the Federal Housing Administration hiked the cost of getting a federally supported mortgage. April 18, 2011, the cost will increase again. This increase could make it even more difficult to get a mortgage in the tightening market.

The place of FHA loans

Federal Housing Administration home loans are a very specific subset of home mortgages. Rather than directly providing bad credit personal loans not payday loans, the FHA insures mortgages from other lenders. FHA-insured loans often require very little down payment — between 3 and 6 percent, rather than the standard mortgage down payment of 10 percent. FHA mortgages can be taken out for any amount up to $729,750. The intention is that borrowers who can make mortgage payments but have a tough time making a down payment can become homeowners.

Cost of getting an FHA loan

For borrowers, getting an FHA loan is not significantly different than getting any other mortgage loan. FHA loans require that the borrower pay mortgage loan insurance, so if the loan goes bad, the federal government can reimburse the lender. For many years, FHA loans required a 0.5 percent premium be paid as mortgage insurance. In 2010, that amount went up to 0.9 percent. In April, the cost is going to increase another 0.25 percent, bringing the total to 1.15 percent of the total loan amount. For FHA borrowers, this essentially adds 1.15 percent to the mortgage interest rate to be paid each month. For a $157,000 mortgage, this increase will cost slightly less than $400 per year extra.

The improving portfolio of the FHA

In the first quarter of 2011, the Federal Housing Administration wrote mortgage insurance for a portfolio of $72.1 billion worth of loans. This is fewer mortgages than in previous years, though the FHA also wrote more refinancing loans. The good news is that fewer FHA loans are currently entering default. The bad news is that the lower number means the FHA has to increase rates in order to remain solvent. For most borrowers, this is an indication that the cost of all mortgages will start going up. This could be an indication that the housing market and the economy are recovering, or it could be an indication that the federal government is still nervous about the status of mortgage lending. Either way, the boon of low interest rates is sure to end soon.

Sources

Tampa Bay Times
Total Mortgage

FHA mortgage insurance will get more expensive because rising delinquencies and foreclosures have depleted FHA reserves. The TruthAbout/Flickr photo.

Federal Housing Administration mortgages saved the housing market from total collapse when the housing crisis emerged in 2007. The FHA virtually eliminated barriers to entry into the housing market to keep mortgage lending from completely drying up. FHA mortgages became so popular that today they make up nearly a third of the mortgage market. But risks and delinquencies from those loans are rising. And The FHA’s reserve funds used to cover losses when borrowers default or go into foreclosure are shrinking. To protect those reserves, the easy terms of an FHA mortgage are about to change.

FHA mortgage insurance takes a big hit

FHA mortgages weren’t a factor in the housing crisis, but its lax standards for mortgage insurance are a problem now. The Real Estate Channel reports that the FHA said 6.2 percent (about 360,000 loans) of the entire insured FHA mortgage portfolio had been issued to homebuyers with FICO scores lower than 500. More than 37 percent of these loans are now at least 60 days delinquent, in foreclosure or in bankruptcy. During the housing crisis, the FHA helped 450,000 families keep their homes out of foreclosure in fiscal year 2009. In the first quarter of 2010, the FHA helped another 122,000 families. The Office of Comptroller of the Currency and the Office of Thrift Supervision said 67 percent of these modified FHA mortgages were in default again within 12 months. The number of FHA mortgages delinquent more than 90 days climbed to 555,000 in May 2010.

Depleted FHA reserves force tougher terms

Because of soaring loan delinquencies and defaults, the FHA is taking actions to protect its Capital Reserve Account, which had dwindled to $3.5 billion by 2009, compared to a $19.3 billion balance on Sept. 30, 2008. SmartMoney.com reports that last week the Senate passed a bill that allows the annual insurance premium to increase on FHA mortgages. The FHA is also considering a minimum credit score of 580 to qualify for the 3.5 percent down payment. Borrowers with a credit score between 500 and 580 will have to make a down payment of at least 10 percent.

