San Antonio's Rockstar Turned Realtor®

FHA Loan Changes - Good Idea?

Yesterday, I re-blogged a post about FHA loans, originally written by Ken Cook, one of the lenders I really trust when it comes to FHA information and advice.  I had read his article with great interest, as any change in any lender's rules, regulations, or requirements - directly affects me and my clients.

I'm not a mortgage wizard, which is why I surround myself with the best lenders I can find - so that when I do have questions or my clients need more explanation of a mortgage issue, I can get them the answers or at least have them chat with the lenders I know.  I do try and stay up to speed on all the issues though and the new ideas about what to do with FHA loans in order to refill the coffers of the Department of Housing and Urban Development's FHA funds were the subject of Ken's post.

The problem is simple; with foreclosure rates skyrocketing, the FHA has had to pay out more and more insurance claims to the mortgage companies.  Part of every FHA loan is the mortgage insurance premium (both upfront and monthly).  The upfront mortgage insurance premium is paid (who would have guessed?) upfront at closing.  However, it is possible to roll that premium into your financing (so many people don't actually bring that cash to the closing table).  The monthly mortgage insurance premium is a monthly fee tacked onto your your mortgage payment.  Like other insurances, you're paying today, in case something goes wrong tomorrow.  In the event a home buyer defaults on their loan and the house is foreclosed on, the lender gets paid out of the FHA funds that are built up through the collected of these mortgage insurance premiums.

Now that we have that FHA primer out of the way (there's a lot more to it, but I didn't want to write a full post on how FHA works - we have other issues to discuss today).  On December 3, 2009, HUD Secretary Shaun Donovan appeared before the House Committee on Financial Services and announced that FHA's funds were getting uncomfortably low (they had dropped to 0.53% of outstanding loans, well below the 2% required by federal law).  After looking at some of the ideas that have been tossed around to cure the problem, I spent some time thinking about what's good and bad about those suggestions.

I would write it all out here, but the fact is, it's a rather long post (something you should be used to by now).  I think it might be one of my top 5 posts of all time.  I hope you'll take the time to read it and weigh in with your opinions.  I just spoke with a friend of mine who disagrees with me completely, so this could be interesting.  So, here you go...enjoy:

"An Open Letter To HUD About FHA Loans" at RErockstar.com

photo courtesy of Caitlinator

Thanks Ken!

As usual, Ken Cook, does a great job breaking down some of the latest expected changes to FHA loans.  I find it shocking that everyone ran around saying we need to help clear the inventory by extending and expanding the First Time Home Buyer Tax Credit and now they're thinking about making it tougher to buy a home.  So which is it?  I thought it was odd when they raised FHA down payment requirements from 3% to 3.5% while saying they needed to get the housing market moving again.  A jump from 3.5% to 5% will most certainly eliminate a larger pool of ready, willing, and able buyers.

Although the theory of "having some skin in the game" is a commonly accepted idea, this reeks of an attempt by Secretary Donovan to save himself at the expense of home buyers and possibly the housing market recovery.  When the federally mandated reserves started to slip, we should have been talking about solutions, not when they are 1.47% below where they should (the law requires the FHA insurance pool to be maintained at 2%, Secretary Donovan reported it was at 0.53%).  Maybe we should have learned a lesson from the banks that didn't notice how low their reserves were getting before then announced (seemingly overnight in many cases) that they were broke.

How does someone not notice these things?  Ugh.

Thanks again Ken!