Government Refinance Assistance

Elizabeth Price from the Dow Jones Newswires recently wrote up this summary of recent comments by the US Treasury Secretary:

WASHINGTON -(Dow Jones)- U.S. Treasury Secretary Henry Paulson Wednesday urged mortgage companies to develop new ways and loan products to identify and help borrowers at risk for default on their home loans.

“I am calling on industry participants to review their existing practices and adopt specific criteria that will quickly identify borrowers who can keep their homes and follow up with a refinancing, a loan modification or other flexibility,” Paulson said in a statement released after he met with a group of mortgage lenders participating in Hope Now. Hope Now is a partnership between housing counselors and Wall Street firms aimed at publicizing relief for overstretched borrowers.

U.S. Secretary for Housing and Urban Development, Alphonso Jackson, called on Congress to pass legislation overhauling the Federal Housing Administration.

“It’s been exactly two months since President George W. Bush urged Congress to pass bipartisan legislation to modernize the FHA and 18 months since the administration first proposed a plan,” Jackson said.

The House of Representatives has approved an FHA reform bill but the Senate has not.

Companies participating in Hope Now, including Countrywide Financial Corp. ( CFC), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC), said they would send letters to borrowers late on their mortgage payments notifying them of counseling beginning Nov. 19.

Paulson said that after making contact with struggling borrowers, mortgage companies can assess whether people are candidates for loan modification. Some people, current on payments but at risk of default after adjustable-rate mortgages reset, might be fast-tracked to refinancing.

Paulson repeated his view that weakness in the housing market is the most significant threat to U.S. economic growth. However, Paulson said the announcement earlier Wednesday that U.S. gross domestic product growth accelerated to 3.9% in the third quarter “reinforces my belief that we have a healthy diversified economy that will continue to grow.”

There was an interesting article by Alan Heavens in the Philadelphia Inquirer the other day about the state of the mortgage business. Here is an excerpt:

Lawrence Yun, senior economist for the National Association of Realtors, agreed that widening credit availability would help turn home sales around.

“Conforming loans are abundantly available at historically favorable mortgage rates,” Yun said. “Pricing has steadily improved on jumbo mortgages [over $417,000] since the August credit crunch, and FHA loans are replacing subprime mortgages.”

According to Freddie Mac, the 30-year fixed interest rate is hovering around 6.5 percent, and short-term rates could back down a bit in the next couple of months, depending on what the Federal Reserve’s Open Market Committee does when it meets Wednesday and Thursday.

Financial markets are “looking for about a 30 percent chance of a 25-basis-point rate cut rather than the 50 percent chance that they had previously expected,” said Frank Nothaft, Freddie Mac’s chief economist.

On the positive side, Yun said, “speculative excesses have been removed from the market, and prices remain near record highs, reflecting favorable mortgage rates and positive job gains.”

“All real estate is local,” he noted, “with naturally large variations within a given area.”

A few municipalities - Haddonfield and Camden, for example - saw sales and median prices increase in the third quarter of 2007 from the same 2006 period. But sales were lower in most communities, while median prices were up or level with the 2006 third quarter.

One continued positive is this area’s condo market. According to Delta Associates of Alexandria, Va., which tracks the Middle Atlantic region among others, the third-quarter supply of 5,400 unsold units provides a 2.6-year inventory. The city’s ratio is slightly better, 2.5 years.

Still nagging the local market is the absence of first-time buyers, and there are two major reasons for that, local observers said: continuing price increases and fears that financing isn’t available.

First-time buyers “are critical to the health of the market because without [them] current owners who want to trade up to bigger, more expensive houses can’t move,” said John Duffy, broker/owner of Duffy Real Estate in Narberth and Wayne.

Fred Glick, a mortgage broker/Realtor in Old City, said many buyers, especially first-timers, have been discouraged by the subprime crisis and foreclosure fears.

“There is still 100-percent financing available, and with a conventional mortgage,” said Glick, “as well as Fannie Mae and Freddie Mac programs for first-time buyers.”

Nearly 20% of sub prime mortgage holders were late on their payments in July 2007 according to a recent article by Stephen Bernard at the AP. And about 4% of the “Alt-A” mortgages, or mortgages above sub prime but below prime credit scores, had late payments as well. Here is the story:

NEW YORK - In all phases of the mortgage industry this week, from the people who make the loans to the people who insure them, the news was bad — and most of them expect it to get worse.
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Things have gotten so tough, title insurer Stewart Information Services Corp. said it could not cut costs fast enough in August and September to keep up with the plummeting market. The company has already made “significant reductions” in its work force in October. Its insurance reimburses a homeowner or a lender if there is an error in the deed transferring property.

The market turned quickly for mortgage insurer MGIC Investment Corp. as well, as the rising delinquencies forced the company to pay out more in claims in the third quarter. MGIC said it expects to lose money through 2008 because it estimates it will pay billions in claims. MGIC Investment already posted a loss of $372.5 million in the third quarter.

And Countrywide Financial Corp., the nation’s largest mortgage lender, said it lost $1.2 billion over the summer, as the amount of money it set aside to cover losses from loans gone bad skyrocketed.

Angelo Mozilo, the chairman and chief executive of Countrywide, said the changes in the mortgage market over the summer were “unprecedented,” and the company is eliminating nearly all but the safest loans from its product menu. It is also in the midst of cutting 12,000 jobs.

For potential mortgage borrowers, the comments paint a sobering picture of the difficulty in getting a new home loan in the coming months.

“If your credit scores are low, your access to mortgage money has all but vanished,” said Dan Green, a certified mortgage planning specialist and author of TheMortgageReports.com.

Strong credit scores are the main factor driving mortgage lending today, but borrowers also need proof of employment and money in the bank to obtain a loan. Traditional prime mortgages are still readily available, but the supply of other mortgage types is severely constricted, Green said.

Nearly one in five subprime borrowers was at least two months’ payments behind in July, while one in 20 alt-A borrowers fell in the same category, according First American LoanPerformance. Subprime loans are made to people with poor credit history, while alt-A loans are mostly made to people with limited documentation.

With the market in a nosedive, mortgage originators are likely to continue to play it safe for the foreseeable future as they try to avoid losing more money. That means fewer people will qualify for loans.

