The Devolution Of The FHA Home Mortgage Loan
“I Thought Getting An FHA Loan Was Easy? Doesn’t The Government Like Me Any More?”
The Next Mortgage Banking 'House Of Straw!'
Are you in a home purchase transaction right now? Are you a Buyer, seller, or an agent involved in the sale?
Are you pulling your hair out?
Here's what's going on in the world of home finance using FHA loans…..
Let's start with the basics of FHA.
An FHA loan is a loan with more relaxed credit requirements and a smaller down payment requirement than most other loan programs (VA and USDA are similar) on the market.
FHA stands for Federal Housing Administration and the loans offered through FHA have been around for decades, but only recently (last two years) have they become popular again.
Why the Rebirth Of FHA Lending?
Because other than VA and the ultra-rare USDA loan, it's the only loan not requiring at least 10% down and great credit! Remember those NO DOC and basically silly FREE loans of ‘not so long ago?’
(and yes, it's the same USDA that grades the beef you buy, but I'll talk about USDA loans at another time – Gotta be in the right mood for this stuff!)
FHA loans are loans that are issued by a typical bank, but insured (not made by, but insured by) the government against default.
I repeat, the government DOES NOT MAKE THE LOANS, they only insure them against loss.
In essence, to promote home ownership, the government encourages private banks to make home loans to folks under easier terms than the rest of the market might allow, and promises the bank that the government will step in and make whole any bank that offers the FHA loan where the borrowers default (cease making timely payments).
The government makes these bail-out payments to the bank using a pool of funds that is replenished each time a borrower takes out a new FHA loan (that's what the FHA Funding Fee is for) and each time a borrower makes a payment on an existing FHA loan (that's what the monthly Private Mortgage Insurance payments are for).
The FHA loan presently allows for:
· A small 3.5% down payment
· Offers very competitive rates and…
· Is easier on qualifications like credit score or employment history than traditional loans have become (I say "become" because-again- remember dead people could take out unaffordable loans in the recent past. Or near death - Hence the ‘Fog the Mirror’ loan.)
It's pretty tempting to buy that $400,000 home using an FHA loan which requires only $14,000 down instead of a more conventional loan that requires $40,000 down; so many folks with strong credit have used the program, to keep more of their savings in the bank. Makes sense to me!
FHA Is Suddenly En Vogue!
So now the FHA loan program has gone from moth balls to concert halls in about two years, and the volume has really stressed the program, which once really only served a fairly small sliver of homebuyers.
This is where the story gets interesting!
You see, in order for the government to insure FHA loans, they require that certain, lengthy, detailed, often silly or duplicative requirements be met, and that's the present source of the widespread frustration with FHA lending. The "red tape" just got thicker and stickier…
Consider this: FHA was not popular until recently because until 2007 or so, there were several programs that catered to borrowers with troubled credit or little down payment that did so faster and more easily than the government-sponsored program.
The notion of FREE or almost FREE Bank money has always been popular, naturally, but always a seriously flawed fantasy. Banks don’t do anything for FREE!
Known affectionately (and maybe wistfully) as "Sub-Prime" and "Alt-A" in the banking industry, these loans were fast and easy to get, so for a few years FHA volume nearly flat lined, and most loan originators, underwriters, and lending banks forgot how to do them, or never learned to begin with. No ^%##@!!
I'm serious. Really!
The volume of paperwork and detail for an FHA loan was so high in comparison to the fast money of the early 2000' s that there was no incentive to use the program. "FH-What?"
"Quality-shmality. As long as I'm rich"
In the heyday, no one looked too hard at loan documentation quality because all homes were rising in value and everyone was having a good time.
Then,…KA_BLAM!
Since the death of sub-prime however, the market pendulum has swung hard in the other direction, with loan quality now a top concern and making lending a very detail-centric experience, compelling at least one financial reporter compare getting a mortgage to a “financial colonoscopy" (http://online.wsj.com/article/SB124277960359137325.html)
Credit quality is the newfound religion on Wall Street and in the world of debt investors (people who buy mortgages and other "promise-to-pay" instruments, like corporate and municipal bonds,…etc), and originators (those are the people who actually take the application and get paid the commission (which has shrunk dramatically I might add)) with spotty records or low volume are being dropped or disqualified from FHA.
It's true…many loan professionals don't even qualify to do FHA loans now.
How Things Change!
FHA was never designed to be used as heavily as it is now (6,000 FHA mortgages every day!), and what's worse, the credit quality of past FHA loans is under the microscope now because many FHA loans done recently are already in default.
That's right…FHA loans are defaulting at an alarming rate, scaring the crap out of bankers, investors, and government officials and making them pull harder on the purse strings.
Thanks to the Meat Heads who didn’t get the lessons of the last 3 years!
I certainly am not referring to those people who are still being churned and sucked under the wheels of this mortgage lending tragedy – this perversion of lending.
Look at this: http://www.zacks.com/stock/news/25746/Is+the+FHA+Going+Broke%3F+-+Analyst+Blog or http://www.zacks.com/stock/news/25746/Is+the+FHA+Going+Broke%3F?print=print
and especially this http://www.reuters.com/article/GCA-Housing/idUSTRE58H5TG20090918
It seems that FHA is in trouble and defaults are getting out of control, and some are indicating that unless quality controls are improved ANOTHER bailout for the mortgage industry is coming, but this time for the government itself.
Be Afraid – Be Very Afraid!
This growing wave of defaults means banks that did FHA loans are standing in line at the FHA window with their hands out, expecting FHA to make good on its promise to make the banks whole.