New FHA mortgage loan requirements

New FHA mortgage loan requirements will go into effect in Sept. 2010. Chicago77 reports that they may place home ownership out of reach for buyers who just squeak by. Under the new structure, FHA requires a borrower to pay an upfront mortgage insurance premium calculated at 1 percent of the loan amount. The good news is that this is down from the 2.25 percent currently required. The bad news is that the monthly figure will increase from 0.55 percent annually to 0.90 percent annually. As an example, Chicago77 examines a $150,000 home purchase:

Before Sept. 7 2010

Upfront Premium (2.25 percent): $3,256.88
Monthly payment including mortgage insurance: $793.93

On or after Sept. 7 2010

Upfront Premium (1.00 percent): $1,447.50
Monthly payment including mortgage insurance: $826.93

Net changes

Upfront cost: Decreased by $1,809.38
Monthly cost: Increased by $33.00

The FHA is planning on increasing mortgage rates, even though housing is still weak. Image: Wikimedia Commons

The Federal Housing Administration is the federal government agency charged with helping guarantee mortgages. The FHA does not directly provide no credit loans for homes, but guarantees loans to certain classes of borrowers. The FHA is required to keep about 2 percent reserves in case loans go bad, but they currently only have about .53 percent reserve. Interest rates on FHA loans will be going up on September 7, though there are plans in place to actually help reduce average payments.

FHA provides bad credit loans

The home mortgage loans that the FHA backs are usually targeted to borrowers with bad credit that need money now. The FHA loan programs help reduce the necessary down payment. Currently, the down payment required for an FHA loan is about 3.5 percent of the value of the home. Some senators tried to increase the required down payment to 5 percent, but the bill was struck down. Currently, the FHA originates about 20 percent of the mortgage loans for people with bad credit.

Requirements for FHA reserves

Currently, the FHA has cash reserves on hand that would be able to cover only .53 percent of the loans they have currently guaranteed. Federal law states that the FHA have reserves on hand to cover 2.0 percent of their loans. In order to make up this gap, the FHA requested permission to increase the rates charged on loans they guarantee. Lawmakers approved an increase of 1 percent on the premium for home insurance paid over the life of the loan. This new fee will go into effect on September 7, though it will be phased in depending on the size of the borrower’s down payment. The move is expected to raise $3.6 billion per year.

Payments on FHA loans

The borrowers that have FHA loans will be seeing increases in their payments, though not as much as some expect. While the amount of money paid over the life of the loan will be increasing, the origination fees will be going down. The loan origination fee will be going down from 2.25 percent of the loan to 1 percent. This means that homeowners who have gotten the loans will pay about $40 per month more for their loans, but less for the origination.

If you were thinking about getting an FHA-backed loan through Lend America, it’s time to come up with a different plan. Lend America, operated by Ideal Mortgage Bankers, has shut down. Ideal Mortgage Bankers also originated mortgages under the moniker Lending Key, but Ideal Mortgage Bankers is officially out of business.

The Federal Housing Administration withdrew its approval from Ideal Mortgage Bankers Monday, Nov. 30, and now Lend America and Lending Key are ceasing all loan originations. In October a civil lawsuit was filed against Ideal Mortgage Bankers.

Word from the FHA

HousingWire.com reports that the lawsuit “reveals allegations of a pattern of mortgage fraud that’s spanned more than 20 years across a number of mortgage firms.” The FHA appears to believe it’s possible that the crimes were unintentional, but that matters little.

“We have no tolerance for lenders who abuse their FHA-approval,” said FHA commissioner David Stevens. “The evidence in this case points to a disturbing pattern of senior officials and underwriters, either not knowing what they were doing, or not caring. Therefore, Ideal has been immediately withdrawn from participating in the FHA-insured mortgage program.”

The lawsuit says that Mike Ashley, in sales staff meetings and in general, “encouraged Lend America sales staff to originate FHA loans, even when borrowers were not eligible.” He allegedly told people they could give FHA-backed loans regardless of credit score, which is not true.

A long time coming

Apparently, the loans in question span a time period of 20 years. So I guess it’s about time Lend America got taken to court. With all the mortgage fraud and debt help fraud out there, we certainly do not need companies like Lend America out there committing more fraud.

I hope that this whole subprime mortgage crisis has taught lenders a lesson, and I hope they won’t forget it. This recession we are going through is nothing the country hasn’t seen before, but it seems every decade or so we have to go through a bad economical period in order to remind people to be careful wiht their budgets and their credit.

Types of fraud

Whether Lend America did, in fact, commit fraud will be decided in court. However, this story does present a good opportunity to remind people seeking mortgage loan modification or debt relief how to avoid fraud. Make sure you don’t pay fees up front for consultations or debt consolidation loans or mortgage restructuring. You should only give debt relief or mortgage counselors money after the work has already been done.

Mortgage restructuring does not require that you sign the deed to your house over to someone else. Make sure you don’t hand over your most valuable asset to a scammer. Remember that research and knowledge are the best protection against getting swindled. Make sure you know throughly research any institutions that you entrust with your finances. You can never be too careful or know too much about a business. If anything about an organization seems even a little sketchy, there is plenty of legitimate help out there, so never be afraid to walk away and find company that you really trust.