The tightening of underwriting standards will play a role in the steady drop in mortgage originations in 2008. The trade group Mortgage Bankers Association projects a 31 percent decline in mortgage origination volume between 2006 and 2008.

A recent Reuters story reported that California broke a foreclosure record in the third quarter of 2003:

SAN FRANCISCO (Reuters) - Mortgage lenders launched more than 70,000 foreclosure proceedings in California in the third quarter, marking a record for the state, where many housing markets are slumping amid mortgage market turmoil, according to a report released on Friday.
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Mortgage lenders filed 72,571 notices of default against delinquent borrowers from July through September, up 34.5 percent from the prior quarter and 166.6 percent from a year earlier, according to the report by DataQuick Information Systems, a La Jolla, California-based real estate information service.

California’s third-quarter default level topped the state’s previous peak of 61,541 in the first quarter of 1996, reflecting a surge in mortgage borrowers failing to keep up with loan payments.

The most populous U.S. state’s high home prices required many home buyers, especially those who bought at the tail end of its housing boom in 2005 and 2006 and in relatively affordable markets, to use adjustable-rate mortgages to finance purchases.

Low initial rates on those loans have been expiring and new higher rates are proving too much for many borrowers.

“There was a lot of funky financing that has gone bad,” said DataQuick analyst Andrew LePage.

Mortgage lenders were too aggressive in lending to too many borrowers with questionable personal finances, added Marshall Prentice, president of DataQuick.

“We know now, in emerging detail, that a lot of these loans shouldn’t have been made,” Prentice said.

“The issue is whether the real estate market and the economy will digest these over the next year or two, or if housing market distress will bring the economy to its knees,” he said. “Right now, most California neighborhoods do not have much of a foreclosure problem. But where there is a problem, it’s getting nasty.”

Half of California’s mortgage defaults are concentrated in 293 zip codes, almost all in the Inland Empire of Southern California, made up of Riverside and San Bernardino counties, and in the state’s Central Valley, where falling home prices are making refinancing distressed mortgages difficult.

The median home price last quarter for the 293 zip codes was $352,250, down 11.7 percent from a peak of $399,000 in the year-earlier quarter.

The staff joint economic committee headed by senator Charles Schumer recently released this interesting report.

Among other things it predicts that there could be 2 million home foreclosures in the US between 2007 and 2009 if current conditions are not changed. It also predicts that nearly $100 billion in homeowner wealth could be lost in that period along with a nearly $1 billion drop in property tax revenues to states.

Maya Roney over at BusinessWeek recently wrote this interesting review of the mortgage troubles the US is currently facing. She sees signs that the worst my be past us now:

In recent months, mortgage issues have been a main force hampering home sales but, according to a new report from the National Association of Realtors, mortgage availability is finally improving—even as home sales continue to slide.

The rate of existing-home sales dropped 8% in September to a seasonally adjusted annual rate of 5.04 million units from a downwardly revised rate of 5.48 million in August, according to the NAR study released Oct. 24. The national median price of existing-homes sold in September fell 4.2% year-over-year, to $211,700. September, 2007, marked the seventh consecutive month in which existing-home sales decreased.

This continuous decline in home sales has been predictable, to put it lightly. After existing-home sales fell 4.3% in August, the NAR advised realtors and homeowners to expect “similar results” in September and cited “temporary mortgage problems” as the main reason for poor home sales in August.
Jumbo Rates Down

A significant rise in jumbo loan rates resulting in a high number of postponed or cancelled sales was a particularly strong disruption to August home sales, according to NAR senior economist Lawrence Yun. On Aug. 15 the 30-year fixed jumbo mortgage rate hit 7.43%, according to data from Bankrate.com.

But now those “temporary” mortgage problems may have subsided. As of today, Bankrate.com reports that the jumbo mortgage rate is down to 6.59%. “Mortgage problems were peaking back in August when many September closings were being negotiated, and that slowed sales notably in higher-priced areas that rely more on jumbo loans,” said Yun in a release. “The good news is that mortgage availability has markedly improved in recent weeks with interest rates on jumbo loans falling, and more people are applying for safer and conforming FHA mortgage products.”

The bad news is that home sales are still dropping sharply in the wake of July and August’s credit market turmoil, as existing-home sale figures typically reflect credit conditions during the month or two before closings. The September drop in homes sales and the median home price “left a report for the month that managed to prove even weaker in all respects than the market feared,” said Mike Englund, chief economist at Action Economics.
More Resets On the Way

And, while it’s possible that mortgage availability is improving as you read this, it’s also possible that the credit situation could still get worse. “Compared to August, yes, the availability of mortgages is probably a little better now,” said Moody’s Economy.com (MCO) housing economist Celia Chen. “But I wouldn’t say that mortgage problems peaked [in August] because there are still a lot of people with subprime mortgages facing resets right now.”

But in some ways, the mortgage market’s future is looking a little less grim. Some banks are even starting to help out borrowers in trouble. Major mortgage lender Countrywide Financial (CFC) said on Oct. 23 that it has come up with a new refinancing plan to help homeowners avoid foreclosure. The company has created a special finance unit of 2,700 employees that will work with borrowers who are likely to have difficulty making payments once their adjustable mortgages reset.

When will the bleeding stop? Mortgage problems will likely weigh heavily on October home sales, but the NAR’s prediction may turn out to have some truth in it after all. “Sales in October may be as ugly as September’s,” said Global Insight economist Patrick Newport, who expects housing activity to hit bottom in mid-2008. “Afterward, the drops will be smaller.”

Christie Smythe over at the Arizona Daily Star in Tucson wrote this interesting piece on the resurgence of FHA loans this year. It’s worth a read:

On the national level, slow real estate sales and sinking prices are prompting some comparisons to the Great Depression.

Little wonder, then, that a home-buying program from the New Deal is beginning to make a comeback.

Federal Housing Administration loans, which fell out of favor during the red-hot real estate market of years past, are becoming more alluring to real estate agents and mortgage professionals looking for ways to keep transactions flowing.

The FHA program was established in 1934 to help moderate-income Americans purchase homes, according to the U.S. Department of Housing and Urban Development. The Federal Housing Administration doesn’t provide mortgages, but rather insures them against default.