Hard to feel sorry for banks but I kind of do in this case.
“A funny thing happened to me on my way…”
But a funny thing has been happening lately…well, maybe not funny at all. The FHA is looking at the loan packages associated with these defaulting FHA loans and noticing that little things were not done correctly, (usually of a clerical nature, such as not properly documenting the movement of funds within a borrower's accounts, or not dating correctly the signed borrower disclosures,…little things like that) AND THEY ARE DENYING TO INSURE THE LOANS on that basis.
Can you say "Mad Banker?”
Staplers, paperclip holders, and stupid desk toys are flying around executive offices all over America amidst shouting CEO's and crying secretaries (and ashen-faced Quality Control Officers).
Banks that were relatively new or rusty at putting together FHA loans in 2007 and 2008 are being sent to back of the line when they expected to collect restitution payments from the Feds for defaulted loans. Nothing gets a banker in lather faster than telling him (or her) that "the check IS NOT in the mail."
Let me state that again, because it's the main reason for FHA loan woes: for clerical and documentation deficiencies in the loan files themselves (where the entire collection of the borrower's documentation is stored) banks are having to eat loans they thought they were insured for.
I would joke maliciously here but it’s serious enough not to.
If you're a smaller bank that lends maybe $100m each month in FHA loans, and sells all $100m of those FHA loans to investors (so you can re-lend that $100m every month, making money on the turning of the loans, not the keeping of them–get it?), you're dead meat if you have to buy back from the investor the loans that the FHA was supposed to insure but didn't because you were a little sloppy or uninformed in 2008 when you did 100 FHA loans (which is a tiny number compared to FHA which does 6,000 loans every day).
A loan "buy back" is what a bank experiences when the borrower defaults and the FHA wont insure the loan for some reason; the bank literally has to buy back from the investor the whole loan, plus any losses and missed payments, and then must either keep the loan on its books or else try to fix what's wrong with the loan and then sell it at the scratch and dent window for under-performing loans.
Bankers HATE THAT with a passion.
As FHA is struggling with credit quality and is receiving an ever-increasing demand to insure defaulting mortgages, FHA is in turn trying to deny claims for restitution by finding little clerical errors and sending the claimant bank back to the end of the (llooongg) line.
Ch-ch-ch-ch-changes (in C Sharp)
So banks are right now tightening up their standards, as we speak, often on the fly, and are staying up late reading the FHA bible and all the latest bulletins to see what is changing, so they can do loans that won’t come back to bite them in six or 12 or 18 months.
Big banks are slower to react to the tightening FHA standards because they can absorb losses more easily than smaller banks, which have to watch every loan very closely to ensure they don't have to buy it back without warning sometime in the future. But it will happen – no doubt. Don’t be surprised when the cock sure LO who tells you ‘know problemo’ all of a sudden starts having problems getting deals done for clients.
This shows up in loan files as a new demand for a tax return, or a demand for another pay stub, or a demand for the appraiser to go back out and re-inspect the home, often at the last minute.
This is happening more and more now and the result is a simple loan procedure is becoming a thousand mile march through snake invested swamps!
It's maddening to have new requirements show up just days before a scheduled closing, but the banks' attitude is, "Hey, we would rather not even do the loan at all rather than do it, miss some little detail, and get a buy back demand in 9 months. No thanks!"
Lenders have reacted by subscribing to the same newsletters that bankers are reading with new interest, the newsletters that publish changing FHA requirements up to the minute, so they can know what the bank will want/need/demand before they ask it.
I know Lenders, LO’s, are also working longer hours, annotating every page, keeping careful notes on a file, and babysitting the loan more than ever.
Me included! – Remember I am a Licensed LO with Columbia Mortgage under the extremely competent watch of Ross Farr.
Lenders and Brokers are re-writing loan flow process (again) to accommodate the multiple and often redundant checks on income, assets, and employment the investors are now demanding as they try to avoid future foreclosures.
The Nail In The Coffin!
FHA is mulling further changes to credit requirements like possibly mandating a larger down-payment of 5% (up from the current 3.5%).
All eyes are on the FHA program now, and some are calling it the "new sub-prime," destined to cause problems like the old sub-prime did.
Anyway, I thought you should know what's happening and what is being done about it.
Many of us are working our butts off to help people out there! We hope to earn and keep your business by doing the best job of getting loans done and by constantly adapting to the changing loan-scape.
Don’t forget the Real Estate side of the transaction is also equally more painful than ever before.
I suspect the waters will calm eventually, but even if they don't, we're getting pretty good at doing loans on choppy seas.
Lets talk if it’s time to Buy, Sell or Refinance. (Just have lots of Pay Stubs ready!)
Thanks for reading.
My Thanks and appreciation go out to Ross Farr of Columbia Mortgage and Right Start Mortgage. The Lions share of the preceeding BLOG entry was written by Ross and I am in his debt for sharing with me the true inner workings and disfunctions of the home mortgage world. I am richer in knowledge and ethics as a result of my affiliation with Columbia / Right Start Mortgage. Together we write some kick ass loans in a tough environment where the BIG Banks want to absolutely benefit from the situation they created, eliminate all Brokers and hence your rights to FULL disclosure. Dont ever let that happen! You'll never know what hit you - and thats the way the Banks want it!
See you on the Beach!
http://jch-homes.com (FREE home listings emailed daily – no agents!)
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Filed under Blog, Community info, Home buying, Home selling, Local real estate news, Mortgage info, National real estate news by jeremy