The mortgages insured by FHA have more flexible underwriting guidelines than conventional loans, allowing borrowers with limited or spotty credit histories to purchase homes under certain conditions, according to local mortgage brokers.

The mortgage program also allows for a down payment of 3 percent of the purchase price instead of a more onerous 10 percent or 20 percent for most conventional loans, local mortgage brokers said.

So-called subprime mortgage loans allowed many people with marginal credit to buy homes and helped fuel the real-estate boom a few years ago. But subprime loans dried up recently as delinquencies mounted and the secondary market for such loans evaporated.

“I think it’s becoming a de facto alternative to subprime primarily because it uses different credit rating criteria when approving a loan,” Mark Ross, president of the local mortgage brokerage Prime Capital Inc., said of the FHA loan program.

There are strings attached. FHA borrowers must pay for FHA insurance in addition to the principal and interest. Until about a year ago, the program was also considered burdensome to sellers because it required the condition of the property to meet strict criteria, local mortgage brokers said.

Sellers, real estate agents or mortgage brokers also previously had to swallow costs of closing the loan because lenders were not permitted to charge the buyer for them, local mortgage brokers said.

…

When borrowers had access to quick and easy subprime and other non-traditional loans, FHA loans were seldom used, mortgage brokers said.

Last year, FHA-insured loans represented just a little less than 2 percent of mortgages approved in Pima County and about 1.3 percent of mortgages approved statewide, according to lending data collected under the Home Mortgage Disclosure Act.

However, many of the property standards have been relaxed, local mortgage brokers said. Buyers also can be charged standard closing costs, they said.

Also, now that standards have tightened for many loans, borrowers with less-than-stellar credit or limited down payments are increasingly having to turn to FHA mortgages, said some industry observers.

“Up until just a few months ago, we didn’t even consider (FHA loans),” said Cheryl Ledford, a sales associate with Re/Max All Executives, at 1985 E. River Road. But since then, Ledford has closed two sales with FHA loans, she said.

The shift to FHA loans makes sense given conditions in the market, said Bill Anastopoulos, principal of Tucson Mortgage Co. Anastopoulos said his company is seeing more buyers at the low end, with most loans falling around $125,000 to $150,000 compared to around $250,000 to $300,000 a year ago.

In the boom years, “these folks were essentially somewhat shut out of the marketplace,” he said, referring to the run-up in prices. “Now . . . these folks are in there and things are moving.”

Jeanne Sahadi over at CNNMoney.com recently gave this review of FHA and other govement backed loan bail-out programs:

NEW YORK (CNNMoney.com) — Lend a hand to distressed homeowners? No way, say many, who worry the tab will come out of their pockets as taxpayers.

Some proposals, it’s true, would be directly financed by taxes. For example, the Senate voted in favor of an appropriations bill that earmarks $100 million to provide housing counseling for those facing foreclosure.

But some proposals would cost taxpayers money only in a worst-case scenario.

The worst case for FHA and Fannie and Freddie

Taxpayer dollars, for instance, don’t directly support the Federal Housing Administration’s loan insurance program - the premiums paid by homeowners with FHA loans do.

But moves to liberalize FHA loan guidelines concern some because the government would presumably step in if the FHA stumbles after taking too much risk.

In the wake of the credit crunch, the agency instituted FHASecure to loosen guidelines to make more FHA loans available to homeowners in trouble. A modernization bill under consideration would allow the agency to insure bigger loans and loans with 0 percent down.

Those provisions would expose the FHA to more expensive and more risky loans. If too many of those loans fail, the thinking goes, the government would step in with taxpayer money.

“While the subprime market has witnessed considerable stress, the losses in that market are being borne by investors. Were these same losses to occur in FHA programs, it is likely they would be borne by the taxpayer,” said Richard Shelby (R-AL), ranking member on the Senate Banking Committee, in a July hearing.

Other proposals on the Hill focus on Fannie Mae and Freddie Mac. The agencies guarantee the purchase and trading of mortgages, which helps promote homeownership. Fannie and Freddie can’t buy loans valued above $417,000 and some proposals call for an increase in that limit.

Some proposals also call for higher limits on the amount of mortgage assets that Fannie and Freddie buy and keep in their own portfolio, and earmarking a portion of the raised limit for the purchase of subprime loans.

Fannie and Freddie are “government sponsored,” not government funded, but there is an implicit understanding that should Fannie and Freddie falter, the government would feel pressure to help out.

“As a purely legal matter, it’s not required to. But it’s bailed out private companies before,” said Patrick Fleenor, chief economist for the Tax Foundation, a nonprofit research group that advocates for lower taxes.

More…

Amy Hoak over at MarketWatch recently wrote this interesting review of the current state of sub-prime loans and how goverment-backed programs like FHA fit in:

BOSTON (MarketWatch) — Although “subprime” has become a four-letter word in the country’s collective lexicon and no one is sure when the credit crisis that was spawned by a meltdown in the risky lending sector will ease, mortgage bankers say you can count on this: Subprime shall return.

The next generation of subprime mortgages, however, will look much different than the loans issued during the height of the housing boom in the first half of the decade that are now causing so much trouble, mortgage professionals say.

“So long as we have a policy position in this country of maintaining or further increasing homeownership rates there is going to be subprime lending,” said Mark Fleming, chief economist with First American CoreLogic, a provider of mortgage-risk management and fraud-protection technology.

“We have been very successful in increasing homeownership rates. One of the ways we’ve done that is by creating liquidity and offering credit to people who we traditionally wouldn’t have 20 years ago — the subprime borrower.”

Fleming was one of 4,300 mortgage professionals who traveled from around the country to Boston this week for the industry’s annual convention, where participants did a lot of reflecting on the lead-up to the credit crunch this summer and the housing slump pervading many of the nation’s real-estate markets.

Many are looking to the Federal Housing Administration to step into the subprime void. Several proposals in Congress would expand FHA lending authority, allowing it to come to the rescue of subprime borrowers struggling with their current mortgages.
The FHA, which provides government-backed mortgage insurance on low-down-payment loans, is in a good position to address the subprime market, Fleming said, even though the growth in private-investor-backed subprime lending “directly cannibalized the FHA business. FHA went down and subprime went up.”

That said, subprime mortgages backed by nongovernment investors will also return — albeit with greatly different lending standards than in recent years, some in the industry say. Translation: It won’t be the “Old Wild West” again, where mortgage money came easily for all types of borrowers, said Thomas P. Cronin, vice chairman of Clayton Fixed Income Services, a credit-risk management firm.

“But it (subprime lending) will come back in a mature and rational fashion, as markets tend to do,” Cronin said.

Rebound still a ways off.

Certainly, that return isn’t happening just yet. According to data from Clayton, nonconforming securitizations were down 82% between December 2006 and August 2007. Nonconforming loans are those that can’t be purchased by government-sponsored mortgage agencies Fannie Mae or Freddie Mac, which are limited to buying loans of $417,000 or less.

Jumbo loans, those above the limit, and most subprime loans rely on the private-securities market for liquidity.

“[Subprime] volumes are way off from where they were even a year ago,” said Steve Nadon, president and chief operating office of Option One Mortgage Corp., during a MBA panel discussion. But Nadon thinks that the subprime market will indeed return.
“Will we serve as many borrowers as before? Maybe not,” he said.

Hard-working people with limited income or blemished credit histories deserve and need access to credit, but the terms should be fair, said David Beck, policy director for Self-Help, a community-development lender that makes fixed-rate loans to credit-blemished borrowers. Self-Help’s affiliate, the Center for Responsible Lending, is a vocal policy organization with a mission to protect homeownership and eliminate abusive financial practices.

“It used to be the problem was access to credit. Now it’s the terms of credit,” Beck said. “There’s a line between providing fair access to credit and taking advantage of people.”

To start, Beck said prepayment penalties should be prohibited on subprime loans. He also thinks that there should be more of an effort by conventional lenders to figure out which of these subprime borrowers eventually could be moved into prime products.
Subprime lending shouldn’t dry up completely, it’s the “abusive products” that should dry up, Beck said. Before putting a borrower into a loan with an interest rate maybe one percentage point above the prevailing conforming rate, Self-Help spends a fair amount of time with clients to make sure they can make the monthly payments, he said.

While FHA reform might help some of these borrowers, it’s hard to say how much, he said.

More…

Alphonso Jackson, the Secretary of the Department of Housing and Urban Development wrote an interesting response to an editorial in the Wall Street Journal this week. Here is the the letter:

John Berlau’s Oct. 15 commentary opposing FHA modernization (”The Subprime FHA”) is incorrect when he tries to pin the “worst excesses” of subprime loans — such as unverified income levels — on the Federal Housing Administration. The FHA requires lenders to underwrite all loans and borrowers to document their credit history and income. Short-term “flipping” of homes is also prohibited, contrary to his claims.

Mr. Berlau conveniently omitted that the FHA, despite considerable opposition from special interests, has closed the loophole allowing seller-funded downpayment assistance. We agree that such loans have been a drag on the FHA’s portfolio for years. They are a financial shell game where the seller wins and too many homebuyers lose. Our rule puts an end to this type of self-serving, circular-financing arrangement and its harmful effects on homeowners and the housing market. By closing this loophole, the FHA will help prevent more people from being steered into a situation where they don’t understand the fine print and end up being foreclosed upon.

A healthy FHA is good medicine for the ailing housing market. It is self-sustaining, costing taxpayers nothing, not “subsidized,” as Mr. Berlau claims. It is safe, with a foreclosure rate half that of risky subprime mortgages. And it is sound, free of costly gimmicks such as “teaser” interest rates or prepayment penalties. It also offers mandatory loss mitigation, meaning that we will work with homebuyers if they get in trouble.

But the FHA must be updated for the 21st century. Outdated loan and downpayment limits have priced the FHA out of high-cost markets such as California, which — not coincidentally — has been one of the states hardest-hit by the housing crunch.

That’s why the House and the Senate Banking Committee each voted overwhelmingly to modernize the FHA. And it’s why President Bush recently launched FHASecure, which will expand the pool of homeowners able to choose a safe, affordable FHA loan into which they can refinance.

The time to modernize the FHA is now. Low- and moderate-income borrowers desperately need an alternative to the riskier and more expensive subprime loans. A new FHA would also increase liquidity in the market place and help stem the overall credit crisis.

The subprime market share explosion, from 8.5% in 2003 to 20% in 2005, was a major cause of the housing bubble. The FHA is part of the solution.

Alphonso Jackson
Secretary
Department of Housing and Urban Development
Washington

There was a blurb over in the Santa Cruz Sentinel recently on the progress of increasing the loan limits on FHA loans:

SACRAMENTO — The California Association of Mortgage Brokers is lobbying to raise the Fannie Mae and Freddie Mac loan limits in California from $417,000 to $625,000 as a way out of the mortgage mess.

Such a change would allow tens of thousands of California homeowners to refinance out of their risky subprime loans, reducing their interest rates and payments, and obtaining affordable loans, said group president Pete Ogilvie, a Santa Cruz mortgage broker.

The House of Representatives passed HR 1427, the “Federal Housing Finance Reform Act of 2007,” May 22, allowing government-backed loan limits to be raised. The Senate version of this bill passed the Senate Banking Committee but the full Senate has yet to act.

The House also passed HR 1852, which could increase FHA loan amounts, on Sept. 18 but the Senate has not taken action. A 2005 study by the California Association of Mortgage Brokers projected that raising conforming loan limits would cut interest rates for more than 150,000 borrowers, allowing them to buy a median-priced home. The state median is $588,970.

Les Christie over at CNNMoney.com recently wrote an interesting article on the line government officials are trying to walk where they help people with bad loans but don’t reward reckless borrowing practices. Christie writes:

Treasury Secretary Hank Paulson is walking a fine line, pushing the need to help troubled mortgage borrowers without rewarding past risky behavior.

“I have no interest in bailing out lenders or property speculators. Still, we must recognize the very real harms to families affected by the housing downturn,” Paulson said in prepared remarks for a speech given Tuesday at Georgetown University.

“We must take steps to minimize the neighborhood effects and the macroeconomic effects of this housing market correction,” he continued.

Paulson pointed out that President Bush charged him, along with HUD Secretary Alphonso Jackson, to work closely with market participants to “modify” at-risk mortgages.

Paulson noted that as many as 50 percent of failing borrowers never contact their lenders to address their problems. Paulson said the industry must increase its outreach efforts.

Last week, Paulson announced the creation of a new alliance of mortgage servicers, counselors and investors called “Hope Now” that was designed to get to more troubled borrowers and find solutions to their mortgage problems.

Tuesday, he called for more flexibility in loan modifications and refinancing.

“For many families, this is the only viable solution,” Paulson said. But he pointed out that many servicers are not well staffed to provide “mitigation” services even though preventing foreclosures is in the best interest of investors in mortgage-backed securities.

Loan servicers, who handle billing and payments after a loan has been made, must put more trained credit counselors in place to deal with the increases in volume of borrowers in need of help.

Paulson also called upon Freddie Mac and Fannie Mae to work closely with private lenders to make affordable mortgage products more available and to increase funds so those in risky adjustable mortgages can refinance.

Starting in April 2007, Freddie Mac began to dedicate billions to buying refinanced mortgages designed to help troubled borrowers stay in their homes. Paulson would expand on initiatives like this.

Offering affordable mortgage products, through such agencies as the Federal Housing Administration (FHA), is part of Paulson’s prescription. In August, President Bush announced a plan to make these loans available to more Americans.

FHA loans carry competitive interest rates, require little in the way of down payments and are popular with lenders because they are backed by the Federal Government. They are aimed at increasing home-buying opportunities for low- and moderate-income Americans.

Changes in laws and regulations on mortgage borrowing was also addressed by the Treasury head. He pointed out that the patchwork of rules governing state and federal institutions make regulation more difficult.

Looking forward, Paulson stressed the need for more transparency in mortgage lending. “We need simple, clear, and understandable mortgage disclosure,” he said.

He pointed out the complexity of paperwork at closing, many of which are designed to shield lenders from liability rather than provide borrowers with useful information.

Paulson advocated for a single-page summary of the most critical facts that borrowers need to know, including actual interest rates and schedules of payments. To accomplish this, the Treasury Department is reviewing the Truth In Lending Act.

To improve integrity among mortgage originators, Paulson wants to establish nationwide licensing, education and monitoring systems for mortgage broker and loan officers.

That should also help combat predatory lending and Paulson wants regulators to assert more authority in defining and prohibiting unfair and deceptive practices. The rules would apply to the entire mortgage industry.

Paulson did not allow borrowers to escape without their share of blame. “Buying a home today is a complex process, but that in no way excuses home buyers from their obligation for due diligence.”

Although the speech seemed to mark a step up in activism on the part of the Treasury Department, Paulson was quick to point out the limitations of the government’s approach during the question and answer following the talk.

Referring to HopeNow, he said, “This is a 100 percent market-based solution. I believe in markets. The government is doing nothing here but facilitating people coming together.”

Paulson also downplayed the possibility that the housing crisis could plunge the nation into recession. “I’ve seen turbulence in the market a number of times and I can’t think of any situation where the backdrop of the global economy was as healthy as it is today,” he said.

Jeanne Sahadi over at CNNMoney.com recently wrote this interesting piece on the moves toward FHA loans in the US:

BOSTON (CNNMoney.com) — If your credit is weak or your savings anemic, here are two phrases you’re likely to hear from mortgage loan officers in the next few years: FHA and mortgage insurance.

They’re part of a back-to-basics theme that was emphasized Monday at the annual conference of the Mortgage Bankers Association in Boston.

For those who entered the business in the past five years, they’ve only known the good times and will need to be re-educated, said Paul Bibb, CEO of National City Mortgage, who was on a panel of leading mortgage industry executives.

“You probably have a lot of loan officers who can’t spell FHA,” said Bibb.

Bibb and David Lowman, CEO of Chase’s Global Mortgage, which is a top 10 originator and servicer, said that during the go-go days of the housing boom, loan officers would steer home buyers with weak credit to subprime loans. And they would advise them to finance part of their down payment with a home equity loan.

“We probably all wish we had trained our sales staff to sell mortgage insurance,” Lowman said. “The reason we’re in this crisis is that we got away from the basics.”

Now with the subprime market eviscerated, loan officers will be steering more borrowers with weak credit to loans insured by the Federal Housing Administration and advising those with little savings to get private mortgage insurance in cases where they can’t put down 20 percent.

The FHA program is intended for home buyers and homeowners with weak credit. Borrowers with FHA-insured loans - which they get from private lenders as they would any other mortgage - pay a small premium to the FHA every month.

The FHA, in turn, uses those premiums to cover the lender in the event of foreclosure and requires lenders to pursue viable ways to help borrowers avoid foreclosure if they become delinquent.

Bibb can remember a time when FHA loans made up 30 percent of National City Mortgage’s business. A few years ago, however, FHA loans had shrunk to about 3 percent of the business. Now, he said, they currently account for as much as 12 percent.

The call to go back to basics comes amid a sobering forecast for home price growth. Patricia Cook, executive vice president and chief business officer of Freddie Mac, who was also speaking on the MBA panel, expects price declines on a nationwide basis this year and next and then only a slow recovery thereafter.

Some markets are holding up and will continue to do so, Bibb said. But he’s less optimistic for markets such as Arizona and Nevada where home-price gains were driven by heavy speculation. “[In those markets] the correction could be quite severe and last into 2009, if not 2010,” Bibb said.

Lawmakers have been working on legislation to reform the FHA to modernize its standards so that they reflect changes to the housing market in the past 30 years. Among the changes on tap, lawmakers want to:

Raise loan limits. Today the FHA won’t insure loans above $362,790 for single-family homes, and even less in lower-cost areas. Lawmakers are considering raising that ceiling to at least 100 percent of the conforming loan limit for mortgages backed by Fannie Mae and Freddie Mac, currently $417,000.

Reduce down payment requirements. Homeowners would no longer be required to have 3 percent equity or the cash equivalent. They could get an FHA-insured loan with 0 percent down.

Reduce complexity. Lenders have been complaining about the time and expense it takes to make an FHA loan.

Separately, the Department of Housing and Urban Development, which oversees FHA, may move to introduce risk-based pricing. Riskier borrowers would have to pay higher premiums than less risky borrowers.

Al Yoon recently recently wrote this interesting article on the FHA program for Reuters:

BOSTON, Oct 15 (Reuters) - The Federal Housing Administration will likely boost its share of the mortgage market to as high as 12 percent in coming months as it picks up borrowers locked out of subprime and other private lending programs, two leading industry executives said on Monday.

“I think FHA will play a huge role in the recovery of the market,” David Lowman, chief executive of JPMorgan Chase & Co.’s (JPM.N: Quote, Profile, Research) global mortgage group, said at the Mortgage Bankers Association annual meeting in Boston. Compared with a market share of about 2 percent in recent years, “I envision they will be in the double-digits, at 10 percent to 12 percent.”

President George W. Bush in late August announced a program that would widen the reach of the FHA program that guarantees loans purchased by mortgage investors. The initiative, known as FHASelect, makes it easier for borrowers facing default to refinance into the FHA program.

National City Corp (NCC.N: Quote, Profile, Research), based in Cleveland and the ninth largest U.S. bank, has already boosted its production of FHA loans to 11 percent to 12 percent from as low as 2 percent six months ago, said Paul Bibb, chief executive officer of National City Mortgage.

But Lowman and Bibb said FHA, whose lenders’ loans become collateral for Ginnie Mae mortgage-backed securities, must still overcome some hurdles that led the agency to lose market share in the first place. The loans are more cumbersome and expensive for lenders to originate because they require more back-office work, Bibb said.

Wall Street investment banks expanded their share of the subprime market during the housing boom by offering lenders a lower-cost way to securitize loans. Those programs are largely frozen today as soaring delinquencies led an investors revolt against many kinds of mortgage-related debt.

“FHA over a period of 10 to 12 years simply let that business get away from them,” Bibb said. “There’s a lot wrong with FHA” that increased costs and risks to lenders compared with conventional loans sold through Fannie Mae and Freddie Mac mortgage bond programs, he said.

But Brian Montgomery, the FHA’s housing commissioner, told mortgage bankers during a later panel that his agency has remained an “island of stability.” Concerns among mortgage investors that the FHA Select loans are vulnerable to default and may taint mortgage bond programs will soon be addressed by Ginnie Mae, the government-owned company that pools FHA loans into mortgage-backed securities.

“FHA has been a model of stability throughout the recent subprime boom and credit crunch but only recently have people come to recognize that fact,” Montgomery said.

Lowman, meanwhile, noted that FHA still hasn’t paid some outstanding claims from losses tied to Hurricane Katrina, suggesting that some may question the integrity of the guarantee. But that issue will get “worked out” through legislation or other avenues because “they know if they don’t pay claims there’s no program,” he said.

Steve Nadon, president and chief operating officer of H&R Block Inc.’s Option One Mortgage conceded that the FHA program will be an integral part of the subprime market where his company once played a dominant role.

“Over the next 24 months, or even 36 months, the subprime market is FHA,” said Nadon, who sat on the panel with the FHA’s Montgomery. “There’s no subprime” financing available anywhere else, he said.

The subprime market will eventually come back, he said, though not in the form that fueled lending to riskier borrowers that was done during the housing boom. Reminding bankers at the conference that patience is a virtue, he told them to anticipate recovery for subprime in 2009.

Larry Cragun over at the Seattle PI recently gave this useful overview of the differences between conventional and FHA loans:

Are you shopping for a home? When it comes to home shopping getting the right program may mean the difference between looking and buying.

Do you have concerns you might not be able to qualify? Do you have a loan you want out of, yet aren’t sure your situation is good enough? If so, you might want to talk to an FHA lender.

Sadly, FHA is not readily available to the mortgage community. The red tape, extra costs, and difficulties keep many good lenders from having it or wanting it. Another sad fact is that this lack of availability put some folks in sub prime loans when the could have closed FHA. In like manner some people don’t know they could buy now, and are not buying.

Hello, I promised on a recent article by Greg Perry (Bush says no to raising FHA loan limits past $417,000) that I would point out reasons FHA should be made more readily available to the market. The new proposed FHA changes seem to have moved a little in that direction but in my opinion fall way short. I will leave that for another article except to say, far too few mortgage brokers offer the product.

Those that claim FHA is no big benefit to consumers are wrong. Treat anyone who makes this statement as incompetent or unwilling to be straight with you. Understand, not all borrowers need to go FHA, nor do all properties qualify - but to many borrowers it is the only product. I repeat, the only product.

Also, on this blog a loan officer argued FHA pricing is much higher. That too is wrong. When he made that claim I quickly went to my rate sheets to double check. Using one of the markets leading mortgage banks the pricing was virtually the same for both programs.

I will spell out some benefits of FHA, understanding that there are probably even more on the horizon if the laws are going to be passed as proposed.

I first offer my thanks to Mary Pickard and Johanna Kimura, both experienced FHA professionals, for the gut check and feedback I needed for this article.

Borrowers, especially first time borrowers, read this.

With FHA there is no minimum FICO score requirement whereas with the My Community Program a 600 FICO is required. Your FICO may not truly represent what it accurate for now. Often old data is still on your report. Sometimes there is a good explanation.

With FHA even if automated underwriting denies your file, that doesn’t mean that you can’t get the loan funded. It just means that the underwriter would have to make a manual decision on the file. This is important as I have never seen an underwriter override a conventional automated underwriting decision. We have closed thousands of files, not just a few, the sample is big. It just doesn’t happen and is the door opener for a loan officer to move you to sub prime.

One of the best advantages with FHA is that you have the flexibility of underwriters discretion. FHA is really a make sense type of underwriting whereas with Fannie/Freddie its black and white it works or it doesn’t.

FHA allows up to 6% seller contributions and also allows temporary buydowns other programs do not allow. A temporary buydown is often justified and makes the loan make sense. A typical temporary buy down is 2% lower interest rate the first year and 1% the second. The difference in payments may make it work for you, also may make the proposed transaction work for the underwriter.

Non traditional credit is also allowed through FHA and unlike Fannie 1 of the trade lines do not have to be rent. So you could potentially have a borrower living rent free with other forms of non traditional credit and still make the loan work. Non traditional credit is credit you have been given that doesn’t show up on your credit report. The power company for example.

FHA also doesn’t have a maximum cap to the amount of income a borrower can make. The Up front MI can be paid by the seller using the 6% closing costs.

In the past the stigma with FHA was that the sellers ended up having to pay the bulk of the closing costs which is actually no longer the case the only non allowable closing costs is the tax service fee. People also thought that with FHA it was more of a hassle because HUD would require all repairs even minor repairs to be fixed. This is no longer the case.

Other things people don’t know about FHA is that if the borrowers run into trouble and cannot make their payment HUD will work with the borrower on a repayment plan so they won’t necessary go to foreclosure immediately they are really there to help the borrower.

If you have a hint that you qualify, now is the time to talk with an FHA lender.

Lynn Underwood over at the the Star Tribune in Minnesota recently gave this useful overview of various mortgage programs now available:

Just six months ago, home buyers with borderline credit, questionable income and no money down could easily snag a mortgage.

Today lenders are playing it safe in response to increasing problems with subprime sweetheart loans and recent state legislation that created stricter lending guidelines.

Although the lending landscape has changed, there are still plenty of consumer-friendly loan options for a wide range of home buyers.

Ronny Loew, senior mortgage banker at First Horizon Home Loans, Edina, said the industry is responding by taking a more conservative approach. “We’re taking a big step back to the old ways,” he said.

Some of those time-tested loan programs have been around for decades. Federal Housing Administration (FHA) loans, for example, weren’t highly promoted in recent years because they offered less profitability to brokers, came with strict guidelines and could be time-consuming to process.

“Now they’re one of the only games in town,” said Kris Wilson, a senior loan officer at Fairway Independent Mortgage, Bloomington.

The following are some examples of conforming conventional loans (for amounts less than $417,000). Variables related to income, credit, assets and property determine if a buyer can qualify for a mortgage.

COMMUNITY HOME BUYER LOANS

What: Offered by lenders under a variety of names such as Home Possible, My Community Mortgage and Neighborhood Advantage, for low- to moderate-income buyers.

Good for: Borrowers who need 100 percent financing, zero percent down and have a credit score of 620 or higher (some exceptions). However, a buyer’s income must not be higher than the HUD median income for the area they are buying in.

Features: The interest rate is .75 of one percentage point higher than a standard conventional loan. Thirty- or 40-year fixed-rate or adjustable rate mortgages (ARMs) are available. Mortgage insurance payments are discounted (and can be dropped when the mortgage reaches 20 percent equity).

FANNIE FLEX

What: A Community Home Buyer loan that has no income limits.

Good for: Borrowers with a higher income who need 100 percent financing/zero percent down. Requires a credit score of 620 or higher.

Features: The interest rate will be about .75 percentage-point higher than a standard conventional loan. Available as a 30-year fixed-rate or ARM. Mortgage insurance is not discounted.

EXPANDED APPROVAL LOANS

What: Fannie Mae and Freddie Mac expanded standard qualifying guidelines so more people can get a loan. Two examples are EA1 and A Minus loans.

Good for: Slightly higher-risk, credit-challenged borrowers with a credit score under 620.

Features: Interest rate will be 1.25 percentage points or more above that of a standard conventional loan. Requires 5 percent down. Mortgage insurance payments may be higher.

FEDERAL HOUSING ADMINISTRATION (FHA )

What: FHA insures mortgages for low- to moderate-income buyers and is the loan of choice for many first-time home buyers.

Good for: Credit-challenged borrowers. FHA will allow more flexibility on credit scores, but is strict on income documentation. “FHA also will work with you if you lose your job and can’t make payments,” said Tim Bendel, president of the Minnesota Mortgage Association.

Features: The maximum mortgage amount is $272,683. Requires a minimum 3 percent down payment. Interest is charged at the market rate. Available in a 30-year fixed or ARM. Mortgage insurance payment is in effect for almost the entire life of the loan.

FHA Secure Program: A new refinancing option for credit-worthy homeowners who made timely mortgage payments before their ARM reset to a sharply higher rate, causing them to default.

FHA reform: Congress is considering legislation that will result in improved FHA options for home buyers.

VETERANS ADMINISTRATION

What: This government agency provides federally guaranteed home loans for military personnel or surviving spouses.

Good for: Veterans who need 100 percent financing/zero percent down; credit score may be lower than 620.

Features: Loan amount is higher than FHA; 30-year fixed rate available. One-time funding fee instead of mortgage insurance

An article in Investor’s Business Daily recently pointed out the the FHA issue is likely to get a lot more national attention as the ‘08 presidential campaigns ramp up:

The meltdown in subprime loans is a made-for-TV political extravaganza debuting just in time for election season — especially as more Americans keep losing their homes.

At least, that’s the way economist David Shulman sees it. He expects “show trials” before Democratic congressional committees to begin this winter, replete with testimony from distressed homeowners.

But so far the gloves have largely stayed on as regulators and lawmakers grapple with ways to help an estimated 2 million U.S. homeowners who have lost or are about to lose their homes — not to mention fix mortgage lending excesses that led to today’s debacle.

“A lot of it will be bipartisan, at least initially,” said Shulman, senior economist with the UCLA Anderson Forecast. “Both parties will try to show how sensitive they are to homeowners.”

The first stand-alone bill to address the mortgage crisis easily breezed through the House last month, expanding the ability of the Federal Housing Administration (FHA) to help struggling subprime borrowers.

The bill would give more power to the FHA, the federally insured loan program known for affordable fixed-rate mortgages. It would let the FHA give subprime borrowers lower rates and better terms. A Senate committee has passed a companion bill with a lower loan limit.

“The FHA reform bill has good bi-partisan support,” said Kurt Pfotenhauer, senior vice president of government affairs for the Mortgage Bankers Association. He says the FHA is the only real alternative at the moment for subprime borrowers now that the “private-label subprime market has disappeared.”

The Bush administration supports making it easier for the FHA to refinance adjustable rate mortgages — though not as easy as the Democrats would like.

Another bill giving borrowers relief passed unanimously in the House last week by voice vote and also got support from President Bush. It would waive taxes on mortgage debt forgiven as part of a mortgage workout.

This House bill also extends deductibility of mortgage insurance, making loans cheaper for those who have little equity in their homes or can’t put down 20%. Political observers expect the Senate to approve the bill.

The problem is, how many lenders will rework subprime terms? Only 1% of reset subprime adjustable rate mortgages were modified by lenders and servicers earlier this year, according to a recent report from Moody’s.

Attorneys general and bank regulators in 10 states have joined forces to push mortgage loan officials to rework loans to stave off foreclosures.

Also, Treasury Secretary Henry Paulson on Wednesday announced that 11 of the largest mortgage servicers, plus mortgage counselors, investors and trade groups, have formed a coalition to improve outreach to struggling homeowners.

“Their partnership, called Hope Now, has put together an aggressive plan to reach more homeowners and help them find a way to stay in their homes,” Paulson said in prepared remarks.

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Aldo Svaldi over at the Denver Post recently had this to say about recent government mortgage assistance programs changes:

A new federal loan program designed to help borrowers cope with rising payments on adjustable-rate mortgages is kicking into gear.

An estimated 80,000 borrowers nationally are expected to take advantage of the FHASecure loan program, said Ben Johnson, director of the Denver Homeownership Center with the Federal Housing Administration.

Another 160,000 or so are expected to use other FHA loans to escape their unaffordable mortgages.

The first Colorado borrowers in the program should start receiving their new loans in early November.

Critics say the program doesn’t go far enough to help homeowners.

FHASecure loans, unveiled by President Bush in August, are designed to shift borrowers who can’t afford higher payments on their ARMs into more traditional FHA-backed loans.

But they aren’t a shoo-in. Borrowers facing a reset must have stayed current on their payments for at least six months, although those who have fallen behind because of a reset to a higher interest rate are eligible.

Loans are underwritten to FHA standards, which limits how much can be financed. In Denver-Aurora, the FHA cap is $308,370.

The FHA will insure a mortgage for up to 97 percent of a home’s appraised value. If the borrower can’t come up with the down payment or the loan is worth more than the home, the current mortgage provider must be willing to accept a second mortgage for the difference, including any prepayment penalties or other fees.

Borrowers must also demonstrate an employment history and that they can afford the payments on the new loan, based on an interest rate that will come in somewhere between the initial rate offered on the ARM and the higher adjusted rate.

Critics charge that FHASecure and other administration efforts represent a Band-Aid on an open wound. There were 223,538 foreclosure filings in the U.S. in September, according to RealtyTrac.

“Unfortunately, the bottom is falling out of our housing market much more quickly than the administration is willing to stem the tide of foreclosures,” Sen. Charles Schumer, D-N.Y., said Wednesday.

Schumer was responding to an announcement Wednesday by Treasury Secretary Henry Paulson Jr. of a new alliance with mortgage servicers, housing counselors and government agencies to help an estimated 2 million borrowers who face higher payments on their ARMs - not all of whom would qualify for FHASecure loans.

“A combination of stagnant or falling house prices, low- down-payment mortgages and resetting adjustable-rate mortgage rates are creating real challenges for many American homeowners,” Paulson said in a statement.

The Hope Now program will work to establish best practices in housing counseling and launch a mass-mail marketing campaign next month to reach struggling borrowers before they fall off a cliff.

As it reaches out to help borrowers, the FHA also has cracked down on seller-financed assistance programs.

The programs, which claimed to be charities, inflated home sales prices, allowing the minimal 2 percent to 3 percent down payments to be wrapped back into the FHA loans and increasing the risk to buyers and the government.

Barry Jacobs over at Affordable Housing Finance reports this progress as of today:

The House Financial Services Committee has approved legislation (H.R. 2985) to create a national affordable housing fund, bringing advocates one step closer to their goal of a dedicated funding source for housing aid.

The funding is still contingent on the passage of government-sponsored enterprise (GSE) reform and Federal Housing Administration (FHA) modernization legislation, which would channel money from Fannie Mae- Freddie Mac portfolio holdings and FHA premium revenue into the trust fund. Those sources are expected to provide $800 million to $1 billion annually for affordable housing.

“The growing shortage of affordable housing is one of the most serious social and economic problems facing our country,” said Financial Services Committee Chairman Barney Frank (D-Mass.) after the committee approved the bill, 45-23. “Given our severely constrained fiscal realities, we are today doing the best we can to address this—creating a lowincome housing trust fund that will be paid for in ways that do not draw from federal tax revenues.”

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Alan Zibel recently reported that a high percentage of blacks and Hispanics are paying a high percentages on their mortgages. (All the more reason to look at FHA options).

WASHINGTON (AP) _ A disproportionately large percentage of mortgages made to blacks and Hispanics last year met the government’s definition of “high cost'’ loans, a new study said.
The report, released Oct. 4 at an industry conference in Arlington Va., analyzed nationwide mortgage data for 2006 and reached conclusions similar to those of another study published by the Federal Reserve last month.

Advocacy groups say mortgage discrimination has contributed to the current crisis in lending to borrowers with weak, or subprime, credit, in which a growing number of families are losing their homes.

The study, sponsored by Richmond, Va.-based mortgage insurer Genworth Financial, concluded that 48 percent of home loans given to blacks and nearly 42 percent of loans given to Hispanics last year met the government’s definition of “high-cost “loans. That compares with 18 percent for whites and more than 24 percent for the overall population.

The analysis, which excludes refinances and second mortgages, uses the Federal Reserve’s definition of high-cost loans: mortgages whose rates are at least 3 percentage points above comparable Treasury securities, a category that includes most subprime loans given to people with weak credit records.

Subprime lending among blacks nearly doubled from 2004 to 2005, and it more than doubled among Hispanics, according to data from the study.

“Some of those consumers could have been in prime loans with lower interest rates if they had been given the proper education about their options,'’ said Lori Jones Gibbs, vice president for affordable housing industry affairs at Genworth.

Consumer advocates say low-income borrowers and minorities are intentionally steered by unscrupulous lenders toward subprime loans. But Jones Gibbs instead stressed that consumer education is crucial for borrowers.

Total lending dropped nearly 12 percent in 2006 from a year earlier as the housing boom ended, the study found. Even as that happened, the number of home loans to blacks actually grew by 0.6 percent, while loans to Hispanics fell by more than 5 percent.

The Mortgage Bankers Association couldn’t be reached for comment on the study, but mortgage lenders generally say they examining borrowers’ debt levels and the amount of money they can provide as a down payment, rather than race.